Investing in Canadian REITs: How to Get Started

Real Estate Investment Trusts (REITs) offer a way to invest in real estate without directly owning physical properties. These vehicles allow individuals to participate in the real estate market by purchasing units in companies that own and operate income-producing real estate. In Canada, REITs provide an opportunity for investors seeking exposure to various property sectors, from residential complexes to commercial centers and industrial facilities. This article provides guidance on how to begin investing in Canadian REITs.

Understanding Canadian REITs

A Canadian Real Estate Investment Trust is a publicly traded entity that owns, manages, or finances income-generating real estate. These trusts are designed to provide investors with regular income distributions, similar to dividends from stocks, while also offering potential for capital appreciation. Unlike traditional real estate ownership, REITs offer liquidity, as their units trade on major stock exchanges.

Canadian REITs are structured as flow-through entities, meaning they generally distribute most of their taxable income to unitholders. This structure avoids double taxation, where income is taxed at the corporate level and again when distributed to shareholders. Their portfolios can include diverse asset classes such as retail malls, office buildings, apartment complexes, industrial warehouses, and specialized properties. The income generated from rents and property operations forms the basis for the regular distributions paid to unitholders.

Investing in Individual REIT Units

Purchasing units of Canadian REITs listed on stock exchanges requires opening a brokerage account. Investors typically use a self-directed investment account, which can be a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Plan (RRSP), or a non-registered (taxable) account.

Before placing a trade, research individual REITs. This involves identifying their ticker symbols. Reviewing financial statements, distribution history, and the composition of their management team provides insight into performance and governance. Examining the property portfolio helps understand the real estate assets a REIT holds and their geographic diversification. This information is available on the REIT’s investor relations website or through financial news platforms.

After selecting a REIT, place a buy order through the brokerage platform. Navigate to the trading section and search for the REIT by its ticker symbol. Specify the number of units to purchase and select an order type, such as a market order for immediate execution or a limit order to buy at a specific price. Once executed, the brokerage provides a trade confirmation, and the transaction typically settles within two business days.

Investing Through REIT Funds

Investing in Canadian REITs can also be achieved indirectly through REIT funds, such as Exchange-Traded Funds (ETFs) or mutual funds. These funds pool money from many investors to purchase a diversified portfolio of individual REIT units. This approach offers immediate diversification across multiple properties and sectors, reducing the risk associated with investing in a single REIT.

Researching these funds involves identifying the fund providers, understanding their expense ratios (MER), and reviewing fund fact sheets and prospectuses. The Management Expense Ratio (MER) represents the annual cost of owning the fund, including management fees and operating expenses. Fund fact sheets and prospectuses provide detailed information about the fund’s objectives, investment strategy, and the underlying REIT holdings. This information is available on the fund provider’s website or through financial data aggregators.

The process of purchasing units of a Canadian REIT ETF or mutual fund through a brokerage platform is similar to buying individual REIT units. Investors navigate to the trading section, searching for ETFs by their ticker symbol or mutual funds by their unique fund code. Specify the desired investment amount or number of units, and select an appropriate order type. After the transaction is confirmed, the purchase is processed, and investors become unitholders in the fund, subject to the fund’s ongoing management fees.

Tax Considerations for REIT Investments

Distributions from Canadian REITs have specific tax implications depending on the account type. In a Tax-Free Savings Account (TFSA), all distributions are tax-free upon withdrawal. Within a Registered Retirement Savings Plan (RRSP), distributions grow on a tax-deferred basis, with taxes paid only when funds are withdrawn in retirement.

When Canadian REITs are held in a non-registered (taxable) account, their distributions are subject to taxation. These distributions typically comprise several components, including interest income, capital gains, and a return of capital. Each component is treated differently for tax purposes; interest income is fully taxable, while capital gains are taxed at a lower inclusion rate.

A portion of REIT distributions consists of a “return of capital,” which is not immediately taxable. It reduces the adjusted cost base of the REIT units, deferring taxation until the units are sold. Investors receive a T3 tax slip annually from their brokerage or the REIT, detailing the breakdown of these distribution components for reporting to the Canada Revenue Agency.