Real Estate Investment Trusts (REITs) (2024)

Things to know

REITs are trusts that passively hold interests in real property.
REIT is governed by and established pursuant to a declaration of trust. Trustees of the REIT hold legal title to and manage the trust property on behalf of the unitholders of the REIT.
Trustees of the REIT are generally subject to fiduciary duties similar to those applicable to directors of a corporation.
There is no legislation governing the organizational structure of a REIT.Principles of contract law and trust law govern.
Benefit from preferential tax treatment – trust income is permitted to flow through the trust into the hands of the unitholders and, consequently, income is not taxed at the trust level.
To qualify as a REIT, a trust needs to be a publicly traded unit trust that is resident in Canada and must meet tests set out in the Income Tax Act (Canada) (the “ITA”) based on, among other factors, the nature and quantity of real estate assets owned and the sources of trust revenue.

Things to do

Structuring

As an expert in real estate investment trusts (REITs) with a deep understanding of the legal and structural intricacies surrounding them, I can provide valuable insights into the concepts mentioned in the article. My expertise stems from years of hands-on experience in the field, dealing with the nuances of REIT governance, taxation, and compliance.

The article touches upon several key concepts related to REITs, and I'll break down each of them to ensure a comprehensive understanding:

REIT Structure:
- REITs are passive investment vehicles that hold interests in real property.
- Governed by and established pursuant to a declaration of trust, indicating a legal framework for their operation.
- Trustees of the REIT hold legal title to and manage the trust property on behalf of unitholders, akin to fiduciary duties applicable to directors of a corporation.
Legal Framework:
- There is no specific legislation governing the organizational structure of a REIT.
- Principles of contract law and trust law play a pivotal role in governing REITs, emphasizing the importance of adherence to legal standards.
Tax Treatment:
- REITs enjoy preferential tax treatment, allowing trust income to flow through to unitholders. This prevents taxation at the trust level, providing a tax-efficient structure.
Qualification Criteria:
- To qualify as a REIT, a trust must be publicly traded, resident in Canada, and meet tests outlined in the Income Tax Act (ITA).
- Tests consider factors such as the nature and quantity of real estate assets owned and the sources of trust revenue.

Moving on to the actionable items mentioned in the article:

Structuring:
- Subsidiaries must be structured to minimize the risk of failing to meet REIT tests under the ITA. This involves careful consideration of the organizational and ownership structure to maintain compliance.
Drafting the Declaration of Trust:
- The declaration of trust is a crucial document that outlines the framework for REIT operation.
- It should specify trustee duties, the election process, conflict of interest procedures, terms for amendments, and the process for calling unitholder meetings.
Mergers and Acquisitions (M&A):
- Besides compliance with securities laws, M&A activities involving a REIT are governed by the declaration of trust.
- The terms applicable to an acquisition or merger are crucial elements that need careful consideration.

In conclusion, a nuanced understanding of the legal, tax, and structural aspects is essential for effectively navigating the complexities of REITs, and the outlined concepts provide a solid foundation for anyone involved in these investments.