GREAT PACIFIC’S MORTGAGE INVESTMENT CORPORATIONS (MICs)
They may excite us but mortgage investments are really the boring part of your portfolio. They just keep making consistent returns quarter after quarter after quarter – the power of compounding interest.
What are MICs?
MICs are a great way to enhance your investment portfolio, offering the best of security and return on investment, especially when compared to the risk of stocks and the low returns of money markets.
MIC funds are designed for private mortgage lending in Canada. MICs lend to qualified borrowers in a ‘niche’ mortgage market who may be finding traditional mortgage lending is not getting them the results they need.
Mortgages in a MIC generally have a higher interest rate and are short term, usually not longer than one year. They are designed to support borrowers in the early stages of a project to the point that they are able to attract conventional lending.
MIC mortgage investments, like any other mortgage, are secured by property. We often take additional security such as other properties, personal and corporate guarantees, general security agreements and assignments of material contracts, such as insurance policies.
A MIC maximizes profits while preserving capital for shareholders, who invest in a diversified and secured pool of private mortgages, which greatly reduces their exposure to risk.
Shares of a MIC are qualified investments under the Income Tax Act (Canada) for RRSPs, RRIFs, RESPs and the Tax Free Savings Account (TFSA).
The following are highlights from the Income Tax Act
- A MIC must have at least 20 shareholders.
- A MIC is generally widely held. No shareholder may hold more than 25% of the MIC’s total capital.
- A MIC has, at all times, at least 50% of its capital invested in residential mortgages and/or government insured instruments (bank deposits, treasury bills, etc.).
- A MIC may invest up to 25% of its capital directly in real estate property for income purposes but may not develop land or engage in construction.
- A MIC is a tax exempt investment vehicle, providing the MIC distributes 100% of its net income to its shareholders.
- Dividends received by MIC shareholders are taxed as interest in the shareholder’s hands.
- A MIC is an eligible investment for RRSP, RESP, RRIF and TFSA.