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Ottawa cracks down on REITs skirting taxes Add to ...

When Ottawa first announced that it was changing the tax rules for income trusts, the federal government promised to keep reviewing its policies, knowing that some firms would come up with ways of bending the rules.

Five years later, the government has issued new requirements for the treatment of stapled units. These units consist of two separate securities that cannot be transferred independently of each other. Hence the term 'stapled.'

"Recent transactions involving publicly-traded stapled securities have raised concerns about the use of these types of structures in a manner that frustrates [tax]policy objectives," the federal government said in a statement.

For corporations, Ottawa has ruled that interest paid on the debt portion of a stapled security can't be deducted from taxes paid any longer. But the change has the biggest effect on REITs with stapled units.

Before the announcement, some Canadian REITs had issued stapled securities so that they could pay distributions on property the weren't allowed to hold. Because REITs have strict rules on the types of things they can own, without losing their tax-advantaged status, they would sometimes set up a subsidiary that holds these tainted properties, and then issue a stapled security so that the income from them can still be paid to unitholders.

Under the new rules, any distributions paid from the security that applies to the second entity are can no longer be deducted from taxes.

InnVest Real Estate Investment Trust took the biggest hit on the news, crashing about 20 per cent yesterday. (The stock has since ticked up because of speculation that it could be taken private now that its structure no longer maks sense.) Other REITs with stapled units, such as H&R REIT and Northern Property REIT didn't fall nearly as much because they aren't as affected. H&R even went so far as to press release that it doesn't receive any interest or income from its H&R Finance Trust subsidiary.

The afffected f have either a year or 5 years to comply with the changes, depending on when the stapled securities were first issued.

Ottawa also announced a few other changes for trusts. For instance, trusts currently remit taxes to the government on a quarterly basis. Going forward, they will be treated liked corporations and must pay monthly.

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