REIT Tax Hike Possible: Learn if You Should Still Buy

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Real estate investment trusts (REITs) are popular with investors, because they earn recurring income streams while minimizing the risks of owning investment properties. the TSX has an array of choices that covers eight sub-sectors in the real estate industry.

However, there are plans by the Trudeau administration to change the tax rules for REITs. The federal Liberals made a campaign promise to review and possibly reform, the tax treatment to make housing more affordable for ordinary Canadians. It also hopes to bring fairness to the housing market.

Existing rule

REITs generally pool resources to invest in real estate, whether residential, commercial, industrial, residential, and other types of properties. The income or gains by the REITs are non-taxable, but instead are paid out to tax-paying unitholders. Investors can elect to hold these real estate stocks in an RRSP or TFSA for tax-free money growth or tax exemption.

Opposition to the plan

Michael Cooper, president of Dream Unlimited, and other parties oppose the federal government’s plan to tinkering with the current tax structure of REITs. Cooper said it makes little sense and won’t help the government bring down housing costs.

John Nicola, Nicola Wealth’s chairman and CEO, is likewise uncertain as to what aspect of the tax treatment of rental housing REITs concerns the federal government. He said targeting REITs or large owners of residential real estate might disincentivize investment. It also runs counter to the broader goal of boosting housing affordability.

Nicola added, “It’s hard to see how reducing the supply of rental housing helps the overall housing market.” Nick Robertson, an emeritus professor with Ivey Business School at the Western University, said the government shouldn’t alter the tax treatment.

He said the current structure allows retirees and other retail investors to generate steady income and participate in an investment class that would otherwise be inaccessible.

Standout REIT

Dream Industrial (TSX:DIR.UN) is a standout and a cash cow in Canada’s REIT universe. Apart from its robust leasing momentum at attractive rental spreads, a solid contract rent growth is on the horizon. More importantly, it benefits from the e-commerce boom.

This $3.53 billion REIT owns and operates 244 multi-use (warehouse, storage, light-industrial plants, etc.) industrial assets in Canada, Europe, and the United States. The real estate stock trades at $13.90 per share and pays a 5.04% dividend. In Q1 2022, net income and net rental income increased 364.9% and 40%, respectively, versus Q1 2021.

Brian Pauls, CEO of Dream Industrial, said, “Despite higher inflationary pressures putting upward pressure on interest rates, industrial fundamentals have continued to strengthen. We believe that there is a long runway for rental rate growth across all of our markets.” Notably, about 90% of the leases are indexed to the consumer price index (CPI).

Prime Minister Justin Trudeau’s election pledge was to tackle the “financialization of the housing market” by the end of 2023. However, Dream Unlimited’s Cooper insists the plan will do nothing to affect home prices in Canada. Prof. dr. Robertson wants the government to instead focus on protecting renters, which is also a campaign promise in 2021.

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