WHAT IS A MORTGAGE INVESTMENT CORPORATION (MIC)?
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Mortgages as Investments
A “private” mortgage is funded
by an individual investor, group of investors,
or private corporate entity, instead of a bank
or other institutional lender. The legal status
of any mortgage is the same regardless of who
the mortgage holder, or mortgagee, is. Private
mortgagees have the same legal security in a
mortgage as banks and other institutional lenders.
The legal obligations of the borrower, or mortgagor,
and the legal remedies available to the mortgagee,
are identical. All of the related legal work
is performed by a lawyer.
Mortgages offer high rates of return, relatively
low risk by virtue of the real estate pledged
as security, and the borrower’s personal
covenant, and regular income, at a fixed interest
rate. Accordingly, mortgages have long been
an investment option utilized by relatively
sophisticated, affluent investors. These investors
typically fund 100% of an individual mortgage,
and hold the mortgage directly. Given the dollar
amounts involved, substantial capital is required
to fund even a small portfolio of mortgages.
The individual mortgage investor is solely responsible
for all aspects of the underwriting process,
including reviewing the real estate being offered
as security, scrutinizing the mortgage application,
including the credit history of the borrower,
verifying the borrower’s income and employment,
and assessing their overall financial capacity.
Once a decision to lend is made, the individual
investor must then negotiate the interest rate,
and other terms and conditions applicable to
the mortgage, and instruct a solicitor accordingly.
Subsequently, the individual investor is responsible
for collecting the payments, and dealing with
any arrears or default problems which may arise.
Mortgage Investment Corporations (MICs) represent
a very attractive investment vehicle for those
investors who wish to reap the benefits of mortgage
investing, but who may lack the expertise, or
investment capital required, to invest by way
of holding individual mortgages directly. A
MIC also provides a convenient, and effortless
investment vehicle, in that management is fully
responsible for all aspects of the Company’s
operations, from sourcing the mortgages, to
making the lending decisions, to negotiating
the most favourable interest rate and terms
and conditions possible, to instructing and
interfacing with lawyers, to administering the
mortgage portfolio.
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What is a Mortgage Investment
Corporation (MIC)?
Investors pool their money by buying shares
in a company called a Mortgage Investment Corporation
(MIC). MICs 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. MICs
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.
Please refer to WHAT WE DO for a more detailed
discussion of the managerial function.
Like an investment fund, the MIC’s manager
is paid a management fee, typically calculated
as a percentage of assets under administration.
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 management fees, audit and other
professional fees, and loan interest, if the
MIC is employing debt in addition to share capital.
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How a MIC Works
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Income Tax Act, Section 130.1:
Salient Rules
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.
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