Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

The real estate investment trust (REIT) is a widely used structure for Canadian sponsors seeking to pool capital for income-producing real estate in a tax-efficient manner. In Ontario’s private capital markets, sponsors increasingly deploy private REITs to attract high-net-worth individuals, family offices, and institutional investors. However, forming and operating a compliant REIT can require coordination across trust law, tax law, securities regulation, continuous disclosure expectations, and the practical realities of real estate ownership and financing.

Unlike a limited partnership, a REIT is typically structured as a unit trust established under a declaration of trust. Trustees hold legal title to the assets, exercise management authority, and owe fiduciary duties to unitholders. The structure raises distinct considerations, including trustee liability, governance design, and securities law classification risk where the trust exhibits investment fund characteristics. This article outlines the formation process for a REIT with an Ontario focus, examines the applicable tax and securities framework, and highlights key compliance and structuring issues relevant to sponsors using a trust vehicle to acquire and operate real estate.

Regulatory Framework and Sources of Law

A REIT sits at the intersection of trust law, securities regulation and taxation. The foundational instrument is the declaration of trust, which establishes the trust, sets governance rules, outlines trustee powers and fiduciary duties, and defines unitholder rights. Unlike corporations, trusts in Ontario are largely creatures of the common law and equity, supplemented by specific statutory provisions (for example, the Trustee Act (Ontario)). Trustees owe fiduciary duties analogous to corporate directors, including duties of loyalty, care and impartiality.

From a securities law perspective, units of a REIT constitute “securities” within the meaning of s. 1.1 of the Securities Act (Ontario). A private REIT must therefore distribute its units in reliance on prospectus exemptions under NI 45-106, most commonly the Accredited Investor exemption and/or the Offering Memorandum (OM) exemption. 

Classification issues arise where the trust pools capital from passive investors and offers liquidity at a price determined by reference to net asset value (NAV). In particular, NAV-based redemption rights are a defining feature of a “mutual fund” under the Securities Act (Ontario). If the trust meets that definition, it falls within the scope of NI 81-106 ‘Investment Fund Continuous Disclosure’ in Ontario, even if it is not a reporting issuer, subject to the filing exemption available to non-reporting issuer mutual funds.

NI 31-103 governs potential registration of the manager or sponsor. A REIT sponsor must assess whether the trust constitutes an investment fund, whether anyone is advising with respect to investing in securities, and whether distribution activities amount to being in the business of trading, as these determinations govern whether registration as an investment fund manager, adviser, or exempt market dealer is required. In private structures, sponsors often engage a registered exempt market dealer to satisfy dealer registration requirements.

Tax treatment is determined under the Income Tax Act (Canada) (“ITA”) and its regulations, which sets out the conditions under which a trust may qualify as a “mutual fund trust” and, separately, defines a “real estate investment trust” for purposes which can be relevant for certain public REITs.

Depending on the real estate assets involved, additional regulatory regimes may apply, such as the Land Transfer Tax Act (Ontario), municipal zoning and planning legislation, Canadian Mortgage and Housing Corporation (CMHC) rules, and mortgage brokering statutes if the REIT originates loans.

Definitions and Thresholds

A REIT is typically defined in its declaration of trust as a unit trust formed to acquire, hold and manage real estate or real estate related assets for the benefit of unitholders. Legally, the REIT is not a separate legal person but operates through its trustees, who hold title to assets on behalf of the trust. The governance structure is therefore contractual and fiduciary rather than statutory.

Some real estate trusts use the term “REIT” as a commercial descriptor without seeking to qualify as a “real estate investment trust” within the meaning of s. 122.1 of the ITA. In private structures where the specified investment flow-through (SIFT) regime does not apply, the statutory REIT tests are generally not relevant and the trust is taxed under the ordinary trust rules. By contrast, where a trust is publicly traded and would otherwise fall within the SIFT regime, it must satisfy the detailed income, asset, and listing requirements in section 122.1 to qualify as a REIT as defined in the ITA and remain outside SIFT taxation.

From a securities law standpoint, Accredited Investor thresholds under NI 45-106, s. 1.1 such as financial assets exceeding $1 million or income exceeding $200,000 (or $300,000 with a spouse) remain the most common gateway for private REIT investors in Ontario. If a REIT uses the offering memorandum (OM) exemption, Form 45-106F2 disclosure and risk acknowledgment obligations apply.

Application in Practice

Forming a REIT begins with drafting the declaration of trust, which operates as the REIT’s constitutional document. It outlines trustee appointment, powers and duties, unitholder meeting requirements, valuation policies, investment restrictions, distribution policies and amendment procedures. Trustees are often a mix of nominee directors of the sponsor and independent appointees, and they must meet the fiduciary standards expected of trust fiduciaries under Ontario law.

The sponsor typically establishes a management entity that enters into a management agreement with the trustees. This agreement delegates day-to-day property management, leasing, financing, acquisitions, dispositions and operational oversight. The manager earns fees for asset management, property management and acquisitions, subject to conflict-of-interest provisions.

The REIT then creates its offering documents, which may be a Private Placement Memorandum (PPM) or an Offering Memorandum (OM) depending on the exemption strategy. Regardless of exemption, the documents must present balanced disclosure of strategy, risks, fees, governance, conflicts and tax considerations. Units are offered under NI 45-106 exemptions, and each subscription requires due-diligence steps to confirm investor eligibility. After each closing, the REIT files Form 45-106F1 on SEDAR+ within ten days.

Operationally, valuation and financial reporting obligations are driven by the trust’s securities law classification rather than by the prospectus exemption relied upon. If the trust constitutes a “mutual fund” under the Securities Act (Ontario), NI 81-106 requires audited annual financial statements prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises, which is IFRS, including the application of IAS 40 for investment property measurement. This requirement applies even where the trust is not a reporting issuer and distributes units solely under, for example, the Accredited Investor exemption, subject to the filing exemption available to non-reporting issuer mutual funds.

If the trust does not meet the definition of a mutual fund and is not a reporting issuer, securities legislation does not automatically mandate IFRS. In that case, accounting standards may instead be shaped by contractual disclosure commitments, lender requirements, tax considerations, and investor expectations. Regardless of classification, where net asset value is calculated or liquidity is offered, valuation methodologies must be documented, consistently applied, independently supported where appropriate, and transparently disclosed.

Grey Areas and Regulator Focus

A recurring challenge concerns whether a REIT is an investment fund for securities law purposes. While publicly listed REITs can be expected to be characterized as an investment fund, private REITs sometimes operate like real estate operating companies rather than pooled investment vehicles. The distinction turns on investor control, redemption rights, business activity and the degree to which the REIT is actively engaged in real property operations rather than passively investing in securities or financial instruments. OSC staff have historically taken a substance-based approach, and REITs with redemption features or passive investment strategies may attract investment fund classification even when they hold physical property.

Another area of regulatory scrutiny involves valuation practices. Real estate valuations rely on appraisal methodology, cash-flow modelling and cap-rate assumptions. OSC reviews often focus on whether valuations are consistently applied, independently supported and transparently disclosed. Material conflicts, such as managers participating in property acquisitions or development transactions, must be carefully managed and disclosed.

Private real estate trusts that are not publicly traded are generally outside the SIFT regime, and the statutory REIT definition in section 122.1 of the ITA is typically not engaged unless the structure contemplates public trading.

Interactions with Adjacent Regimes

A REIT structure typically engages overlapping regulatory regimes. NI 31-103 governs potential registration of the manager as an investment fund manager, adviser, or dealer depending on the trust’s classification and the sponsor’s activities. NI 45-106 shapes the distribution strategy and disclosure framework. Real estate law, land registration requirements, and lender constraints must also be integrated into the structure to ensure enforceability of trustee authority and compliance with financing arrangements.

Illustrative Scenarios

Consider a sponsor establishing an income-oriented real estate trust to acquire stabilized multifamily assets across Ontario. The trust distributes units to accredited investors in reliance on NI 45-106. Unitholders have no day-to-day control over operations, and the trust provides quarterly redemptions at a price determined by reference to net asset value (NAV). On those facts, the structure is likely to meet the definition of a “mutual fund” under the Securities Act (Ontario), since the defining feature is the right of redemption at NAV rather than the nature of the underlying assets. Accordingly, NI 81-106 applies in Ontario even if the trust is not a reporting issuer, subject to the filing exemption available to non-reporting issuer mutual funds. The presence of NAV-based liquidity materially increases regulatory focus on valuation policies, independence and oversight of NAV determinations, audit quality and timing, liquidity management, and consistency between offering disclosure and actual redemption practices.

In another scenario, a development-oriented REIT focuses on acquiring land and engaging in active development. Although structured as a REIT for tax purposes, the entity’s activities resemble an operating business rather than a passive investment fund. Trustees maintain active oversight of development operations and ensure that subsidiary structures preserve tax treatment. The OSC may therefore take the view that the REIT is not an investment fund.

Lastly, consider a cross-border REIT seeking U.S. capital raising may rely on Regulation D for U.S. investors and NI 45-106 for Canadians. The tax structuring must address U.S. withholding tax and Foreign Investment in Real Property Tax Act (FIRPTA) exposure, often through blocker corporations. The manager must ensure disclosure documents harmonize cross-border requirements and clarify how foreign investors are treated.

Compliance Checklist

Structure

• Design trust structure for Income Tax Act (Canada) and Ontario securities compliance.
• Settle declaration of trust covering trustee authority, governance, investment restrictions, valuation, conflicts, distributions and redemption rights.
• Form any subsidiary entities (e.g. GP/LPs) that may be use as part of the structure.

Management

• Incorporate the management company
• Put a management agreement in place defining scope, compensation, conflicts and termination.
• Confirm NI 31-103 registration analysis for manager and affiliates.

Offering

• Confirm prospectus exemption under NI 45-106.
• Prepare offering memorandum or subscription package with tax disclosure, distribution policy, risk factors and fee disclosure.
• Implement investor qualification procedures.
• File Form 45-106F1 within prescribed timelines after closing.
• Maintain documents and records.

Operations

• Implement valuation and financial reporting framework.
• Adopt conflict of interest policy.
• Conduct annual REIT tax qualification testing, if applicable.

Ongoing Compliance

• Monitor asset and income composition for REIT status, if applicable.
• Review subsidiary structure and debt arrangements.
• Monitor redemption rights and liquidity.
• Ensure ongoing securities filings and compliant marketing practices.

What’s Changing

The OSC and CSA continues to evaluate exemptions and disclosure regimes that affect private REITs, including revisions to the offering memorandum (OM) exemption, expanded definitions of Accredited Investor categories and evolving regulatory focus for non-reporting investment funds. Proposed changes to NI 31-103 relating to conflicts of interest and know-your-product (KYP) obligations may increase compliance expectations for REIT managers. Sponsors should monitor OSC and CSA Staff Notices and Department of Finance releases for updates affecting both securities and tax compliance.

Conclusion and Next Steps

A private REIT offers powerful advantages for real estate sponsors seeking to combine tax efficiency with real-asset investing. But the structure demands careful planning. Sponsors must navigate trust formation, securities exemptions, registration obligations, valuation standards and tax-qualification tests, all while maintaining governance systems that meet investor and regulatory expectations. A well-structured REIT can form the foundation for a scalable real estate platform that supports both income and growth, but only if its legal architecture is designed with precision from the outset.

Book a Consultation

If you are forming, restructuring, or operating a real estate investment trust (REIT) in Canada, contact us to schedule an initial consultation with Nick Wright.