A Mortgage Investment Corporation (MIC) is a lending company designed specifically for mortgage lending in Canada. Owning shares in a MIC enables investors to participate in income from a diversified and secured pool of mortgages. Shares of a MIC are eligible investments under the Income Tax Act (Canada) for RRSPs, RRIFs, DPSPs, or RESPs and TFSAs.
A MIC mortgage portfolio can include everything from a small second mortgage on residential property to commercial and development mortgages on new projects. A typical MIC loan does not exceed 75%-85% of the current value of the property. The rules for MICs, which are flow-through instruments (meaning that tax is not paid by the company, only its investors), are found in the Tax Act, and include the following:
- A MIC must have at least 20 shareholders.
- No shareholder may hold more than 25% of the MIC’s total capital.
- 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.
- A MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction.
- A MIC is a flow-through investment vehicle and distributes 100% of its net income to its shareholders.
- Dividends received with respect to directly held shares, not held within RRSPs or RRIFs, are taxed as interest income in the shareholder’s hands.
- A MIC’s annual financial statements must be audited.
- A MIC may employ financial leverage by using debt to partially fund assets.
The process starts when an Investor first deposits funds into the MIC. These funds are then exchanged for shares of the company. Each investor is entitled to an appropriate number of preferred shares, which entitles the shareholder to his/her pro rata share of mortgage income earned by the MIC.
Shares are valued at $10 and the minimum investment is $150,000 (15,000 preferred shares). Once the initial investment has been made, additional deposits can be made as low as $25,000.
When investing within an RRSP, the investor instructs his/her trustee (Olympia Trust) to deposit funds on his/her behalf into the MIC. The trustee receives the preferred share certificate and holds the certificate “in trust” on behalf of the shareholder.
For a typical $150,000 investment, the investor would receive a preferred share certificate in the amount of 15,000 preferred shares with par value of $10.00 each.
Investments in WMIC are eligible for self directed RRSPs. All new accounts are to be opened with Olympia Trust Company 1810, 125 9 Avenue SE Calgary Alberta T2G0P6.
Once an investor’s funds have been deposited into the MIC, the management team at Westboro Mortgage Investment Corp. selects mortgages to fund with the new investment. Day-to-day administration of the portfolio includes: receipt and posting of mortgage payments, funding new mortgages, renewal of existing mortgage loans, property insurance and tax follow up, maintaining amortization schedules and bank records for the portfolio.
Westboro Mortgage Investment Corp. also maintains an appropriate amount of cash within the portfolio so that existing investors can make redemptions of their principle amount during the year. The amount of cash on hand varies throughout the year and thus redemptions are subject to six months notice.
According to section 130.1 of the Canadian Income Tax Act, a MIC must distribute 100% of its annual net income before taxes to shareholders in the form of a dividend. Dividend payments to investors are made on a regular basis; WMIC pays a monthly 8% distribution and once the audited financial statements are completed, any surplus is required to be paid within 90 days of the year-end (August 31).
At the end of every fiscal year, the MIC is audited by an independent accounting firm. The results of this audit are made available to every investor in the form of audited financial statements.