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Dividend Investing in Canadian REITs

Investors who enjoy collecting dividends while they’re waiting for their stocks to go up might want to look north, specifically to Canadian Real Estate Investment Trusts, or REITs. I’ll

Investors who enjoy collecting dividends while they’re waiting for their stocks to go up might want to look north, specifically to Canadian Real Estate Investment Trusts, or REITs. I’ll explain why in a minute, but first some background.

REITs (pronounced “reets”) are entities that don’t pay federal income taxes provided that they meet certain rules. First, at least 90 percent of their assets must be real estate properties or mortgages secured by real estate. Also, they must pay out most of their taxable income to shareholders.

Late to the party compared to the U.S., Canadian REITs were first established in 1993. Even now there are only 19 REITs based in Canada compared to hundreds in the U.S. Canadian REITs offer one, and possibly two major advantages over U.S. REITs.

Why Canada?

For starters, Canadian REITs typically pay 5 percent to 7 percent dividend yields compared to 4 percent to 5 percent for U.S. REITs. At first glance, that might not seem like much. But it is. If you do the math you’ll see that you’ll collect 40 percent more income from an investment yielding 7 percent than from a 5 percent payer.

If you’re rusty on your math, dividend yield is analogous to interest on a bank account. Your yield is the amount you receive over a year’s time divided by the principal that you invested. For example, your yield would be 10 percent if you pay $10 per share for a stock and collect $1 in dividends over the next 12 months. Keep in mind however, that dividends are not the same as bank account interest. A company could cut its dividend at any time, and further, the share price could drop, resulting in loss of your initial investment (principal ).

U.S. vs. Canadian REITs

Unlike U.S. REITs, which are corporations, Canadian REITs are unincorporated investment trusts, so the terminology is different. You own “units” instead of “shares,” and you collect “distributions” instead of “dividends.”

Because they are not incorporated, in theory, Canadian REIT unitholders are liable for their debts and other liabilities. However, most REITs take steps to shield unitholders from REIT liabilities.

Both U.S. and Canadian REITS do not pay federal income taxes as long as they distribute a specified percentage of net taxable income to shareholders. However, the minimum percentage is 90 percent for U.S. REITs, but 100% for Canadian REITS.

While U.S. REITs typically pay quarterly dividends, most Canadian REITs pay unitholders monthly.

Tax Issues

The Canadian government requires REITs to withhold 15 percent of distribution to shareholders. The tax withholding applies to REITs held in tax-sheltered as well as regular accounts. U.S. residents may claim a foreign tax credit when they file their U.S. tax returns. However, you may or may not get a the entire 15 percent back depending on the particulars of your tax situation.

The withholding issue aside, Canadian REITs offer a significant advantage to U.S. investors in that distributions are subject the maximum 15 percent capital gains tax rate, not the ordinary income rate that applies to dividends received from U.S. REITs.

Here are the five Canadian REITs paying at least 5 percent distribution yields. All are listed on the Toronto Stock Exchange. I’ve listed the Toronto and also the Pink Sheet ticker symbols that you can use if your broker doesn’t provide direct access to Toronto stocks.

  • Calloway Real Estate Investment Trust (CWYUF:US) or (CWT.UN:CA) or : Owns community shopping centers, distribution yield 6.2 percent.
  • Canadian Apartment Properties (CAR.UN:CA) or (CDPYF:US): Multi-family residential, 5.7 percent.
  • Chartwell Seniors Housing REIT (CSH.UN:CA) or (CWSRF:US): Senior housing communities, 6.2 percent.
  • Dundee REIT (D.UN:CA) or (DRETF:US): Office and industrial properties, 6.6 percent.
  • Primaris Retail REIT (PMZ.UN:CA) or (PMZFF:US): Retail shopping malls, 5.9 percent.

You can see a list of all Canadian REITs on my Dividend Detective site.

Because it is rich in natural resources, especially crude oil and natural gas, and didn’t experience the recent housing boom and bust, the Canadian economy is riding high. Thus, the time is right for checking out Canadian investment opportunities.

That said; don’t assume that you’ll make money owning the trusts that I’ve mentioned. Do your own due diligence. The more you know about your investments, the better your results.

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