2 ND BIENNIAL ONTARIO NEW YORK LEGAL SUMMIT

2 ND BIENNIAL ONTARIO NEW YORK LEGAL SUMMIT STRUCTURING FOR COMMERCIAL AND PERSONAL INVESTMENTS Co-Chairs: Thomas Nelson, Hodgson Russ LLP Lorne Saltman, Gardiner Roberts LLP Panelists: Mary Voce, Greenberg Traurig, LLP Jon Northup, Goodmans LLP

Agenda: I. U.S. Income Taxation of Income From U.S. Real Estate In General II. U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal estate and gift taxation III. Alternative Structures for Investing in U.S. Real Estate 2

I. U.S. Income Taxation of Income From U.S. Real Estate In General 3

U.S. Income Taxation of Income From U.S. Real Estate In General A. Non-U.S. persons two types of income from U.S. sources, with different rules: 1) Investment Income 2) Business Income B. There is a further sub-characterization: 1) Ordinary Income 2) Capital Gain 4

U.S. Income Taxation of Income From U.S. Real Estate In General C. Investment Income includes, e.g., interest, dividends and rents that are not earned in an active trade or business (sometimes referred to as fixed, determinable, annual or periodic income or FDAP Income ) Canadian individuals and corporations taxed the same: 1) 30% gross withholding tax unless reduced or eliminated by a treaty (or, in the case of interest, by the portfolio interest exemption) 5

U.S. Income Taxation of Income From U.S. Real Estate In General 2) Withholding Rates under U.S. Canada Treaty: a) Interest 0% b) Dividends from U.S. corporations i. 5% if paid to a Canadian corporation that owns at least 10% of the voting stock of the payor (special rules apply to REITS) ii. Otherwise 15% c) Passive rents from real property 30% (no benefit from treaty) 3) Election is available to treat rental activities as Business Income rather than Investment Income to allow taxation on a net basis 6

U.S. Income Taxation of Income From U.S. Real Estate In General D. Business Income is income that is effectively connected with a U.S. trade or business (referred to as ECI ) 1) Subject to tax the same as a U.S. person carrying on a trade or business 2) Under the U.S.-Canada Treaty, U.S. source business income is only taxable if it is attributable to a permanent establishment ( PE ) in the U.S. 3) However, U.S. real property generally will be a PE 7

U.S. Income Taxation of Income From U.S. Real Estate In General E. Capital gain is gain from the sale or exchange of a capital asset (which may be an asset held either in connection with a trade or business or for investment) 1) As a general rule, capital gain from the sale of property that is not used in a U.S. trade or business is sourced to the country of the seller (in this case Canada) and therefore is not subject to U.S. tax, whereas gain from business property is sourced to the U.S. and is subject to U.S. tax 2) Under the Foreign Investment in Real Property Tax Act ( FIRPTA ), gain from the sale or exchange of a U.S. real property interest (USRPI ) is deemed to be Business Income and is therefore subject to U.S. tax even if it is not actually used in a trade or business 8

U.S. Income Taxation of Income From U.S. Real Estate In General a) A USRPI includes: i. Direct holdings in U.S. real property (which includes land, buildings, crops, timber, mines, wells and other natural deposits, and associated personal property) ii. Indirect interests in U.S. real property (other than an interest solely as a creditor), such as rights to share in the appreciation in value of U.S. real property, gross or net proceeds or profits from real U.S. property, contracts and options to acquire U.S. real property and certain leases with respect to U.S. real property. 9

U.S. Income Taxation of Income From U.S. Real Estate In General a) A USRPI includes: (continued) iii. iv. Most interest in partnerships (U.S. or Canadian) that own U.S. real property interests Stock in a U.S. real property holding corporation ( USRPHC ), which is a U.S. corporation the value of which is, or was at any time during the prior 5 years, at least 50% attributable to USRPIs with three exceptions: A. if a USRPHC disposes of all of its USRPIs in fully taxable transactions it ceases to be a USRPHC B. Publicly traded stock generally is not subject to FIRPTA if the Canadian investor has less than a 5% interest C. Stock of a domestically-controlled REIT is not subject to FIRPTA 10

U.S. Income Taxation of Income From U.S. Real Estate Taxation of Canadian Individuals F. Taxation of Canadian Individuals 1. Ordinary Business Income: a) The U.S. federal income tax graduates to a maximum rate of 39.6% b) Plus state and local taxes (which can range from zero to >15%, depending on the locality) (deductible against federal income tax) 2. Capital Gain: a) Long-term capital gain is subject to U.S. federal income tax at a maximum rate of 20% (25% in the case of depreciation recapture) b) Plus state and local taxes (which can range from zero to >15%, depending on the locality) (deductible against federal income tax) 11

U.S. Income Taxation of Income From U.S. Real Estate Taxation of Canadian Corporations G. US Taxation of Canadian Corporations 1) Ordinary Business Income and Capital Gain: a) U.S. federal income tax graduates to a maximum of 35% (no reduced rate for capital gains realized by a corporation) b) Plus state and local taxes, which can range from zero to >15%, depending on the locality (deductible against federal income tax, subject to certain limitations) 12

U.S. Income Taxation of Income From U.S. Real Estate Taxation of Canadian Corporations c) Plus a Branch Profits Tax i. Imposed on after-tax income not reinvested in the business in the year earned (or when withdrawn from the business in a later year), except that there is an exclusion for gains from final sale of U.S. assets and withdrawal from U.S. ii. iii. Under the U.S.-Canada treaty the branch profits tax rate is limited to 5%, and the first C$500,000 is exempt However, treaty benefits generally not allowed for Canadian corporations directly owning interests in U.S. limited liability companies. Branch profits tax is 30% for such structures 13

U.S. Income Taxation of Income From U.S. Real Estate U.S. Tax Returns H. Requirement to File U.S. Tax Returns 1) If a Canadian person has only Investment Income No requirement to file U.S. tax return provided the payor has properly withheld the required taxes 2) If a Canadian person has Business Income (including FIRPTA gains, which are treated as Business Income) Must file U.S. tax returns 3) Note that even if a Canadian individual or corporation is not required to file a U.S. tax return, the U.S. entity in which it invests might be required to identify such person and report payments made to such person on its own tax return 14

U.S. Income Taxation of Income From U.S. Real Estate U.S. Withholding I. US Withholding Taxes 1) Three types: a) Withholding at source on Investment Income is a final tax b) Some withholding taxes are merely collection mechanisms and are credited against the Canadian taxpayers U.S. taxes reported on their U.S. tax returns i. Withholding at maximum applicable rates is required of partnerships and certain trusts on allocations or distributions of Business Income (including FIRPTA gains, which are treated as Business Income) ii. i. Note: U.S. source business income earned directly is not subject to U.S. withholding tax (the recipients are expected to file U.S. tax returns and report the income) Purchasers of U.S. real property from Canadian sellers must withhold 10% of gross proceeds 15

U.S. Income Taxation of Income From U.S. Real Estate U.S. Withholdng c) FATCA ( Foreign Account Tax Compliance Act ) Withholding i. A 30% U.S. withholding tax is imposed on payments made to certain foreign financial institutions ( FFIs ) and nonfinancial foreign entities (including certain partnerships and trusts) ( NFFEs ) of A. certain U.S. source Investment Income, B. beginning in 2017, gross proceeds from sales of assets that produce U.S.-source interest and dividends C. also beginning in 2017, payments treated as foreign passthru payments made to foreign intermediaries 16

U.S. Income Taxation of Income From U.S. Real Estate U.S. Withholding i. Unless: ii. A. in the case of a Canadian FFI, such FFI has complied with the Intergovernmental Agreement ( IGA ) between the U.S. and Canada, and B. in the case of a Canadian NFFE, such NFFE has provided information on its substantial U.S. owners to the U.S. payor of the above amounts Pursuant to the IGA, the Canadian government will collect from Canadian financial institutions information on their U.S. account holders and will annually provide that information to the U.S. Internal Revenue Service and, correspondingly, the U.S. government will collect from U.S. financial institutions information on their Canadian account holders and will annually provide that information to Revenue Canada 17

U.S. Income Taxation of Income From U.S. Real Estate Use of Leverage J. Use of Leverage to Reduce U.S. Tax 1. In many investment structures, the foreign investors in U.S. real estate may make loans to the entity that owns the real estate or, more often, to a U.S. holding company that is owned and controlled by the foreign investors. a) Ideally, interest paid on the loan may provide a deduction to the U.S. entity that can be used to offset income from the property b) If properly structured, the interest can be paid to the foreign lender(s) with little or no withholding tax imposed (either as a result of a favorable income tax treaty or the portfolio interest exemption) 18

U.S. Income Taxation of Income From U.S. Real Estate Use of Leverage c) As noted above, interest paid to Canadian persons generally is exempt from U.S. withholding tax under the U.S.-Canada treaty d) Portfolio Interest Exemption Key requirements: Foreign shareholder holds less than 10% of the payor s voting stock Debt instrument must be in registered form (not bearer paper) Not applicable to contingent interest or interest paid to banks Generally not a significant factor in US-Canada structures because of the exemption provided by the U.S.-Canada treaty (unless note is issued or assigned to person not eligible for U.S.-Canada treaty benefits) 19

U.S. Income Taxation of Income From U.S. Real Estate Use of Leverage 2. There are many limitations on the extent to which the above benefits may be fully achieved in the case of loans from the investors in the real estate a) First, the advances must qualify as debt and not disguised equity for U.S. federal income tax purposes, which is a factual inquiry b) There is no statutory definition of debt and its characterization is governed primarily by principles developed in case law and IRS rulings. In Notice 94-47, the Service listed eight factors that are relevant in determining the proper characterization and courts have indicated several others: 20

U.S. Income Taxation of Income From U.S. Real Estate Use of Leverage i. Whether there is an unconditional promise on the part of the issuer to pay a sum certain on demand or at a fixed maturity date that is in the reasonably foreseeable future; ii. Whether holders of the instruments possess the right to enforce the payment of principal and interest; iii. Whether the rights of the holders of the instruments are subordinate to the rights of general creditors; iv. Whether the instruments give the holders the right to participate in the management of the issuer; v. Whether the issuer is thinly capitalized; vi. Whether there is identity between holders of the instruments and stockholders of the issuer; vii.the intent of and label placed upon the instruments by the parties; viii.whether the instruments are intended to be treated as debt or equity for non-tax purposes, including regulatory, rating agency, or financial accounting purposes; and ix. the ability of the borrower to obtain funds from outside sources 21

U.S. Income Taxation of Income From U.S. Real Estate Use of Leverage 3. Other Considerations: a. Section 163(e)(3) and Treas. Reg. Section 1.267(a)-(3)(b) provide that interest owed to a related foreign person is not allowed as a deduction until actually paid. An investor is related to the borrower if the investor owns (directly, indirectly, constructively or via attribution) 50% or more of the borrower b. Section 163(j). Section 163(j) disallows a deduction for some or all of the interest paid by a corporation to a related person (as defined above) if the corporation s ratio of debt to equity exceeds 1.5 to 1 and certain other conditions are met. c. Section 482 Transfer Pricing Rules. Section 482 allows the IRS to recast interest charged in transactions among related parties, including parties acting in concert unless the interest is computed and payable on arm s length terms. d. Must consider tax imposed on the interest in the home jurisdiction of the lenders (i.e., if they will pay a high rate of tax upon receipt, the joy comes out of the deduction to the U.S. investment vehicle) 22

U.S. Income Tax a brief recap: U.S. Source Investment Income Treaty Rate: Interest - 0% Dividends 5%-15% Rent from real property - 30% U.S. Source Business Income Individual: up to 39.6%, plus State and local taxes Corporations: up to 35%, plus branch profits tax (5% under Treaty), plus State and local taxes Long Term Capital Gain from Sale of U.S. Real Property Individual: up to 20% (25% for depreciation recapture), plus State and local taxes Corporations: up to 35%, plus branch profits tax (5% under Treaty), plus State and local taxes Tax imposed via withholding No withholding if earned directly; but withholding at maximum rate if earned through partnership or trust 10% gross withholding by purchaser; also withholding at max. rate if earned through partnership or trust No U.S. return req d U.S. tax return required U.S. tax return required 23

II. U.S. Estate and GIFT Taxation of Interests in U.S. Real Estate Owned By Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation 24

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation A. General Considerations 1) A non-resident alien individual is subject to U.S. estate tax on his or her assets that are located or deemed to be located within the U.S. on date of his or her death 2) A non-resident alien individual is subject to U.S. gift tax on lifetime gifts of U.S.-situs property, which includes directly-owned U.S. real estate but generally does not include intangible property such as shares of corporations 25

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation B. Rates 1. Imposed at rates of up to 40% on value of assets C. Direct Ownership by Individual 1. Estate tax: U.S. real estate subject to estate tax at death. 2. Gift tax: U.S. real estate subject to gift tax for lifetime gifts. 3. Estate tax exemption amount: Under the Treaty, a pro rata portion of the amount available to U.S. citizens based on relative values of U.S.- situs property and worldwide property. Under the Treaty, possible doubling of exemption amount for spousal transfers. 4. Estate tax: Generally disadvantageous for spouses to own U.S. real estate through joint ownership. Tenancy-in-common ownership is generally better to reduce taxable estate of second-to-die. 26

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation D. Ownership Through a Canadian Corporation 1) Estate tax: Shares in a Canadian corporation generally treated as a foreign-situs asset. No U.S. estate tax at death. 2) Gift Tax: Shares in a Canadian corporation are an intangible asset. No gift tax upon a lifetime transfer. E. Ownership through a Canadian Partnership 1) Estate tax: Lack of definitive authority whether partnership interest is a foreign situs asset? Is the position the same for commercial and personal-use property? 2) Estate tax: Can a check-the-box election strengthen the U.S. position? Are postmortem retroactive elections viable? Is there a timing mismatch at date of death in Canada and the U.S.? 3) Gift tax: Is lifetime gift of a partnership interest a gift of an intangible asset? 27

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation F. Ownership Through a Family Trust 1. Gift tax: Trust must acquire and own U.S. real estate from inception 1. must be a gift of cash, not a gift of U.S. real estate. For already owned property, consider possible bona fide sale to family trust. 2. Estate tax: Terms of trust are critical to provide U.S. estate tax protection. Settlor of trust must surrender sufficient dominion and control over trust assets, which limits rights as trustee and beneficiary. Limitations also encompass others who are gratuitous transferors. 3. Estate tax: Works best if spouses are involved one spouse is settlor and other spouse is trustee and beneficiary. Children can also be trustees and beneficiaries. Ascertainable standard needed to limit trustee discretion. Independent trustee used for certain purposes. 4. Estate tax: Could be combined with partnership ownership, where family trust owns LP interest. 5. Estate tax: Can also provide protection to children 5. using generation-skipping trust terms. 28

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate Taxation G. Recap of Estate/Gift Taxation US real property Type of Asset Stock of U.S. Corporation Stock of Foreign Corporation US Grantor Trust US Discretionary Trust Subject to U.S. estate taxation? Yes Yes No Depends on terms Settlor: Depends on Terms Beneficiaries: No Interest in U.S. or Canadian Partnership that owns U.S. real estate or business assets (including entities treated as partnerships for U.S. tax purposes) Unclear 29

III. Alternative Structures for Investing in U.S. Real Estate 30

Alternative Structures for Investing in U.S. Real Estate Structuring Objectives: 1) Minimize U.S. taxation on income and exit gains 2) Avoid exposure to U.S. estate or gift tax 3) Avoid U.S. tax reporting obligations 4) Ensure Canadian tax credit for U.S. taxes paid 31

Alternative Structures for Investing in U.S. Real Estate A. For personal residences or other personally owned real property, the investment may be direct but typically is through a trust or flow-through entity B. For commercial property that will have both U.S. and foreign investors, the U.S. investment entity typically is a U.S. limited partnership (LLCs are generally avoided if possible for Canadianowned structures due to possible denial of Treaty benefits) because the U.S. investors and/or the general partners/managers generally prefer a tax transparent investment entity so their share of the income is subject to only one level of U.S. tax 1) As a partnership, the U.S. investment entity is not itself subject to tax; rather, the income, gains, losses, deductions and credits generated by the investment entity are allocated to the members 32

Alternative Structures for Investing in U.S. Real Estate 2) The income or losses of the partnership retain their character as ECI or FDAP Income and as ordinary income or capital gain in the hands of the members of the partnership 3) For individuals, U.S. or foreign, the tax transparent nature of the investment entity permits them to claim the individual rates applicable to capital gains (20% - 25%) on a sale of the underlying real property or a sale of their interests in the investment entity 4) For corporate investors, or for individual investors who want to invest through a corporate blocker or REIT (e.g., to mitigate exposure to U.S. estate tax or to avoid filing personal U.S. income tax returns), a corporation or domestically controlled REIT may be inserted into the structure between the investors and the investment entity 5) For commercial property owned by an LLC (e.g., if it 5) has majority U.S. members who insist on an LLC rather than an LP), Canadian members may need to interpose a U.S. corporation in ownership chain to avoid denial of Treaty benefits, including potential 30% U.S. branch profits tax 33

Alternative Structures for Investing in U.S. Real Estate Direct Investment C. Direct Investment by Canadian Individual in Personal Use Property Operating income from real property, if any Capital Gains on sale of real estate or interest in Investment Partnership File U.S. Income Tax Returns? Exposure to U.S. Estate Tax? 39.6% 20% - 25% Yes, on sale Yes Canada Canadian Individual U.S. 34

Alternative Structures for Investing in U.S. Real Estate Direct Investment Canadian Tax Implications > Direct investment by a Canadian resident individual without an intervening entity creates an obligation in Canada to report any income or capital gain realized from U.S. sources. Generally, the Canadian resident individual would be permitted to claim a foreign tax credit for the U.S. tax paid on such income or capital gain as an offset against the Canadian tax otherwise payable. > Care must be taken in using an intervening entity. A partnership (whether general or limited) will generally be treated as fiscally transparent, or a pass-through vehicle. Accordingly, the Canadian resident individual partner will be considered to have realized his/her U.S.-source income or capital gain based on the allocation of partnership income and gains. A trust of which the Canadian resident individual is a beneficiary will permit the same flow-through treatment if the U.S.- source income or capital gains are distributed to such beneficiary in the year of realization. 35

Alternative Structures for Investing in U.S. Real Estate Canadian Tax Implications (continued) > It is not recommended that a Canadian resident individual invest through an LLC, as the anti-tax-avoidance rule in Article IV-7(a) of the Canada-U.S. Tax Convention (the Treaty ) will apply to deny relief from U.S. tax otherwise available under the Treaty. 36

Alternative Structures for Investing in U.S. Real Estate - Through Canadian Partnership D. Investment in Personal Use Property Through Canadian Partnership Operating income from real property 39.6% Canadian Individual Canadian Individual Capital Gains on sale of real property 20% - 25% File U.S. Income Tax Returns? Canadian Partnership Canadian Partnership Yes Canadian Individuals Exposure to U.S. Estate Tax? Yes Maybe law unclear Canada U.S. 37

Alternative Structures for Investing in U.S. Real Estate - Through Canadian Partnership Canadian Tax Implications > The Canadian Partnership will be considered to be fiscally transparent for Canadian income tax purposes. As noted earlier,, the Canadian resident individual partner will be considered to have realized his/her U.S.-source capital gain based on the allocation of partnership income and gains. Modified Structure > The Canadian partnership makes a check-the-box election to be treated as a corporation for U.S. tax purposes. This may strengthen the U.S. estate tax position. Timing of election may be important. However, potential disadvantages are (1) increase in U.S. capital gain rate on sale of real property to 35% plus potential 5% branch profits tax, and (2) potential timing mismatch at death of Canadian individual in Canada (disposition event) and U.S. (general no disposition event). 38

Alternative Structures for Investing in U.S. Real Estate In U.S. P ship E. Direct Investment by Canadian Individual in U.S. Limited Partnership Operating income from real property 39.6% Canadian Individual US Partner Capital Gains on sale of real property or interest in Partnership File U.S. Income Tax Returns? Exposure to U.S. Estate Tax? 20% - 25% Yes Yes, likely Canada U.S. US Partnership 39

Alternative Structures for Investing in U.S. Real Estate in U.S. P ship Canadian Tax Implications > Again, the US Partnership will be considered to be fiscally transparent for Canadian income tax purposes. As noted earlier,, the Canadian resident individual partner will be considered to have realized his/her U.S.-source capital gain based on the allocation of partnership income and gains. 40

Alternative Structures for Investing in U.S. Real Estate by Canadian Corp F. Direct Investment by Canadian Corporation Operating income from real property Capital Gains on sale of real property or interest in Investment Partnership File U.S. Income Tax Returns? Canadian Corporation 35% income tax plus 5% branch profits tax 35% on capital gain plus 5% branch profits tax Yes No Canadian Individual Canada Canadian Corporation U.S. US Partnership US Partner Canadian Individual -- Exposure to U.S. Estate Tax? No 41

Alternative Structures for Investing in U.S. Real Estate by Canadian Corp Canadian Tax Implications > The Canadian corporation will be required to report any income or capital gain realized from U.S. sources. Generally, the Canadian corporation would be permitted to claim a foreign tax credit for the U.S. tax paid on such income or capital gain as an offset against the Canadian tax otherwise payable. > Generally, the Canadian system for taxing investment income of a Canadian-controlled private corporation (through so-called integration ) involving refundable taxes in the corporation and the ability to pay out one-half of tax-free capital gains through the capital dividend account as well as the dividend tax credit for the shareholder ensures that the individual pays the same ultimate tax whether earned directly or through the investment corporation. However, when it comes to foreign investment income, the integration is imperfect and there is a small penalty in additional tax for such US capital gains. 42

Alternative Structures for Investing in U.S. Real Estate by Canadian Corp Canadian Tax Implications (continued) > It also used to be the CRA s administrative policy to permit a special purpose Canadian corporation to be used by a Canadian resident as a shield against U.S. estate tax, without adverse Canadian tax consequences.. However, that is no longer the case, and the Canadian resident shareholder(s) will be faced with a taxable benefit from the use of the corporate asset unless the shareholder(s) pays fair market compensation to the corporation. 43

Alternative Structures for Investing in U.S. Real Estate Double Blocker G. Double Blocker Structure Operating income from real property Capital Gains on sale of real property or interest in Investment Partnership Withholding tax on dividends paid to Canadian Blocker Corporation Regular dividends Liquidating dividend after taxable sale -- File U.S. Income Tax Returns? U.S. Corporation Canadian Corporation Canadian Individual - 35% income tax (no BPT)(U.S. tax may be reduced by leverage into U.S. Blocker 35% on capital gain (no branch profits tax) 5% 0% Yes No No Canada Canadian Investor U.S. Canadian Blocker Corporation U.S. Blocker Corporation US Partnership US Partner Exposure to U.S. Estate Tax? No 44

Alternative Structures for Investing in U.S. Real Estate Double Blocker LLC Considerations > If the U.S. Partnership is a limited liability company ( LLC ), this structure may be the most advantageous manner for Canadian owners, to invest in the LLC so s to (1) avoid U.S. estate tax (use of Canadian corporation) and (2) avoid a denial of Treaty benefits on operating income (use of U.S. corporation). Canadian Tax Implications > The income or capital gain realized by the US Blocker Corporation may be considered income from property realized by a controlled foreign affiliate of a Canadian shareholder. As a result, such income or capital gain may be characterized as foreign accrual property income (or FAPI) and attributed on a current basis to the Canadian Blocker Corporation. Thus, the Canadian corporation will have a liability for Canadian tax on this US-source income or capital gain regardless of whether any distribution has been made from the U.S. Blocker. There generally would be a credit for any US tax paid to avoid double taxation. > On the other hand, if the US Blocker corporation employs more than 5 employees fulltime in conduct of its real estate business, it may be able to take the position that its earnings are from an active business and the FAPI rules do not apply. In that case, there would be no current Canadian tax on such US-source income or capital gain. 45

Alternative Structures for Investing in U.S. Real Estate Double Blocker Canadian Tax Implications (continued) > Instead, when a dividend is paid from the US Blocker corporation to its corporate shareholder, the Canadian Blocker corporation, the dividend could be received tax-free as an exempt surplus dividend (recognizing that there will be the additional 5% US withholding tax on top of the US corporate tax already paid by the US Blocker corporation). Personal tax would only be payable if and when the Canadian Blocker corporation decided to pay a taxable dividend to its shareholder(s). The total tax on such income flowing all the way up to the Canadian individual shareholder would approach 60%. Accordingly the benefit of the double blocker structure is greatest if the capital can be kept within the corporate sector. 46

Alternative Structures for Investing in U.S. Real Estate - REIT H. Domestically Controlled REIT Structure Operating income from, and gain on sale of, real property Withholding tax on operating income Withholding tax on capital gain dividends Gain on sale of REIT stock File U.S. Income Tax Returns? REIT Canadian Blocker Canadian Investor -- Exposure to U.S. Estate Tax? 0% (Dividends Paid Deduction) 15% - 30% 35% 0% (as long as REIT is more than 50% owned by U.S. persons) Yes No No No Canada Canadian Investor Canadian Blocker Corporation U.S. * U.S. tax liability may be reduced by leverage into the REIT Domestically Controlled REIT US Partner US Partnership 47

Alternative Structures for Investing in U.S. Real Estate Canadian Trust I. Canadian Complex Trust Structure Foreign Settlor Settlor Family Members Beneficiaries Trust US Partner Canada US Partnership U.S. 48