Understanding Mortgage Investment Corporations: A guide for financial advisors in Canada

Mortgage Investment Corporations (MICs) are becoming a popular choice for Canadian investors who want steady income and exposure to real estate without owning property. As a financial advisor, it is important to understand how MICs work so you can help clients decide if they are a good fit for their portfolio. 

In this article, Wealth Professional Canada will explain what MICs are, how they make money, and what risks they carry. We will also look at when it makes sense to recommend a MIC and how to choose the right one for your clients. 

Investing in mortgage investment corporations 

A MIC is an investment tool that was first introduced by the Canadian Government in 1973 under the Residential Mortgage Financing Act. Its original purpose was twofold:  

1. encourage private financing  

2. make investing in real estate and mortgages more accessible for smaller investors 

An MIC is a bit like another popular investment tool, mutual funds. In fact, its alternative name is mortgage investment fund. And just like a mutual fund, MIC pools money from several investors.  

Instead of using the pooled funds to buy stocks or bonds, a MIC pools mortgages. This is done by giving out loans to borrowers, usually through mortgage brokers. These brokers then loan the money out by issuing mortgages to residential, commercial, and industrial developers.  

MICs can also issue residential mortgages to individual would-be homeowners. Investors become shareholders in an MIC, and the income they earn is from the interest and fees charged to a portfolio or pool of mortgages.  

The money invested is issued as shares or units, representing each investor’s ownership in the corporation. Borrowers make regular interest payments on their mortgages, which are then distributed to investors as interest income or dividends.  

An MIC can also earn additional profits from fees charged to borrowers or via other investment activities. 

It’s been said that MICs have similarities to mutual funds, but they are also like Real Estate Investment Trusts (REITs). REITs and MICs both deal in real estate; REITs get their income from rent, while MICs get their income from the interest on mortgage payments.  

Learn more about MICs in this video: 

How do mortgage investment corporations work? 

MICs are flow-through entities. This means that all of a MIC’s net income goes directly to shareholders. This makes MICs just like another common flow-through entity in Canada: mutual fund trusts. 

Just like mutual funds, investors purchase shares of a mortgage investment corporation. By owning shares, your clients own a part of a MIC. Dividends are distributed to shareholders based on their share of ownership. 

Most MICs are private lenders, meaning they might lend money to subprime mortgage borrowers. This means that these mortgages can be riskier than those that a bank might have in its portfolio, as private mortgage lenders are not regulated. 

However, this does allow MICs to offer attractive returns and dividends. MICs limit risk by setting a maximum allowed LTV for their portfolio, keeping mortgage term lengths often less than 1-2 years, and focusing on major urban markets in Canada. In general, MICs expect each of their borrowers to have an exit strategy. 

List of MICs 

Check out this list of MICs below:  

What are the advantages of MICs?  

Investing in a MIC offers some benefits for borrowers and investors alike. Here are some of the advantages for each group.  

Borrowers of a MIC, like home buyers, can customize their loans and have payment terms ranging from 6 to 36 months. Borrowing from a MIC can also provide a better, more accessible alternative to home buyers who may have been rejected by credit unions, banks, or other loan facilities. 

Investors in a MIC can reap a number of significant benefits. For one, this type of investment has a high growth potential; some MICs can promise high returns, sometimes twice that of bank deposits.  

Other benefits for investors include:  

• Often handled by experts: Some MICs have been in the business for decades and have skilled professionals. MIC managers can be those with a solid background in mortgage financing. Their familiarity with different lending scenarios enables them to make quick, informed decisions that can strengthen investors’ portfolios and mitigate risks.  

• Investment portfolios are diversified: MICs offer a broad range of residential, commercial, and industrial mortgages that can max out returns and effectively manage risk levels of investment portfolios.  

• MICs are a more secure investment: In this type of financial institution, real estate property (real assets) secure the mortgages, while insurance policies and personal guarantees provide financial security.  

• MICs get tax breaks: Shareholders of a MIC don’t have to worry about paying double the taxes when the corporation earns interest income. MICs in Canada get preferential treatment when it comes to taxes, with capital gains and cash inflows remaining untaxable under the Income Tax Act.  

Who regulates mortgage investment corporations? 

MICs are regulated under the Income Tax Act, Section 130.1. 

What are the rules for a MIC in Canada? 

According to this section, a MIC must pass the following criteria for its entire tax year to keep its status:  

1. It must be and remain a Canadian corporation.  

2. None of the MIC’s property are composed of:  

• shares of capital stock in corporations outside Canada 
• real or immovable property located outside Canada, or leasehold interests in them 
• debts owed to the corporation secured on real or immovable property located outside Canada 
• debts owed to the corporation by non-residents on real or immovable property located in Canada 

3. It is engaged only in the investing of funds of the corporation, and it does not manage or develop any real or immovable property. 

4. At least 50 percent of the corporation’s costs amount to all its property, consisting of any combination of: 

• deposits of the corporation in a bank or credit union account 

• debts owed to the corporation that were secured on homes or property within a housing project 

• the cost of all real or immovable property, including leasehold interests, does not exceed 25 percent of the corporation’s cost of all its property  

5. The corporation’s liabilities do not exceed the limits stipulated in the Act.  

6. The MIC has at least 20 shareholders. No single shareholder, solely or together with any relatives, has owned more than 25 percent of the total outstanding shares at any time. This applies whether such shares are held by the shareholder or their relatives directly or through a trust or partnership. 

7. Preferred dividends paid to preferred shareholders must be a similar amount per share when paying dividends to the common shareholders. Preferred shareholders are entitled to dividends pari passu with the common shareholders’ dividends in any additional dividends.  

What should clients look for in a MIC? 

To choose the best possible MIC, here’s what investors should look for:  

Consistent earnings 

Checking their performance can help your clients decide whether a certain MIC is worth their investment. Request information detailing the MIC’s target ROI compared to their actual ROI for the past 5 to 10 years. 

This can give investors a sense of how well they can predict their ROI, and also whether they can consistently meet or exceed their projections.  

Acceptable liquidity 

When shopping for a MIC, always check their liquidity agreement first to avoid a liquidity mismatch. Help your clients do this by checking the MIC’s liquidity agreement to know how quickly their investment can be withdrawn.  

Don’t let them get caught in a situation where they need the money, only to realize that their invested amount is locked in a long waiting period. Some MICs only allow redemptions of investments once a year.  

Effective, regular communication 

Prudent and savvy MICs realize that the most important questions are those that shareholders don’t need to ask. Check to see if the MIC provides clear reports regularly and can handle spur-of-the-moment requests for information. 

This is important as there may be cases where your clients will need the relevant details about their investment. A good prospective MIC should also have an investor relations manager. They should be adept at answering all questions, can provide additional information, and can help investors understand their product.  

Matching risk tolerance 

The MIC that your clients are looking at should have a diversified portfolio and have risk tolerance levels that complement their own. Advise them to check the specific housing markets that comprise their prospective MIC’s portfolio. 

Knowing whether they’re urban or rural properties, first or second mortgage loans impact how a MIC sets its interest rates, potential earnings and potential pitfalls of the investment.  

Dividend distributions 

Ask how and when the MIC pays out dividends, especially if your clients intend to reinvest them. Remember that investments in MICs are compounded at a set schedule, and MICs issue dividends at different times–some annually, some quarterly, and others, monthly. 

Are MICs safe as investments? 

In general, yes. Most MICs are considered low-risk investments that give high returns. Borrowers from a MIC have to go through stringent checks and meet strict requirements before they get their mortgages approved and are lent the money. 

It is then their obligation to pay the monthly mortgage obligations and pay the principal amount along with the interest of the loan. Since mortgages are only given to those who are capable of making the payments, MIC investments are deemed safe. 

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