Which Canadian REITs Are Actually Tax-Efficient in a Non-Registered Account?

Have you run out of TFSA room but still want an income stream? Well, this post is for you. As you probably already know - REITs are best suited for TFSAs because of how distributions are structured. I wrote about this a while back. If you are not sure what I mean by “distribution structure”, please read my previous post before continuing with this one.

Here is where distribution structure is really important - two REITs can pay you the exact same $1,000 in cash distributions, and one of them can cost you $300 in tax while the other costs you $0. Same cheque. Wildly different tax bill. The difference lives in how the REIT classifies what it's paying you, and that classification is public information most people never bother to look up. This is the distribution structure.

So I looked up the distribution structure of a handful of REITs, going back several years, using their own investor-relations tax pages. Here's what I found and how you can use this information and apply it to other REITs you have your eye on.

The Three Buckets Every Distribution Gets Sorted Into

Before the comparison, you need the mechanics, because this is where the "just use a TFSA" advice falls apart. A REIT distribution isn't a dividend. It's a mix of up to three things, and the mix is disclosed every year on a T3 slip:

• Other income - mostly rental income after expenses. Fully taxable at your marginal rate. This is the bad one in a non-registered account.
• Capital gains - the REIT sold a property for more than it paid. Only 50% of this gets added to your taxable income, same as if you sold a stock.
• Return of capital (ROC) - the REIT is handing back some of your own money, usually because of capital cost allowance (depreciation) deductions that let it distribute more cash than its actual taxable income. You pay zero tax on this in the year you receive it. Instead, it lowers your adjusted cost base, so you defer the tax until you eventually sell your units.

Registered accounts (TFSA, RRSP) make this whole conversation irrelevant, because none of it is taxed regardless of the mix. But if you're out of registered room, or you're building a taxable account on purpose, the composition of a REIT's distributions is arguably more important than its yield.

The REIT That Proves the "TFSA Rule" Isn't Universal

Take CT REIT, the trust that owns the real estate Canadian Tire leases back from itself. In 2025, its distribution broke down like this - 91.78% other income, 0.43% capital gains, and 7.80% return of capital. The year before, it was even more lopsided - 95.22% other income, with return of capital sitting at basically zero.

That's about as bad as it gets for a non-registered account. Nearly the entire distribution shows up on your tax return as ordinary income, taxed at your full marginal rate, with no dividend tax credit to soften it. If you're in a 40%+ bracket, CT REIT in a taxable account is close to the worst-case scenario for this asset class. This is exactly the REIT that belongs in your TFSA or RRSP, not your non-registered account.

The REITs Actually Doing You a Favour

Now compare that to RioCan. In 2025, RioCan's distribution was 58.49% other income, 3.34% capital gains, and 38.17% return of capital, meaning over 41% of the payout was either tax-deferred or taxed at half rate. And it's been trending in that direction. In 2024 it was 60.90% other income with 18.71% capital gains and 20.39% ROC, and in 2023, 68.41% other income with 22.95% capital gains and 8.64% ROC.

Go back further and RioCan's ROC-heavy years get even more dramatic. In 2014, 40.23% other income against 51.95% return of capital, and in 2012, just 38.29% other income with 53.22% ROC. The mix moves around, but a REIT with that kind of history is at least a candidate for a non-registered account, not an automatic TFSA-only holding.

Smaller, more debt-and-CCA-heavy REITs can be even more extreme. PROREIT, for instance, estimated that approximately 100% of its 2025 monthly cash distributions would be tax-deferred due to capital cost allowance and other deductions. That's a REIT where, in a given year (this is important!), you could receive the full cash distribution and owe nothing on it until you sell.

Older data backs up the same pattern across the sector. Looking at 2022 tax years, Crombie REIT split its distribution fairly evenly between capital gains (48%) and other income (52%), and Canadian Apartment Properties REIT (CAPREIT) was even more favourable, with roughly 68% capital gains against 32% other income. Compare that to Choice Properties in the same year, where distributions were 89.4% regular income, 9.6% capital gains, and only 1% return of capital - basically the CT REIT problem with a different logo.

Why You Can't Just Trust Last Year's Numbers

Here's the catch, and it's the reason this post is a "check every year" exercise rather than a "buy these five tickers" list - the mix is not stable.

CAPREIT is the clearest example. The 2022 numbers above made it look like one of the most tax-friendly REITs on the TSX. But recent commentary on CAPREIT describes its distributions as now being mostly ordinary income with some return of capital - a meaningfully different profile than a few years ago. On top of that, CAPREIT declared a special non-cash distribution of $0.90 per unit in December 2025, paid in additional units, specifically to flow out a portion of the year's net capital gains to unitholders for tax purposes - a mechanic that changes your ACB and tax reporting in a way a simple "check the yield" approach would never catch.

The lesson - a REIT's tax efficiency is a function of its accounting in a specific year, how much CCA it's claiming, whether it sold properties, whether it's doing a special distribution, not a fixed personality trait. A REIT that was ROC-heavy in 2020 can flip to income-heavy in 2025 and back again.

What to Actually Do With This

If you've got TFSA and RRSP room, the simplest rule still applies - park the REITs with the highest "other income" percentage there first, since that's the portion getting hit hardest by tax. CT REIT and Choice Properties are the textbook example of this - hold them registered if you can.

Let’s go back to the start of the post - if you're already maxed out and building a non-registered account anyway and you want the cash flow, don't write off REITs entirely. Look at the actual T3 tax breakdown before you buy, not the yield:

1. Search "[REIT name] tax information" - every REIT posts this on their investor relations site, usually going back a decade or more.
2. Look at the last 3-5 years, not just one. A single ROC-heavy year could be a one-off asset sale, not the trend.
3. Add capital gains % and ROC % together - that's roughly the portion of your distribution getting favourable tax treatment.
4. Remember ROC isn't free - it lowers your adjusted cost base, so you're deferring tax, not avoiding it permanently. Track your ACB, especially if a broker doesn't do it for you automatically.

None of this is a reason to overhaul your account structure for a few percentage points of tax efficiency. Trading costs and the loss of registered contribution room usually outweigh the benefit. But if you're choosing between two similar REITs for a taxable account, or deciding what goes in the TFSA versus what spills into non-registered, the T3 breakdown is a five-minute lookup that can meaningfully change your after-tax return. Most people never do it because "REITs go in the TFSA" is easier to remember than "check the composition." It's just not always true.

I'm not a tax professional, and REIT distribution composition changes annually. Always check the current year's T3 tax information before making account-placement decisions, and talk to an accountant if the numbers are meaningful to your situation. Remember that I am learning as I go and simply distilling my learning journey with you.