Frank Gunn/The Canadian Press
In your column about Plaza Retail REIT, you said the units yield 7 per cent. How are the dividends taxed? Do they qualify for the dividend tax credit?
No. Like most real estate investment trusts, Plaza PLZ.UN doesn’t pay a dividend, strictly speaking. Rather, it pays a distribution that consists of various types of investment income. The good news is that some of these income sources get a tax break.
In 2024, for instance, about 39 per cent of Plaza’s distributions were return of capital. ROC is not taxable – at least not immediately. Instead, any ROC amounts are subtracted from the adjusted cost base of the investment, which creates a larger capital gain, or smaller capital loss, when the units are ultimately sold. In effect, the tax obligation is pushed down the road.
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Another 20 per cent of Plaza’s distribution consisted of capital gains, which are taxed in the year they are received. However, because only half of capital gains are included in income, these amounts are effectively taxed at half the rate of interest or regular income.
Most of the remainder of Plaza’s distribution – nearly 40 per cent – consisted of “other income,” which is taxable at one’s full marginal rate. Plaza did pay out a very small amount of dividend income in 2024, which accounted for less than 1 per cent of the distribution.
Where can I find the tax treatment of a REIT’s distributions?
REITs calculate the tax characteristics of their distributions annually, typically a few months after the end of the calendar year, and publish the information in the investor relations section of their website. You might have to hunt around a bit, but it’s usually there. Brokers use this information to determine the income allocations that appear on investors’ T3 slips, which must be issued no later than March 31. Most REITs also archive data from previous years so you can compare income allocations over time.
Am I better off holding a REIT in a non-registered account, or a tax-free savings account? What about a registered retirement savings plan?
Any investment – whether it’s a REIT, dividend stock or guaranteed investment certificate – will produce a higher after-tax return in a TFSA vs. a non-registered account for the simple reason that income received inside a TFSA is not taxable.
Generally, if you have limited TFSA room, you should aim to put investments inside your TFSA that will save you the most tax. For example, if you have a high-interest savings account that yields 2 per cent and a Canadian dividend stock that yields 5 per cent and has strong potential for capital growth, you’ll probably get the most bang for your buck by putting the stock in your TFSA.
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The same strategy applies to RRSPs. So, if you have room in your TFSA or RRSP, holding a REIT in one of these registered accounts is a perfectly acceptable strategy. As a bonus, you won’t have to worry about tracking your cost base, which is only relevant in a non-registered account where capital gains taxes apply.
I was surprised to see withholding tax on Granite REIT GRT.UN distributions in my locked-in retirement account (LIRA). I was under the impression that, even with U.S.-owned companies, no taxes are withheld in registered accounts. Besides, Granite is a Canadian company. Is this a mistake? Do I need to contact my broker, or is there something special about Granite that I don’t know about?
It’s not a mistake. True, Granite is based in Canada, but roughly half of its industrial properties are located in the United States. Furthermore, while you are correct that there should be no withholding tax on U.S. dividends received in a retirement account such as a LIRA or RRSP, most of Granite’s distribution is classified as foreign non-business income, which under the Canada-U.S. tax treaty is not exempt from U.S. withholding tax. In 2024, for example, nearly 75 per cent of Granite’s distribution consisted of foreign non-business income, which is typically subject to 15-per-cent withholding tax. That’s why you’re getting tax withheld on your monthly distributions. If you held your units in a non-registered account, you might be able to claim a foreign tax credit for the amounts withheld. Unfortunately, since you hold your units in an RRSP, that option is not available to you.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.