Investors pool their money by buying shares in a company called a Mortgage Investment Corporation (MIC)
MIC’s are special companies created by virtue of Section 130.1 of the Income Tax Act, a federal statute, to enable investors to invest in a pool of mortgages. Refer to Income Tax Act, Section 130.1: Salient Rules, below. MIC’s may also borrow from a bank or other lender, employing both the shareholders’ capital and loan proceeds to fund its mortgage portfolio. The pool of mortgages is continuously managed, with newly invested share capital, and the proceeds of repaid and discharged mortgages, being utilized to fund new mortgages.
The MIC’s management is responsible for all aspects of the Company’s operations, including the sourcing of suitable mortgage investments, the analysis of mortgage applications, the negotiation of applicable interest rates, terms and conditions, instruction of solicitors, mortgage portfolio and general administration. Like an investment fund, the Mortgage Investment Corporation’s management in this case Magenta Capital Corporation, the General Partner, is compensated for carrying out these duties by way of an income distribution.
The Income Tax Act requires that 100% of a MIC’s annual net income, as verified by external audit, be distributed to its shareholders, in the form of a dividend. This dividend is taxed as interest income, in that it essentially represents a flow through of the interest earned on the Company’s mortgage portfolio. Like any company, a MIC’s net income is equivalent to its revenues, less its expenses. A MIC’s revenues are comprised primarily of mortgage interest, and fee income. Expenses are comprised primarily of cost for the administration of the fund, audit and other professional fees, and loan interest, if the MIC is employing debt in addition to share capital.
How a Mortgage Investment Corporation Works
Income Tax Act, Section 130.1: Salient Rules
- A Mortgage Investment Corporation must have at least 20 shareholders.
- A MIC is generally widely held. No shareholder may hold more than 25% of the MIC’s total capital.
- At least 50% of a MIC’s assets must be comprised of residential mortgages, and/or cash and insured deposits at Canada Deposit Insurance Corporation member financial institutions.
- A MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction. This ceiling on real estate holdings does not include real estate acquired as a result of mortgage default.
- A MIC is a flow-through investment vehicle, and distributes 100% of its net income to its shareholders.
- All MIC investments must be in Canada, but a MIC may accept investment capital from outside of Canada.
- A MIC is effectively a tax-exempt corporation.
- Dividends received are taxed as interest income in the shareholder’s hands. Dividends may be received in the form of cash, reinvested in additional shares through our dividend reinvestment program.
- MIC shares are qualified RRSP and RRIF investments.
- A MIC may distribute income dividends, typically interest from mortgages and revenue from property holdings, as well as capital gain dividends, typically from the disposition of its real estate investments.
- A MIC’s annual financial statements must be audited.
- A MIC may employ financial leverage by using debt to partially fund assets.