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Government of Canada Announces Amendments to the Real Estate Investment Trust Rules

OTTAWA, Ontario, December 16, 2010 — The Honourable Jim Flaherty, Minister of Finance, today announced proposed amendments to the provisions in the Income Tax Act concerning the income tax treatment of real estate investment trusts (“REITs”).

REITs are trusts that are exempt from the tax on specified investment flow-through entities. To qualify as a REIT, a trust must meet certain conditions that recognize the unique history and role of collective real estate investment vehicles.

“Our Government is committed to providing clarity in the application of the REIT rules,” said Minister Flaherty.  “These changes take into account constructive comments received from the public, helping to ensure that the REIT rules apply appropriately.”

Proposed changes to the income tax rules will:

  • allow REIT subsidiaries to hold certain non-capital property in respect of their real estate investment activities;
  • allow REITs to hold up to 10% of their non-portfolio property as non-qualifying REIT property without losing REIT status (with an associated clarification of the circumstances under which property can be considered to be ancillary REIT property);
  • allow REITs to derive up to 10% of their revenues from sources that are not qualifying sources (currently, a REIT must derive 95% of its revenues from qualifying sources);
  • clarify that a trust’s revenue for purposes of the two revenue tests in the definition “real estate investment trust” is to be computed on a gross, rather than net, basis and that it will include capital gains;
  • allow REITs to earn, as qualifying REIT revenue, gains realized by virtue of foreign currency fluctuations in respect of revenues derived from foreign real or immovable property including certain financing and hedging arrangements in respect of such property;
  • ensure that amounts distributed to a REIT, by an entity in which the REIT has a significant interest, will retain their character for purposes of the revenue tests; and
  • allow an entity to hold investments in a REIT without those investments being treated as Canadian real, immovable or resource property in determining whether the entity itself is a SIFT.

Today’s release includes for consultation draft legislative proposals to implement the changes described in the backgrounder. Interested parties are invited to provide comments on these proposals by January 31, 2011.

News source: Department of Finance

 

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