Ottawa clarifies REIT rules

The federal government has proposed changes to the Income Tax Act provisions governing real estate investment trusts, which were exempted from the taxation treatment imposed upon other income trusts.

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

The proposals would loosen some of the rules governing REITs, allowing them to hold up to 10% of their non-portfolio property as non-qualifying REIT property without losing REIT status.

They would also be allowed to derive up to 10% of their revenues from sources that are not qualifying sources, up from the current 5%. Revenue tests that determine whether a trust qualifies as a REIT will be based on gross revenue, rather than net, and will include capital gains.

Gains realized by virtue of foreign currency fluctuations would be allowable as qualifying REIT revenue.

Subsidiaries of REITs would be allowed to hold certain non-capital property.