Mortgage investment corporation

Requires updating to reflect the current Income Tax Act and the growth of MICs that trade on the TSX. A mortgage investment corporation or MIC is an investment and lending company designed specifically for mortgage lending (primarily residential mortgage lending) in Canada. Shares of a MIC are qualified investments under the Income Tax Act (Canada) for RDSPs, RRSPs, RRIFs, TFSAs, or RESPs. Mortgage investment corporations are generally provincially registered and licensed, with the management of the mortgage fund under the direction of provincially licensed mortgage brokers and real estate agents. A MIC mortgage portfolio can include everything from small second mortgages on residential property to commercial and development mortgages on new projects. Every investment is typically based on a thorough investigation of the property. A typical MIC loan (ideally) should never exceed a specified percentage (typically from 60% to 85%) of the current value of the property. Compare this to a conventional bank's willingness to routinely loan 80% of the value of the property, and sometimes even 100%. MIC's investment strategies vary considerably, as do their rates of return on invested capital. Recent MIC's have generated returns between 6% and 12% for investors, however, returns vary based not only on the investment strategy of the specific MIC but also on the nature of the investment share itself. Some MIC shares are designed to be held for a period as short as a year, and other MIC shares require the investor to hold them for a longer period, up to 10 years in some cases. Yields typically increase when the hold periods are longer, and are lower for shares that are immediately liquid after a short hold period, such as one year. MIC's are organized for investing in pools of mortgages. Profits generated by MICs are distributed to its shareholders according to their proportional interest. The mortgages are secured on real property, often in conjunction with other forms of security, such as personal and corporate guarantees, general security agreements and assignments of material contracts, such as insurance policies, prepared by lawyers for the MIC.

Income Tax Act, Section 130.1: Salient Rules

1. A MIC 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 share capital. Shareholders whose MIC holding are held in registered accounts (RRSP, TFSA, etc.) are limited to 10% due to regulations restricting ownership in those capital accounts. 3. At least 50% of a MIC's assets must be 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, as its income is instead taxed in the hands of its shareholders. 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.