Tax season is upon us, and at this time of year we at Skyline Wealth typically receive a number of tax-related questions. With that, taxation of Skyline’s REIT investments is a great topic to discuss.
Before we begin, please be aware:
The taxation rules described below are only applicable if the REIT investment is held as a non-registered account. They do not apply if the REIT investment is held in a registered account, such as an RRSP, RRIF or TFSA! Each type of registered account has its own tax procedures, which are not related to the type of investments inside the account. Stay tuned to these blog posts to find out more.
When you hold a Skyline REIT investment in your portfolio, you are participating in two distinct opportunities:
1. An ongoing monthly cash distribution (reflected by the current annual yield).
2. The potential for the value of your REIT Units (shares) to increase in market value over time.
When you invest in a REIT, in some circumstances, your monthly cash distributions are not taxed as income. Rather, all or a portion are given to you in the form of Return of Capital (ROC).
These distributions result in a reduction of your Adjusted Cost Base (ACB).
Here is a hypothetical example to illustrate how the ACB is determined:
Now, let’s continue this example over a 5-year period.
In the right-hand column, you will see how the ACB is eroded over time. (If the investment is held long enough, the ACB may eventually go down to zero.)
What is significant about my ACB?
Your ACB determines how much you will realize in capital gains when you divest (redeem) your holdings. Based on our example, if an investor divested at the end of year 5, their capital gains would be calculated as follows:
Capital gains is the most tax-efficient treatment of investment returns. Capital gains are realized if/when you sell, or transfer ownership of, your investment (at a market value that is greater than what your original investment was). 50% of your realized profit (capital gains) is taxed at your individual tax rate.
So, for our example:
Again, this tax treatment is only applicable for Skyline REIT investments held in non-registered accounts. Stay tuned for Part 2, where we’ll briefly cover other types of taxation, and take a look at the taxation of investments held in registered accounts (RRSPs, RRIFs, TFSAs, etc.)
The contents of this article are for high-level,contextual purposes, and are not meant to replace advice from your accountant or any other tax advisor. We strongly suggest that an accountant or tax professional should be consulted prior to making an investment, and should be used on an ongoing basis once an investment is made. Skyline Wealth’s investments are available to qualified investors only. Contact us today to see if you qualify.
The information provided within this Website is for general information purposes only, and does not constitute an offer of, or solicitation for, the purchase and sale of any securities, or advice under any circumstances. Skyline Wealth Management Inc. (“Skyline Wealth”) is an Exempt Market Dealer registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec, and Saskatchewan. Important information with respect to the funds are set out in their confidential offering documents, which should be reviewed prior to investing, as they include important information on fees and risk factors. There is no active market through which the securities may be sold, and redemption requests may be subject to monthly redemption limits. The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with an exempt market product’s performance. Distributions paid as a result of capital gains realized by an exempt market product, and income and dividends earned are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Prospective investors must make an independent assessment of such matters in consultation with their own professional advisors. Sales of interests in any investments offered by Skyline Wealth are only made to certain eligible investors pursuant to regulatory requirements and available exemptions. Some of the investment products offered by Skyline Wealth are from related issuers. A full list of issuers related to Skyline Wealth and details of the relationship between them is available upon request. Information provided herein is current as at the date of publication and Skyline Wealth does not undertake to advise the reader of any changes.