What is a Mortgage Investment Corporation?:
A mortgage investment corporation, or a MIC as it is often referred to by, is a company given special designation by Revenue Canada, highlighted in Section 130.1 of the Income Tax Act. It is a corporation set up to enable investors to invest in a pool of mortgages, mostly residential properties. The structure of a MIC is similar to a mutual fund, the main difference being that instead of investing the capital in stocks, bonds or other instruments, the capital in question is invested in a large pool of mortgages inherently reducing the risk through diversification.
A MIC is a flow-through investment vehicle which means that all revenues generated can be redistributed to investors without accruiing any income tax. The MIC itself is therefore not taxed as a corporation.
A MIC offers investors with limited amounts of capital the opportunity to invest in a well diversified, high yielding, secure portfolio. Mortgage investments have long be a proven investment vehicle that has offered investors great and secure returns. To this day however, private mortgage investments remain inaccessible to the general public for a few reasons.
First, in order for any investment to be secure (to paraphrase an old saying) one can't put all thier eggs in one basket, or one mortgage investment, hence the need for a diversified portfolio. A diversified portfolio inevitably requires a large amount of capital and for this reason such investments aren't common amongst the public.
A second reason why mortgage investments remain somewhat obscure is the risk involved when investing in a private mortgage. While many investment opportunities might be available, one must look at the entire deal quite thoroughly before committing funds. Such analysis requires in-depth knowledge and is a major factor why people might shy away from such investment. Since a MIC is run by professionals of the industry who possess extensive knowledge in regards to financing and mortgage investing, they are able to make informed decisions on which deals they consider appropriate. Hence having a team of professionals that select deals reduces the risk and saves the investor from having to make sense of all the available information.
A third reason why one might not invest in private mortgages is that such investments require some administration on the part of the investor such as mortgage registration, obtaining the payments, dealing with late payments/NSF's, the discharge of the mortgage etc. A MIC assumes all administrative duties thus saving investors considerable amounts of time and worries.
The principal characteristics of a MIC, according to Section 130.1 of the Income Tax Act, are as follows:
- A MIC must have at least 20 shareholders, and more than 40 investors not deemed "Accredited Investors".
- A MIC is widely held, a shareholder may not hold more than 25% of the MIC's total capital.
- A MIC must invest at least 50% of its capital in residential mortgages and/or CDIC insured instruments.
- A MIC may invest up to 25% of its available capital directly in real estate property for income purposes but is restricted from developing land or engaging in construction.
- A MIC is a flow-through investment vehicle and distributes all of its net income to its investors.
- All MIC investments must be in Canada.
- A MIC is a tax exempt corporation.
- Dividends received by MIC shareholders that have invested in cash (outside RRSP) are taxed as interest in the shareholders hand.
- MIC Investments are eligible for all registered pension plans in Canada, such as RRSP's and RRIF's.
