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Investment Q&A

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Q: Hi 5i,
Just a comment in relation to Leon’s question about ROC. It seemed there was an aspect of it left unaddressed:
Q: With respect to ROC and reits. Should I as an investor with most assets in registered accounts avoid as a rule those reits with high ROC.
I assume ROC lowers the value of the company with each distribution . In a non registered account tax provisions allow one to offset the original coast by the same , this advantage is lost in a registered account.
Not being an accountant - am I missing something here?

While you covered that one holding a high-ROC REIT in a registered account gets no specific benefit from the ROC designation of the distributions, the fact is that for those people the ROC designation may simply be irrelevant. Specifically, it does not follow that high-ROC REITs should be avoided as registered account holdings; they may be well worth owning regardless of the account. The main point is just that if you have both a registered account and a non-registered/taxable account, a high-ROC REIT may be most advantageously held in the non-registered account.

The other suggestion, that ROC lowers the value of the company sounds like a misunderstanding (though it certainly lowers the cost base of one’s units). Money that companies or REITs pay out in any form (dividends, ROC, trust distributions, interest) may be taken to nominally lower the value of the company, relative to the alternatives of keeping that same cash on the balance sheet or reinvesting it in the company’s business. But again the ROC designation is completely irrelevant in this respect. Companies either have the capacity to pass along the potential tax advantage or they don’t. Of course any company that generates no value (operating cashflow or increasing asset value) but pays out a steady stream of cash must necessarily erode its value over time. This is true whether or not the cash paid out is designated as ROC for tax purposes. But many Canadian REITs are able to generate regular income from their properties and stream that income to their unit-holders without diminishing the value of their properties. The fact that some of them are able to designate some of that income as ROC for a period of time is not by itself an indication of any diminishment or problem with those REITs.

But two points that anyone considering the impact of ROC from their holdings should be aware of: 1. You don’t get to find out in advance how much of a given year’s distributions will be designated as ROC and 2. the proportion of distributions designated as ROC by a particular REIT can change significantly from year to year. So people should be somewhat careful with assuming that their future REIT distributions either will or will not be designated as ROC in some specific proportion. The reality that comes with the T-slips may be quite different.
Cheers!
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