Investors pool their money by buying shares in a Mortgage Investment Corporation (MIC). A MIC is governed by Section 130.1 of the Federal Income Tax Act to enable investors to invest in a pool of mortgages. A MIC may also borrow from a bank or other lender, employing the shareholders’ capital and loan proceeds to fund its mortgage portfolio. The MIC continuously manages the pool of mortgages with newly invested share capital, with the proceeds of repaid and discharged mortgages being used to fund new mortgages.
The MIC’s management is responsible for all aspects of the company’s operations, including sourcing suitable mortgage investments, analysis of mortgage applications, negotiation of applicable interest rates, terms and conditions, instruction of solicitors, mortgage portfolio and general administration. Like an investment fund, the MIC’s management, in this case, Magenta Capital Corporation, the General Partner, is compensated for carrying out these duties through 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 costs 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.