What is a Mortgage Investment Corporation?

A mortgage investment corporation (MIC) is a flow through investment vehicle which functions very similar to an investment trust.

A MIC is governed by the tax regulations outlined in Section 130.1 of the Canadian Income Tax Act, also referred to as The Act. Section 130.1 of The Act sets out that all dividends paid to MIC shareholders may be treated as expenses for tax purposes by the MIC. Therefore, provided a MIC pays all of its net profits to its shareholders each year, the MIC itself is not taxed. This is a significant advantage for MIC shareholders because they avoid the two levels of taxation that apply to general corporations.

A management company performs the day-to-day administration of the fund.
A MIC makes mortgage investing easier, by allowing individuals to pool their funds, similar to a mutual fund, and invest those funds in a diversified portfolio of residential and commercial mortgage loans.

A MIC may flow through capital gains as well as interest to its shareholders.
Generally speaking, all funds received by investors in a MIC will be taxed in their hands as interest income. However, since a MIC may also invest up to 25% of its capital in the ownership of income-producing real estate property, and therefore stands the possibility of earning capital gains on the disposition of such assets, the MIC may flow through capital gains as well as interests to its shareholders. This results in a possible additional tax advantage for MIC shareholders; as only 50% of the income generated from capital gains is taxable when received by investors.

Investments in a MIC are primarily mortgage charging residential property.
The Act prescribes that a minimum of 50% of the MIC’s capital must be invested in mortgages charging residential (as opposed to commercial) real estate property and/or Canadian Depository Insurance Corporation (CDIC). Typical CDIC instruments include bank deposits, GIC’s, etc.

A MIC’s shares are widely held. No one shareholder may hold more than 25% of any class of shares.

The Tax Act’s MIC Criteria

Section 130.1 of the Tax Act sets out the criteria governing a MIC, and in summary says that in order to qualify as a MIC for a taxation year, a company must have met the following criteria by the end of its first fiscal year, and maintained these criteria throughout every fiscal year thereafter:

  1. Its only undertaking was the investing of its funds and it did not manage or develop any real property;
  2. It did not invest in:
    1. Mortgages secured by real estate located outside Canada, or property outside Canada;
    2. Shares of companies not resident in Canada; or
    3. Real property or leasehold interests outside Canada.
  3. It has at least 20 shareholders, and no one shareholder together with related parties to that shareholder held between them more than 25% of the issued shares of any class of shares of the company;
  4. At least 50% of the company’s assets were comprised of:
    1. Loans secured on houses or on property included in a housing project, as those terms are defined in the National Housing Act (Canada);
    2. Deposits insured by the Canada Deposit Insurance Corporation (“CDIC”) (or Quebec DIC);
    3. Deposits in a credit union; and/or
    4. Cash.
  5. No more than 25% of the company’s assets consisted of real property (excluding any real property acquired by foreclosure).

The Fund operates as a tax-efficient conduit of profit to its shareholders.

The Tax Act’s MIC criteria permit revenue sources other than residential mortgages, including among other things equity investments in real estate, investments in stocks and securities of Canadian companies, and mortgage lending in respect of commercial real estate.  Notwithstanding its ability to invest in the array of investments allowed under the Tax Act, it is the Fund’s policy to invest its non-CDIC-insured holdings in mortgages secured by real estate located in Canada, primarily residential real property.  A MIC’s only permitted undertaking under the Tax Act criteria is the investing of its funds, and it is specifically prohibited from managing or developing real property.

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