Starting in 2011, Ottawa will impose a tax on the distributions of Canadian income trusts. This will put trusts on an equal tax footing with regular corporations. Many trusts are converting to corporations as a result. Some are even cutting their distributions.

Tax exemption sets REITs apart from other Canadian income trusts

Real estate investment trusts, or REITs, will remain exempt from the tax on Canadian income trusts, and will likely remain in their current form. (REITs invest in income-producing real estate, such as office buildings and hotels.)

They can maintain their exemption as long as they meet the following requirements:

1) REITs must not hold any property other than “qualified REIT properties” at any time during a tax year.

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2) At least 75% of the trust’s revenue for a tax year must come from rent or mortgage interest from real or immovable properties in Canada and capital gains from the sale of such properties.

3) At least 75% of the total fair market value of all trust properties that the REIT holds must be in Canada.

RioCan REIT is exempt from the tax on Canadian income trusts

In the latest issue of The Successful Investor, we take a close look at a REIT that meets these requirements, RioCan Real Estate Investment Trust (Toronto symbol REI.UN).

RioCan is a leading property developer. The trust focuses on suburban areas, where land is cheaper than in cities, and has properties in all 10 provinces. A large portion of RioCan’s holdings are big-box-style malls, although it does own some office buildings and residential complexes.

Real estate is a cyclical business, and rental income can quickly dry up during slowdowns. But RioCan attracts high-quality tenants, such as Wal-Mart and Cineplex. Moreover, grocery stores rent a significant amount of space from RioCan, and food demand tends to remain stable regardless of the state of the economy. In the latest issue of The Successful Investor, we’ll look at how RioCan’s occupancy rate has held up during the recession.

Income trust tax exemption just one advantage of REITs

Aside from the 2011 trust tax exemption, REITs can add to your portfolio in a number of other ways. They can provide a hedge against inflation, for example. And we continue to believe that low interest rates and government-stimulus spending will spur inflation over the next few years.

Many REITs have taken advantage of today’s low interest rates to refinance their mortgage debt. Many, including RioCan, have been able to renew leases at high rates. That’s how REITs stand to gain from an economic recovery, while providing a hedge against inflation.

We’ll continue to keep an eye on developments in REITs, and at RioCan, in our Successful Investor newsletters and Hotlines. Click here to learn more about how you can get one month free when you subscribe now.