Q: Hi 5i,
This is in response to Earl’s question about managing an account for someone whose OAS supplement is reduced substantially in proportion to any taxable income from investments. A good way to generate some cash flow giving the effect of income but without taking the full impact of the supplement reduction might be to focus a portion of the portfolio on REITs whose growth and development activities allow them to designate all or most of their distributions as ‘return of capital’ or ROC. The cash payments come monthly, typically, but the ROC designation turns some or all of that cash from income into a reduction of the cost base for the investment, effectively swapping current year income tax on the payments for capital gains tax that is deferred until the eventual sale of the holding. Because any portion of a cash distribution designated as ROC is effectively not income, there should be no reduction of the OAS supplement resulting from receiving that ROC.
There is imperfect visibility with this approach because one cannot be certain in advance exactly how much of the year’s distributions will be designated ROC. That information comes with the tax slips and related info after year-end. But with that caveat, I have held REITs over many years that have designated most, sometimes all, of their distributions as ROC, year after year. A good example that I have held would be Artis REIT (AX.UN) but I expect that other 5i members have several other favorite examples. If you are willing to dig a bit, a REITs’ past record regarding ROC designations is usually available on its website or potentially through its Investor Relations people.
This is in response to Earl’s question about managing an account for someone whose OAS supplement is reduced substantially in proportion to any taxable income from investments. A good way to generate some cash flow giving the effect of income but without taking the full impact of the supplement reduction might be to focus a portion of the portfolio on REITs whose growth and development activities allow them to designate all or most of their distributions as ‘return of capital’ or ROC. The cash payments come monthly, typically, but the ROC designation turns some or all of that cash from income into a reduction of the cost base for the investment, effectively swapping current year income tax on the payments for capital gains tax that is deferred until the eventual sale of the holding. Because any portion of a cash distribution designated as ROC is effectively not income, there should be no reduction of the OAS supplement resulting from receiving that ROC.
There is imperfect visibility with this approach because one cannot be certain in advance exactly how much of the year’s distributions will be designated ROC. That information comes with the tax slips and related info after year-end. But with that caveat, I have held REITs over many years that have designated most, sometimes all, of their distributions as ROC, year after year. A good example that I have held would be Artis REIT (AX.UN) but I expect that other 5i members have several other favorite examples. If you are willing to dig a bit, a REITs’ past record regarding ROC designations is usually available on its website or potentially through its Investor Relations people.
