To qualify as a REIT, a trust must be a publicly listed unit trust located in Canada that meets certain criteria set out in the Income Tax Act (Canada) (the “ITA”), including the nature and quantity of real estate assets owned and the sources of trust revenue.
Can anyone set up a REIT?
Who is eligible to apply? A company or the principal company of a group can apply to be a REIT if it: has an existing property rental business with at least three properties, none of which represents more than 40% of the total value of the properties involved; and has an existing property rental business with at least three properties, none of which represents more than 40% of the total value of the properties involved. For tax reasons, he or she is a UK resident.
Are REITs regulated in Canada?
REITs are governed by stringent regulatory oversight: REITs are governed by Canadian securities authorities and so provide the industry with a high level of control and transparency. There has never been a failure of a Canadian REIT in the over 25 years since they were originally allowed.
How do I register a REIT?
To register a REIT with the Board, the sponsor must submit a Form A application on behalf of the Trust to the Board. Parties who want to REIT
How do you start a REIT in scratch?
Before being classified as a REIT, the Internal Revenue Service (IRS) requires you to meet certain thresholds, and there are specific requirements you must continue to meet. The procedures outlined below are a standard technique used by investors to form a private REIT.
Decide what type of REIT you want to form
Unless you have a real estate portfolio worth more than $100 million, you’ll probably start off as a private REIT. After that, you’ll have to pick whether to create an equity REIT or a mortgage REIT.
There are multiple niches in equity REITs that incorporate various property kinds. These frequently pique the interest of investors because they know exactly what they’re getting into. The following are the several sorts of REITs you might create:
Once you’ve decided what you want to achieve, the steps below will take you from concept to REIT status.
Form a taxable entity
You must first form a corporation with any partners that would subsequently become the REIT. Because certain standards must still be satisfied, this is frequently done through a management firm. This is the optimum moment to draft a detailed operating agreement with any potential partners. This will affect how the company is run in the future.
Draft a Private Placement Memorandum (PPM)
This is an area where you should get legal advice. The PPM will give you a lot of information about the company. The following are a few of them:
The private placement memorandum is the document you’ll hand out to potential investors. Investors will be more comfortable with your company if you have a clear purpose and detailed information.
Find investors
To be classed as a REIT, your organization must have at least 100 investors. The IRS only requires you to fulfill that barrier by the beginning of the REIT’s second tax year, so you don’t have to collect all 100 right now. Losing your REIT status due to a lack of investors, on the other hand, would be detrimental to investor relations. Before moving forward, most REIT firms will need at least 100 investor commitments.
It’s vital to remember that a REIT can’t have more than five investors owning more than 50% of the shares, or it’ll be taxed as a personal holding corporation.
Convert your management company into a REIT
You’ll need to modify your company’s structure from a management company to a REIT and amend your certificate of incorporation whenever you’re ready to move forward with your REIT launch.
When it comes to filing taxes, converting the company into a REIT will need filing IRS Form 1120-REIT. This is the form that will ask for information to verify that you meet the requirements to be taxed as a REIT, and it is the form that you will use to file your taxes.
Maintain compliance
Creating a REIT isn’t a one-and-done proposition. To maintain the same tax treatment, you must continue to qualify.
- Quarterly, at least 75% of the REIT’s assets must be in real estate or real estate mortgages.
- Rental income or mortgage interest must account for at least 75% of the REIT’s total income.
- Nonqualifying sources of revenue, such as service fees or other types of business income, can account for up to 5% of the REIT’s total income.
Naturally, this isn’t an exhaustive list. The IRS has a comprehensive list of conditions for being taxed as a REIT.
What tax form do REITs file?
To record a REIT’s income, gains, losses, deductions, credits, certain penalties, and calculate its income tax liability, use Form 1120-REIT, United States Income Tax Return for Real Estate Investment Trusts.
How are REIT taxed in Canada?
The revenue and gains from a REIT’s property rental operation are not taxed in Canada. Instead, when a REIT’s property revenue is dispersed, shareholders are taxed on it, and some investors may be excluded.
Are REIT dividends taxable Canada?
In comparison to the United States, Canadian Real Estate Investment Trusts (REITs) were founded in 1993. Canadian REITs are unincorporated investment trusts, unlike REITs in the United States, which are companies. Otherwise, REITs (pronounced “reets”) in the United States and Canada are identical.
REITs in the United States and Canada do not have to pay federal income taxes if they distribute a certain amount of net taxable income to shareholders. However, for US REITs, the minimum ratio is 90%, while for Canadian REITs it is 100%.
Because REITs in Canada are not incorporated, unitholders are personally liable for their debts and other obligations. Most REITs, on the other hand, take precautions to protect unitholders from REIT obligations.
The government of Canada restricts foreign ownership of REITs to 49 percent. If the limit is surpassed, the trustees determine which foreign shareholders must sell their stock.
While most REITs in the United States pay quarterly dividends, most REITs in Canada pay unitholders monthly.
REITs must withhold 15% of shareholder payouts considered as return on capital, according to the Canadian government. REITs held in both tax-sheltered and normal accounts are subject to the tax withholding. A foreign tax credit of up to $300 for single filers and $800 for married couples filing jointly is available to U.S. citizens. These restrictions apply to the overall amount of foreign dividends received in a given year, not to each REIT individually. Taxpayers in the United States must file IRS Form 1116 for sums exceeding those restrictions. The credit earned from Form 1116 is determined by the tax situation of each filer.
Withholding is not applicable to capital distributions. However, because REITs normally do not treat distributions as return of capital until the following year, U.S. investors must apply to the Canada Revenue Agency for a refund.
Aside from the withholding issue, Canadian REITs provide a substantial benefit to U.S. investors in that distributions are taxed at the maximum capital gains rate of 15%, rather than the ordinary income rate that applies to dividends received from U.S. REITs.
Instead of REITs, a few publicly traded Canadian real estate companies are formed as Real Estate Operating Companies (REOCs). The REOC has the advantage of not having to pay out all of its taxable income to shareholders. As a result, the REOC has more freedom in allocating its resources.
Do all REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
How are REITs taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is typically 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
How do REITs make money?
REITs, like any other business, require capital. An IPO (initial public offering) is how a publicly traded REIT (real estate investment trust) accomplishes this. This is similar to selling any other stock to the general public, who are investing in the company’s income-producing real estate. People who purchase initial public offerings (IPOs) are investing in real estate that is managed similarly to a stock portfolio. These outside cash sources allow the REIT to acquire, develop, and manage real estate in order to generate profits. REITs generate income, and shareholders must get 90 percent of that taxable income on a regular basis. REITs create money by renting, leasing, or selling the assets they purchase. The shareholders elect a board of directors, which is in charge of selecting investments and recruiting a team to oversee them on a daily basis.
FFO stands for funds from operations, which is how most REIT earnings are calculated. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as the net income from rent and/or sales of properties after deducting administrative and financing costs. The NAREIT’s net income computations follow GAAP (generally recognized accounting rules). The issue is that depreciation of assets is presumed to be a predictable given in GAAP calculations, which skews the true measure of a REIT’s revenue in a negative direction because real estate, which is what REITs deal in, retains or even improves in value over time. As a result, depreciation is not included in FFO’s net income.
