Fall 2005

F i n a n c i a l
Return of capital


Ian Britton Photo

 

With their potential for capital appreciation and their regular distributions, a portion of which is sometimes tax-deferred, real estate investment trusts are becoming increasingly popular among investors. 

by Robert Kavanagh

With their potential for capital appreciation and their regular distributions, a portion of which is sometimes tax-deferred, real estate investment trusts (REITs) are becoming increasingly popular among investors. A REIT is essentially a trust that invests money, obtained through the sale of units to its investors, in various types of income-producing real estate properties.

How does the Adjusted Cost Basis (ACB) of an investment in REITs (and income trust units) differ from the ACB of an investment in “regular” mutual fund trusts?

The starting point for an ACB calculation of an investment is the cost of the initial purchase. The units’ weighted average cost is then used to compute the ACB, since the investor will purchase units at different unit costs throughout the investment’s holding period (similar to a mutual fund trust). However, to complicate matters, certain REIT units pay regular distributions, which are only partly taxable. For these REITs, part of the distribution represents a “return of capital,” which is the non-taxable portion of the distribution. Investors who hold REIT units will have to be alert as the ACB of their units will decrease by the amount of this return of capital.

The following table illustrates the computation of an investor’s ACB in a REIT. Assume that the December 31 distribution of $1.20 per unit was taken in cash and had a non-taxable portion of $0.50 per unit.

Transaction

Units

Purchase/ Sale Price

Transaction Value

ACB of Holdings

ACB/ Unit

Year 1, Jan 1 purchase

1,000

$11.00

$11,000

$11,000

$11.00

Year 1, Mar 1 purchase

500

$11.50

$5,750

$16,750

$11.17

Year 1, Dec 31 return of capital portion of the distribution taken in cash

-

-

-$7501

$16,000

$10.67

Year 2, June 30 redemption

-500

$11.75

$5.8752

$10,6653

$10.67

1The reduction in the ACB as a result of the December 31 distribution was determined as: $0.50 per unit x 1,500 units = $750.

2Assuming that the 500 units were redeemed at a value of $11.75, the unit holder realized a capital gain of $540: (500 units x $11.75) - $5,335 = $540.

3The ACB per unit of the units redeemed on June 30 was determined as: total amount paid, divided by the number of units = ACB per unit: $16,000 ÷ 1,500 = $10.67. Therefore, the total ACB of the units sold can be computed as: 500 units x $10.67 = $5,335. The ACB of the remaining holdings — $10,665 — is the difference between the ACB of 1,500 units less the ACB of the units sold: $16,000 - $5,335 = $10,665.

While the “tax-free” return of capital received on December 31 has translated into a higher taxable capital gain when the units were sold, the benefit is that only 50% of the capital gain was taxable.

Robert Kavanagh is a senior financial consultant with MD Management’s Newfoundland and Labrador regional office.

Feedback

Rating

 Poor Average Good Excellent 

 

Comments

 

Site Map | DisclaimerCredits | Webmaster
© Newfoundland and Labrador Medical Association (NLMA)

Articles

Summary

Actions needed now to shore up medical care system

Make time to take care of yourself

Doctor’s notebooks digitized

Eastern Health now largest health organization in province

Privacy law and health records

Survey shows women know they should have a pap test… so why aren't they?

Unbiased evidence: CCOHTA delivers research on drugs, medical devices and systems

Ruling on private insurance has far-reaching impact

Projects support development of the provincial electronic health record

Nutrition first mantra of Kids Eat Smart

Return of capital

Celiac disease: The hidden epidemic

Mobilizing primary health care renewal

Resource kit to help physicians help problem gamblers

Topics
A&E
AGM
Arbitration
Archives
Clinical Practice
CMA News
Common Revolt Against Paperwork (C.R.A.P.)
Corporate
Doctors in the News
Education
Events
Executive Director's Message
Financial
General Council
Government Relations
Health Administration
Health Policy
Health Promotion
Health Technology
In Memoriam
Information Technology
Job Action
Membership
Perspectives
Physician Wellness
Practice Management
Primary Care Renewal
Privacy
Resident's Corner
Staff
WHSCC
Inserts
CMA Leadership in Practice**
Primary Health Care poster**
Eastern Health poster**
Issues
Winter 2013
Summer 2013
Spring 2013
Winter 2012
Fall 2012
Summer 2012
Spring 2012
Winter 2011
Fall 2011
Summer 2011
Spring 2011
Winter 2010-11
Fall 2010
Summer 2010
Spring 2010
Winter 2009
Fall 2009
Summer 2009
Spring 2009
Winter 2008
Fall 2008
Summer 2008
Spring 2008
Winter 2007
Fall 2007
Summer 2007
Spring 2007
Winter 2006
Fall 2006
Summer 2006
Spring 2006
Winter 2005
Fall 2005
Summer 2005
Spring 2005
Winter 2004
Fall 2004
Summer 2004
Spring 2004
Winter 2003
Fall 2003
Summer 2003
Spring 2003
Fall/Winter 2002
Nexus
Nexus DEFINED
A connected group or series; a bond, a connection.

Nexus is published quarterly for Newfoundland and Labrador's physicians. It is a forum for the exchange of views, ideas and information for members.