Mortgage investment corporation (MIC): Definition and its purposes

Updated 11 Sep 2024

A mortgage investment corporation, also called MIC, can be a unique option for investors looking to expand their portfolios into Canada’s thriving real estate market. If you own shares in an MIC, you can invest funds in a company that manages a secured and diversified pool of mortgages. This way, you can earn steady, high yield returns through regular distributions without facing the risks that come with direct property ownership.

This is just one of the several reasons why MICs are an attractive option for real estate investors.

In this guide, CMP breaks down everything you need to know about mortgage investment corporations. We will explain how they work, what benefits they offer, and why they may be the right choice for your investment strategy. Read on and find out why savvy investors are turning to MICs for reliable passive income.

What is a mortgage investment corporation?

Mortgage investment corporations are companies that process investments and mortgage applications in Canada. MICs offer secured shares of qualified and diversified mortgage plans to investors that are based on the Income Tax Act (ITA) of Canada. Essentially, MICs act as an investment fund that gathers capital from investors to provide private mortgage loans to borrowers.

Read next: How to become a mortgage broker

These funds are secured against real estate for borrowers who do not otherwise qualify for financing from conventional banks. In this arrangement, borrowers usually pay higher interest rates than they would with a larger lender or traditional bank. To lower the monthly payment amount, these investment funds often allow for interest-only payments. Each investor in this fund earns back money on their investment from fees paid by the borrowers on their mortgages and interest. 

A mortgage investment corporation is structured as a flow-through investment vehicle. This means that 100% of its net income is distributed to shareholders in the form of dividends. Under the ITA, MIC shares can be held in registered accounts, including:

• Registered Retirement Savings Plan (RRSP)
• Registered Education Savings Plan (RESP)
• Registered Retirement Income Fund (RRIF)
• Registered Disability Savings Plan (RDSP)
• Individual Pension Plan (IPP)
• Life Income Fund (LIF)
• Locked-In Retirement Account (LIRA)
• Deferred Profit Sharing Plan (DPSP)
• Tax-Free Savings Account (TFSA)

Most mortgage investment corporations are provincially licensed and registered. The management of the mortgage fund lies with real estate agents and mortgage brokers.

How does an MIC work?

There are three entities involved in a mortgage investment corporation:

• The corporation: Investors buy shares (at a fixed dollar amount) of the MIC, which then lends the money to mortgage borrowers. 
• The borrowers: Anyone who borrows money from a MIC only gets the money following the mortgage approval. The borrower then makes each monthly mortgage payment, as well as the principal loan amount and the interest (or loan cost). 
• The investors: Generally, investors can grow their money by investing in shares – often designed for long- or short-term investment periods – with the MIC. For higher yields, investors can choose long-term periods. In that case, interest payments usually produce profit.  

As mentioned, MICs operate as a flow-through entity. This structure is similar to that of mutual fund trusts, another common type of flow-through entity in Canada. As with mutual funds, investors buy shares in a mortgage investment corporation. By holding these shares, investors gain a stake in the MIC. These shareholders then receive dividends based on the number of shares they own.

MICs are also like real estate investment trusts (REITs). Both allow investments in the real estate market without directly holding an interest in the property. But unlike REIT investors, MIC shareholders invest mostly in mortgages rather than physical real estate assets.

The management team of an MIC oversees every aspect of the company's operations. This includes:

• sourcing appropriate mortgage investments
• evaluating mortgage applications
• negotiating interest rates and terms and conditions
• coordinating with solicitors
• handling portfolio management and general administration

Just like in an investment fund, MIC managers receive a management fee. This fee is usually based on a percentage of assets under administration.

What are the benefits of investing in a mortgage investment corporation?

A mortgage investment corporation provides: 

• lower interest rates
• customizable loans
• better security for homebuyers 

This better security helps homebuyers who have had their mortgage applications rejected by traditional banks, alternative loan providers, credit unions, or other conventional financial institutions. 

Here are some of the other advantages that come with investing in an MIC:

Secured investment

Investing in a mortgage investment corporation is a secure way to grow your money. Assets such as personal guarantees and insurance policies are used to provide security, while real assets are utilized to secure mortgages.

Network of industry experts

A network of industry experts with a strong mortgage-lending background can provide first-hand knowledge and critical information. Your investment portfolio will be strengthened thanks to their far-reaching experiences with a wide range of investment scenarios. 

Diversified portfolio

Investors place their money in a broad pool of mortgages in a portfolio investment. This means that when the investor diversifies, they can better maximize their returns and manage their risk levels. Essentially, the MIC manages every mortgage plan efficiently for higher returns. 

Tax benefits

Under the Income Tax Act of Canada, mortgage investment corporations benefit from preferential tax treatment, thanks to capital gains and cash inflows qualifying as tax-free. Since it limits double taxation – especially if an organization gets interest on its income – this is great for shareholders. 

What are the risks of investing in a mortgage investment corporation?

There are risks that come with investing in an MIC. It is always critical if you do decide to invest that you weigh the benefits and the risks. Here are a few possible risks investors should look out for: 

Risky mortgages

Most MICs are private lenders catering to borrowers who are unable to secure loans with traditional lenders and banks. This means that these mortgages can be riskier than what banks may have in their portfolios. This, however, allows MICs to offer shareholders high returns and dividends.

To limit their risks, mortgage investment corporations set a maximum allowable loan-to-value (LTV) ratio by keeping mortgage term lengths shorter, usually six to 24 months. MICs also focus on major urban markets such as the GTA and Vancouver.

Market fluctuations

Fluctuations in property prices can affect the value of the homes being used as loan collateral. Drops in value usually have a negative impact on an MIC. 

It is even possible that an MIC in this situation will fail to recover the money needed to secure the mortgage loan. These housing market fluctuations also have the potential to impact profitability.

Liquidity mismatch

Private lenders do not publicly trade their shares, meaning an investment in an MIC is not liquid. If you are an investor who needs to access cash easily, choosing a mortgage investment corporation may not be a good idea.

Here’s a summary of the potential benefits and drawbacks of investing in an MIC.

What should investors consider when choosing an MIC?

Investors planning to expand their portfolios to include mortgage investment corporations should consider these factors before committing capital:

Risk tolerance and investment goals

Investors with a low tolerance for risk should seek a mortgage pool with lower risk profiles. The level of risk can be assessed by looking at the pool’s underwriting criteria. A pool consisting mainly of first mortgages, for example, indicates a more conservative approach. Those with mostly second mortgages, on the other hand, carry a higher risk.

Reputable companies often provide this information through disclosure documents, making it easier to access. An experienced financial adviser can help you find these details. 

If the priority is income generation and capital protection, a pool with conservative underwriting that offers stable and moderate returns may be best aligned with your financial goals.

Loan-to-value ratio

In most mortgage pool funds, a loan-to-value ratio of 75% is considered conservative. This is aligned with the maximum LTV used by most banks and traditional lenders. It ensures that the loan does not exceed 75% of the property’s value. The difference between the loan amount and property value provides a cushion that protects investors if a borrower defaults, potentially resulting in foreclosure and sale.

Portfolio balance

Ask the MIC for a portfolio breakdown based on how much of the funds are allocated to each project. A heavy investment in a single project or a few large projects can signal a higher risk. High exposure to rural or slow-growth regions likewise increases risk. It is also important to know the proportion of first and second mortgages in the portfolio.

A reputable mortgage investment corporation is transparent about its project selection and portfolio composition. Be wary of MICs that take high-risk strategies without clear explanations.

Fee structure

Get a clear picture of the fee structure. It is important to be aware whether the fund manager collects fees from both the investors and the borrowers. Find out how the company’s employees, managers, and directors are being compensated. Understanding the MIC’s fee set up can help you spot potential conflicts where the manager's interests may not align with yours.

Company reputation

Review past performance records. Determine if the investment fund has consistently met its target returns and consider its growth potential. Choose an MIC that offers stability and growth.

How do you establish an MIC?

Mortgage investment corporations bring like-minded investors together to invest in mortgages. While buying a mortgage is usually too costly for most investors, an MIC can lessen any risk and help diversify an investment portfolio. 

Put simply, MICs allow several investors to invest in multiple mortgages, which also spreads the risk out among members. Another purpose of an MIC is to give out returns to each investor minus any withholdings. 

To establish an MIC, you should first create a corporation, which you can do yourself or through a lawyer, through an approved service provider. The next step is to establish the organization by appointing officers and directors, registering a head office, and creating a bylaw. 

Read next: How this mortgage investment corporation keeps a leg up in the industry | Canadian Mortgage Professional (mpamag.com)

If you want your mortgage investment corporation to be considered under the Income Tax Act of Canada, there are certain criteria that it must meet. Here’s a summary of the rules for MICs, as per section 130.1 of the ITA.

• The MIC must be a Canadian corporation.
• The MIC must have at least 20 shareholders.
• No shareholder can hold more than 25% of the MIC’s total capital.
• At least 50% of the MIC’s assets must consist of residential mortgages and/or cash and insured deposits at Canada Deposit Insurance Corporation (CDIC) member financial institutions.
• The MIC can invest up to 25% of its assets directly in real estate but cannot develop land or engage in construction. This cap on real estate holdings excludes those acquired due to mortgage default.
• The MIC is a flow-through investment entity and distributes 100% of its net income to its shareholders.
• All investments must be in Canada, but the mortgage investment corporation can accept investment capital from outside the country.
• The MIC is a tax-exempt corporation.
• Dividends received from directly held shares and not held within RRSPs or RRIFs are taxed as interest income in the shareholder’s hands. Dividends can be received in cash or through additional shares.
• MIC shares are qualified RRSP and RRIF investments.
• The MIC can distribute income dividends (interest from mortgages and revenue from property holdings) and capital gain dividends (profits from the disposition of its real estate investments).
• The MIC’s annual financial statements must be audited.
• The MIC can employ financial leverage by using debt to fund assets partially.

Who can invest in an MIC?

It depends. There are strict rules in Ontario, for instance, around soliciting others to invest in MICs and other similar ventures. Raising funds in public markets is much more expensive than raising funds in the private markets. This is because you do not have to prepare and file an offering document, such as a prospectus, with the Ontario Securities Commission (OSC). The private issuer exemption is typically the more common way that companies organize and draw early investors. 

Read next: The 10 biggest mortgage lenders in the world by market capitalization

Private issuer exemption guidelines for mortgage investment corporations

If you want to utilize the private issuer exemption, you must follow these guidelines:  

• Include a provision that shareholders cannot trade shares without the board’s consent.
• Excluding employees of the MIC, you cannot have more than 50 shareholders.
• All those shareholders must have an established relationship with the MIC, including an accredited investor, a spouse, an employee, a family member, a friend, or a business associate of the corporation’s founder. 

After the mortgage investment corporation passes the threshold of 50 shareholders, it is subject to reporting obligations around raising capital. At that point, it is necessary to seek legal advice.

Where can you find the best MICs to invest in?

Our Best Mortgage Lenders page is the place to go if you are searching for a mortgage investment corporation in Canada to diversify your portfolio. The companies featured in our special reports have been handpicked by their peers and nominated by our panel of experts as dependable and trusted market leaders.

By partnering with these MICs, you can be sure that you are going with an organization that aligns with your financial goals. 

Do you have experience investing in a mortgage investment corporation? Let us know how it went in the comments section below.