Most people spend their whole life working tirelessly – their goal? To save money and invest. Investing money can be very tricky; you want to ensure that you don’t invest in the wrong place as you could lose all your life savings. Many opt to invest in stocks and mutual funds, but they can be unpredictable. However, in recent years people have now started investing more in properties, specifically REITs, because of their reliability as a passive source of income.
✏ What is a REIT?
Real Estate Investment Trusts (REIT) are companies that buy, maintain, manage properties, and give dividends to their investors. This way, investors receive a share of the total income produced without having to actually purchase or manage the property.
✏ Types of assets a REIT manages
REITs have multiple types of properties in their portfolio: warehouses, offices, call centers, apartments; you name it. REITs can have different types of properties in their portfolios; however, most REITs specialize in a specific niche.
✏ The REIT business model
REITs have a simple business model; they lease properties, generate income through rent, and distribute net income to investors in the form of a dividend. The investment in REITs is not only a safer option than bonds and the stock market; it has higher potential returns as well.
✏ Who can invest in REITs?
Anyone, really! It is perfect for those looking to earn passive income on the side. If you’re someone who doesn’t have time to focus on a side business for some extra money, investing in REITs is the best option; you wouldn’t have to get into the technicalities.
If you’re looking to take a medium-scale investment risk, this is your best bet. On the other hand, if you want your investment to pay off within 3-5 years, this might not be the one for you.
✏ How to set up a REIT in Canada?
Setting up a REIT can be tedious and confusing if you’re not aware of the laws and paperwork. Here is a comprehensive guide on how to set up a REIT in Canada in accordance with Canadian laws.
➤ Test Feasibility
The first thing you need to do is to evaluate whether setting up a REIT is the best option for you. Evaluate your assets, assemble a team of advisors, and make sure all legal requirements are met. If you find the process a bit overwhelming, you can hire a private advisor to aid you and your partners throughout the process.
➤ Check Legality
In Canada, REITs are owned by trustees and are subject to fiduciary laws that are similar to ones applicable to directors of corporations.
REITs benefit from preferential tax treatment – income is not taxed when income flows to the trustees’ accounts.
There is no specific law governing REITs; they are governed by principles of contract law and trust law.
➤ Find a Niche
As we mentioned earlier, there are various types of REITs. It’s important that you find a certain niche and specialize in it so that investors who want to invest in that specific niche know that you’re the best option. This is also particularly important when filing paperwork and is to be mentioned there.
➤ Draft Partnership Agreements
Draft a partnership agreement between the investor and a REIT that establishes all the governing terms and conditions. Make sure the agreement is drafted in a way that is in accordance with the income tax act, and the role of each stakeholder is defined properly and clearly.
➤ Meet the qualifications criteria required to set up a REIT
To qualify as a REIT in Canada;
1- Make sure that your REIT is a publicly-traded unit trust.
2- Registering your company to achieve a certificate of incorporation.
3- Submit all details and documents under the income tax act of Canada. You will be required to take two revenue and assets tests that check for the nature and quantity of your assets and their revenue streams, where following criteria must be met;
★ 90% of the REIT’s gross revenue is generated from either the rent of the properties, interests, dividends, royalties, or capital gains through the property’s disposition.
★ At least 75% of the tax filed for REIT’s properties is generated through the rent of the properties, the interest gained from the mortgages, or from the properties’ dispositions.
★ Over a fiscal year, 90% of the fair market value of the REIT’s nonportfolio properties must fall into the category of qualified REIT properties.
★ All nonportfolio entities of the REIT must either derive 90% or more of the REIT’s gross revenue directly from maintaining, improving, leasing, or managing properties, or it owns no property other than their legal title.
4- Once your paperwork is complete in accordance with the income tax act, file it with the state office secretary against a certain fee for processing the application.
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