REALWorld Law

Taxes

Taxation of distributions

Are additional taxes incurred if any income generated from a real estate investment is transferred to the shareholders or partners in the relevant vehicle and can these be reduced or offset in any way?

Canada

Canada

Distributions from a Corporation

Shareholders must include taxable dividends received on shares of a corporation in income.

If the shareholder is a corporation resident in Canada it will generally be entitled to deduct a corresponding amount from its taxable income. In some circumstances it may be subject to a refundable 38 1/3% tax on dividends received, and be entitled to a refund of that tax as it pays certain taxable dividends to its shareholders.

Dividends paid to an individual or trust that is resident in Canada are subject to a gross-up and dividend tax credit intended to offset corporate tax paid by the corporation.

Dividends paid by a resident Canadian corporation to a non-resident are subject to 25% withholding tax on the gross amount of the dividend, unless an applicable bilateral income tax treaty, if any, provides a lower rate.

A shareholder who receives a distribution from a corporation as a reduction of capital on the shareholder’s shares generally will not be taxable on the receipt. The shareholder will be required to reduce the shareholder’s adjusted cost base (ACB) of the shares by the amount of the distribution, and will be deemed to realize a capital gain equal to the amount, if any, by which the ACB thereby becomes negative. The shareholder would in that case be required to include one-half of the capital gain in income, to be taxed at normal rates.

Distributions from a REIT

Where a REIT distributes income to a beneficiary, generally the REIT will be entitled to deduct the amount of the distribution from its income, and the beneficiary will be required to include the amount in its income.

The beneficiary, if a Canadian resident, will generally be subject to income tax on the amount at normal rates. If a non-resident, the beneficiary will be subject to 25% withholding tax on the gross amount of the income distribution, unless an applicable bilateral income tax treaty, if any, provides a lower rate.

The above assumes that the trust satisfies the technical requirements set out in the Act to qualify as a REIT.