A line will need to be drawn between a REIT's passive ownership and its operation of a business, says Patricia Koval in The Globe and Mail

March 08, 2007

Income trust executives are confident that Ottawa will stand by its word and exclude Canadian REITs from its coming tax rules. But if it doesn’t, experts say that the strong demand in the private market for quality real estate will see REIT valuations maintained, if not enhanced, and spur a large amount of takeovers or going-private transactions.

Officials in the Department of Finance are working on the final regulations. The definition of a REIT will need to be clarified so that it includes those companies the government intends to exempt from the new tax—such as REITs that own commercial properties—but excludes others, such as restaurant chains. REITs that own hotels or seniors' residences, and earn substantial income aside from just their rental income, are also currently undefined.

"The reality is, a REIT is basically an income trust focused on the ownership and operation of real property," says Patricia Koval. "And where do you draw the line between passive ownership and the operation of a business that involves that real property?"

Any unexpected harm imposed on REITs by the government could be good news for private equity firms, who are already scouring the industry for opportunities.

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