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Investor Site Last Updated:
August 30, 2010
REIT Status for Canadian Income Tax
Distributions - Canadian Tax Information
REIT Status for U.S. Income Tax
Distributions - U.S. Tax Information

Classification of Extendicare REIT for Canadian Federal Income Tax Purposes

Extendicare Real Estate Investment Trust (Extendicare REIT) is an unincorporated open-ended limited purpose trust established under the laws of the Province of Ontario. For Canadian income tax purposes, Extendicare REIT currently qualifies as a “mutual fund trust”. Prior to new legislation relating to the Canadian federal income taxation of publicly traded trusts, as described below, income earned by Extendicare REIT and distributed annually to its unitholders was not subject to taxation in Extendicare REIT. 

On October 31, 2006, the Minister of Finance (Canada) announced proposals to amend the Income Tax Act (Canada) (the "Tax Act")  to alter the taxation regime applicable to certain publicly traded entities that are specified investment flow-through trusts or partnerships, or SIFTs, and their investors (the “SIFT Rules”). The SIFT Rules were subsequently enacted by Bill C-52, the Budget Implementation Act, 2007, which received Royal Assent on June 22, 2007. Extendicare REIT is a SIFT, and is therefore subject to the SIFT Rules.

Under the SIFT Rules, an income trust that is a SIFT is subject to tax in respect of certain income that is distributed to its unitholders, at rates that are substantially equivalent to the general corporate tax rate applicable to Canadian corporations. Distributions from income in respect of which this tax is payable will be treated in the same manner as taxable dividends from a taxable Canadian corporation in the hands of unitholders and will be eligible for the enhanced dividend tax credit if paid to an individual resident in Canada. Distributions paid by a SIFT as returns of capital will not be subject to the distribution tax contained in the SIFT Rules.

The SIFT Rules generally apply to a SIFT for taxation years ending after 2006 unless the SIFT would have qualified as a SIFT on October 31, 2006, in which case the SIFT is eligible for transitional relief from the SIFT tax through 2010. Extendicare REIT would not have qualified as a SIFT on October 31, 2006, because its units were not listed or traded on a stock exchange or other public market on that date. Furthermore, due to the nature of its income and investments, Extendicare REIT does not qualify for the exemption from the SIFT Rules applicable to “real estate investment trusts” (as defined in the SIFT Rules). As a result, Extendicare REIT is subject to the SIFT tax commencing January 1, 2007.

On July 14, 2008, December 4, 2008 and February 2, 2009, the Finance Minister released draft amendments to the Tax Act (the “Proposals”), including certain amendments to the SIFT Rules. Among other things, the Proposals include an amendment to the definitions of “SIFT trust” and “SIFT partnership” to specifically exclude certain trusts and partnerships that are wholly owned by a SIFT. These amendments, which are not yet enacted but which are to take effect from October 31, 2006, do not change the status of Extendicare REIT as a SIFT, although they confirm that Extendicare Trust, which is wholly owned by Extendicare REIT, is not a SIFT. Management has assessed the impact of the Proposals on Extendicare LP and has concluded that Extendicare LP should not be treated as a SIFT.  

Distributions – Canadian Tax Information 
The following information is intended to assist unitholders of Extendicare REIT and Exchangeable LP units in the preparation of their income tax returns and does not constitute legal or tax advice. Unitholders are advised to consult with a tax advisor as residency and other circumstances may vary. 

2010 Distributions for Canadian Residents Only
Management estimates that approximately 70% of the 2010 distributions of the REIT and Partnership will be characterized as tax deferred returns of capital for Canadian residents. To the extent the remaining 30% of distributions of the REIT and Extendicare LP to be made in 2010 are taxed as dividends, those paid to Canadian residents are eligible dividends as per the Income Tax Act (Canada).

A portion of these same distributions in 2010 will be subjected to 30% U.S. withholding tax if you failed to submit a valid form W-8 BEN to your broker/administrator.  For further information refer to "2008 Change to Composition of Distributions for U.S. Tax Purposes and Related U.S. Tax Withholding" below.

No assurance can be given that the composition of distributions by Extendicare REIT and Extendicare Limited Partnership for tax purposes will not be changed from that described above. Any change in such composition of Extendicare’s distributions will affect the after-tax return of its unitholders.

Canadian Withholding Tax Obligations
For foreign resident (non-Canadian) holders of units of Extendicare REIT and Extendicare Limited Partnership , the portion of the distribution that is taxable income for Canadian tax purposes (estimated to be 30% for 2010) will be subject to Canadian withholding tax at the rate applicable to foreign resident holders when distributed to such holders. This may be a 25% rate, or lower, if the foreign resident is in a treaty country.

Computershare Trust Company of Canada (Computershare), the transfer agent for Extendicare REIT and Extendicare Limited Partnership will withhold any applicable Canadian withholding tax from the distributions paid to registered holders, other than CDS. The broker/administrator holding the REIT and Exchangeable LP units is responsible for withholding Canadian withholding tax before paying the distributions to U.S. persons and foreign residents.

2009 Distributions for Canadian Residents Only
Approximately 70% of the distributions paid in 2009 by Extendicare REIT and Extendicare Limited Partnership were characterized as tax deferred returns of capital. 

For holders of REIT Units, the 2009 tax components of the distributions were: 
     *  Box 21 - Gross Capital Gain of $0.00529 per unit; 
     *  Box 49 - "eligible" dividend of $0.24671 per unit; and
     *  Box 42 - return of capital of $0.58800 per unit.
 
For holders of Exchangeable LP Units, the 2009 tax components of the distributions were:
     *  Box 50 - interest of $0.13716 per unit;
     *  Box 52 - "eligible" dividend of $0.11484 per unit; and
     *  Box 27 - return of capital of $0.60375 per unit.

Details of the monthly components are provided in the T3 and T5013 forms as submitted to CDS, and included below.

U.S. Form 1042-S Reporting- 2009 Extendicare REIT Distributions
Non-U.S. residents will receive a U.S. Form 1042-S with respect to the 2009 distributions. A portion of the same 2009 distributions reported on either a Canadian Form T3 or T5013, included U.S. source interest income, which may have been subjected to 30% U.S. withholding tax if you failed to submit a valid form W-8 BEN to your broker/administrator. If you did not submit a valid W-8 BEN form, the U.S. tax withheld will be reported on the U.S. Form 1042-S.  The amount of gross income reported in Box 2 of the U.S. Form 1042-S does not represent additional cash distributions paid during the year. It represents the portion of the distributions which are subject to U.S. withholding, and does not need to be reported in the Canadian income tax returns filed by Canadian residents as additional income for tax purposes.

NR4 Reporting - 2009 Extendicare REIT Distributions for Non-Canadian Residents
The income distribution component of the 2009 distributions paid by Extendicare REIT of $0.24671 per unit had two components for purposes of NR4 reporting. One component is an actual dividend flow-through and designated to residents of Canada as a dividend. But for non-residents, it is treated as "trust income" - code 11 on the NR4. The other component is comprised of non-portfolio earnings subject to SIFT tax, the after-tax amount of which is deemed a dividend for both residents and non-residents of Canada - i.e. code 09 on the NR4. The remaining tax deferred return of capital portion is not reported on the NR4.

          NR4 2009
          *  Dividend income (code 09) - $0.12043 per unit
          *  Trust income       (code 11) - $0.12628 per unit


Classification of Extendicare REIT for U.S. Federal Income Tax Purposes

Extendicare REIT elected to be treated as a partnership for U.S. federal income tax purposes. An entity treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. However, as a “publicly traded partnership”, Extendicare REIT will be treated as a non-taxable entity only if at least 90% of its gross income for every taxable year consists of “qualifying income” and Extendicare REIT (if it were a domestic corporation) would not be required to register under the U.S. Investment Company Act. Qualifying income includes certain interest income, dividends, real property rents, gains from the sale or other disposition of real property and any gain from the sale or disposition of a capital asset or other property held for the production of income that otherwise constitutes qualifying income. Extendicare REIT intends to manage its affairs so that it will have sufficient qualifying income in each year and thus expects to be treated as a non-taxable partnership for U.S. federal income tax purposes.

Management will from time to time reassess the benefits of Extendicare REIT’s status for U.S. tax purposes. As such, there can be no assurance that Extendicare REIT will maintain its partnership status for U.S. tax purposes.

Distributions – U.S. Tax Information
The following information is intended to assist unitholders of Extendicare REIT and Exchangeable LP units in the preparation of their income tax returns and does not constitute legal or tax advice. Unitholders are advised to consult with a tax advisor as residency and other circumstances may vary. 

Extendicare REIT is not required to, and does not, calculate its “earnings and profits” pursuant to the United States Internal Revenue Code of 1986, as amended (the “Code”), and therefore no portion of its distributions represent qualified dividend income, or a tax deferred return of capital, for U.S. tax purposes.

2008 Change to Composition of Distributions for U.S. Tax Purposes and Related U.S. Tax Withholding
On April 18, 2008, Extendicare announced a change impacting all unitholders to the taxation of certain distributions for U.S. tax purposes beginning with the May 2008 distribution.

This announcement is relevant for (i) how certain income will be taxed for U.S. tax purposes to U.S. persons who hold units of Extendicare REIT and/or Extendicare Limited Partnership (“U.S. Holders”) and (ii) U.S. withholding tax issues for non-U.S. persons who hold units of Extendicare REIT and/or Extendicare Limited Partnership (“Non-U.S. Holders”).

The change to the composition of distributions does not affect Canadian taxation of distributions, including the Canadian tax withholding obligations of Extendicare in respect of distributions to non-Canadian holders of Units.

The change to the composition of distributions arises from the financing structure implemented for the 2007 acquisition of Tendercare. Interest payments to be made semi-annually in May and November by a wholly owned U.S. subsidiary of Extendicare REIT will be treated as U.S. source interest income of Extendicare REIT and Extendicare Limited Partnership, and consequently of the unitholders for a portion of distributions in respect of those months, for U.S. tax purposes.

The actual amount of U.S. source interest income pertaining to distributions to be declared in May and November will be disclosed in the distribution press releases for those months, and are indicated in the table below. 

U.S. Source Interest in May and November Distributions

 Record Date  Payment Date

 U.S. Source Interest

 May 30, 2008  June 16, 2008  C$0.0497
 November 30, 2008  December 15, 2008  C$0.0331
 May 29, 2009  June 15, 2009  C$0.02093
 November 30, 2009  December 15, 2009  C$0.01828

1. Non-U.S. Holders 
The portion of the distributions that constitute U.S. source interest income is subject to U.S. withholding tax at a 30% statutory rate. A Non-U.S. Holder may be eligible for the portfolio interest exemption under Sections 871 and 881 (the “Portfolio Interest Exemption”) of the Code. A Non-U.S. Holder may assert entitlement to the Portfolio Interest Exemption by submitting a valid Form W-8BEN to their broker/administrator. This is explained in more detail in the Management Proxy Circular dated September 13, 2006.

2. U.S. Holders
The portion of the distributions that constitute U.S. source interest income is subject to U.S. backup withholding tax at the 28% statutory rate. U.S. Holders who receive distributions of U.S. source income can avoid backup withholding by submitting a valid Form W-9 to their broker/administrator.

Obligation to Withhold U.S. Tax
Extendicare will withhold any applicable U.S. withholding tax before distributions are forwarded to its transfer agent, Computershare Trust Company of Canada, for payment to registered holders, including CDS.

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