A Mortgage Investment Corporation (MIC) is a financial organization that invests in Canadian mortgages via a group of private investors. Lenders use a MIC to pool their funds and buy mortgage shares as an alternative investment. MICs eliminate the time and risk required by investors when investing in individual mortgages.
A MIC is more than just an investment concept. The Office of Financial Sanctions Implementation (OFSI) regulates all MIC activities. The federal government classifies MICs as special entities under Section 130.1 of the Income Tax Act. In Canada, MICs account for the vast majority of private mortgage issuance, especially for borrowers who have been previously denied a mortgage due to bad credit score or a faulty credit history.
MICs are given the authority to borrow from banks, mortgage firms, investors and other lenders to fund investments in form of mortgage pools in British Columbia. This borrowed capital is combined with investor capital to finance a mortgage portfolio.
Responsibilities of MIC Administrators
MICs are handled in a similar way to investment funds. Participants often pay management fees, which are a percentage of the assets under management. MIC administrators manage the following mortgage pool operations:
- Exploring investment opportunities
- Examining mortgage applications
- Negotiating interest rates
- Discussing terms and conditions
- Dealing with legal representation
- Fund administration
Mortgage investment corporations must comply with certain legal restrictions. First, each MIC must have at least 20 shareholders. However, no shareholder may own more than 25% of MIC holdings at any one time. This is considered a widely held asset.
Restrictions also apply to how investments are distributed across a MIC’s portfolio. First and foremost, residential mortgages must account for 50% of MIC assets. MICs are permitted to hold real estate but are prohibited from engaging in developer operations. This prohibition applies to both land development and building operations.
How Do MIC Investors Get Paid?
Loan income is distributed to MIC shareholders in the form of dividends. While interest income is the primary source of MIC revenue, net income is determined as the total revenue from all sources after operational expenditures are deducted. The Income Tax Act requires MICs to distribute 100% of their tax-free net yearly income to shareholders as dividends. The Income Tax Act also requires that a MIC yearly financial statement be audited.
Conclusion
MICs provide steady dividends and flow-through tax benefit. Of course, the most crucial benefit that MICs provide is access to wealth generation. Interest earned on mortgage investment provides shareholders with revenue on a scale that individual investors would not be able to achieve.
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