What is a Mortgage Investment Corporation or (MIC)
A Mortgage Investment Corporation (MIC) is a special tax-exempt co. under Section 130.1 of the Canada Income Tax Act, MIC's are a Flow-Through investment vehicle that enable investors to invest in a pool of mortgages.
MIC's may borrow from a bank or other lender, utilizing both the shareholders' capital and loan proceeds to fund its mortgage portfolio. The pool of mortgages is professionally managed, with newly invested share capital, and the proceeds of repaid and discharged mortgages, being utilized to fund additional mortgages. The MIC's Manager handles the daily operations of the fund, which includes sourcing suitable mortgage investments, the analysis of mortgage applications, the negotiation of applicable interest rates, terms and conditions, instructing of solicitors, portfolio and general administration. Like an investment fund, the MIC's manager is paid a MER, typically calculated as a percentage of assets under administration. It may also include stated bonuses based on milestones and achievements of certain criteria as set out by the Board of Directors and shareholders.
The Canada Income Tax Act requires that 100% of a MIC's annual net income be distributed to its shareholders, in the form of a dividend. This dividend is taxed as interest income in the hands of the shareholder and represents a flow through of the interest earned on the mortgage portfolio. A MIC's revenues are comprised primarily of mortgage interest, fee income and interest penalties. The MIC's expenses are comprised primarily of management fees, audit and other professional fees, and loan interest, if the MIC is employing debt in addition to share capital.
Highlights from the Canada Income Tax Act, Section 130.1:
1. A Mortgage Investment Corporation must have at least 20 shareholders.
2. A MIC is generally widely held. No shareholder may hold more than 25% of the MIC's total capital.
3. 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.
4. 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.
5. A MIC is a flow-through investment vehicle, and distributes 100% of its net income to its shareholders.
6. All MIC investments must be in Canada, but a MIC may accept investment capital from outside of Canada.
7. A MIC is a tax-exempt corporation.
8. Dividends received with respect to directly held shares, not held within RRSPs or RRIFs, are taxed as interest income in the shareholder's hands. Dividends may be received in the form of cash, or additional shares.
9. MIC shares are qualified RRSP and RRIF investments.
10. 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.
11. A MIC's annual financial statements must be audited.
12. A MIC may employ financial leverage by using debt to partially fund assets.