A mortgage investment corporation (MIC) is a Canadian company that pools investors’ money and lends it out as mortgages, mostly to borrowers banks won’t lend to. Investors buy shares and receive the interest income; borrowers get financing based largely on the equity in their property, at rates well above a bank’s. The structure is defined in the Income Tax Act, which is what lets a MIC pass its income to shareholders without paying corporate tax on it. This page covers both sides, and is part of our guides to mortgages outside the standard bank route.
How a MIC works
Investors buy shares in the MIC. The MIC’s manager uses the pooled money to fund mortgages, usually brought in by mortgage brokers. Borrowers pay interest and fees, and the MIC pays its income out to shareholders as dividends.
| Participant | Role |
|---|---|
| Investors | Buy shares and receive regular distributions from the mortgage income |
| MIC manager | Chooses which mortgages to fund, manages the portfolio, and handles collections and defaults |
| Borrowers | Get a mortgage from the MIC and pay interest and fees above bank rates |
| Mortgage brokers | Bring borrowers to the MIC and submit their applications |
What the Income Tax Act requires
Section 130.1 of the Income Tax Act sets out the conditions a corporation must meet throughout the year to be a MIC:
| Requirement | What it means |
|---|---|
| Canadian corporation | It must be a Canadian corporation |
| Investing only | Its only business is investing its funds; it can’t manage or develop real estate |
| No foreign holdings | No mortgages on property outside Canada, no real estate outside Canada, and no shares of non-resident corporations |
| 20 or more shareholders | And no shareholder (counted together with certain related people) owns more than 25% of the issued shares of any class |
| At least 50% in residential mortgages, insured deposits and cash | Measured at cost: mortgages on houses or housing projects, deposits at CDIC or Quebec deposit-insured institutions or credit unions, and cash must make up at least half of its property |
| No more than 25% in real estate | Not counting property taken back after a borrower defaults |
| Leverage limits | Liabilities can’t exceed 3 times its equity if less than two-thirds of its property is residential mortgages, deposits and cash, or 5 times otherwise |
The rest of a MIC’s money can go into other mortgages, such as commercial, construction or land loans, which is why two MICs can carry very different risks.
How the income is taxed
A MIC deducts the taxable dividends it pays (within the year or 90 days after it) from its own income, so in practice it pays out its income to avoid tax at the corporate level. For the shareholder, a taxable dividend from a MIC, other than a capital gains dividend, is treated as interest. That means:
- MIC distributions don’t get the dividend tax credit; they are taxed like interest from a bond or GIC.
- A capital gains dividend, when a MIC pays one, is taxed as a capital gain instead.
- Holding the shares in a registered account such as an RRSP or TFSA, where the offering documents say the shares are eligible, shelters that interest-type income.
MICs for investors
Where the return comes from
A MIC’s yield comes from the interest borrowers pay, the lender fees charged when each mortgage is funded, and renewal fees on short-term loans. Management fees, losses on defaulted loans and operating costs come off the top. Yields vary with the portfolio: a MIC that lends first mortgages at low loan-to-value ratios generally pays less than one that funds second mortgages, construction loans or higher loan-to-value deals, because it takes less risk.
Risks
| Risk | What it means |
|---|---|
| Default | Borrowers stop paying, and the MIC has to enforce the mortgage and sell the property |
| Property values | If prices fall, the sale may not cover the loan, the costs and the arrears |
| Concentration | A portfolio heavy in one city, one developer or one kind of loan (construction, land) has less to fall back on |
| Liquidity | Private MIC shares don’t trade on an exchange. Redemptions may only be allowed at set windows and can be limited or suspended when many investors want out at once |
| Interest rates | Higher rates can lift yields on new loans but also raise defaults |
| Manager | Returns depend on the manager’s underwriting, honesty and collection practices |
| Leverage | A MIC that borrows to lend more magnifies both gains and losses, within the tax limits above |
Some MICs are listed on the Toronto Stock Exchange, which gives daily liquidity but a share price that moves with the market. Most are private and are sold under an offering memorandum.
Questions to ask before investing
| Factor | What to check |
|---|---|
| Track record | Years in operation, past returns and past losses |
| Portfolio loan-to-value | Average and maximum LTV; share of first versus second mortgages |
| Loan types | Residential, commercial, construction or land; urban or rural |
| Geography | Where the properties are, and how concentrated |
| Arrears and defaults | How many loans are in arrears and how past defaults were resolved |
| Redemptions | How and when you can get money out, any fees, and whether redemptions have ever been suspended |
| Fees | What the manager takes, and from which line (assets, income or lender fees) |
| Financial statements | Whether they are audited, and by whom |
| Offering documents | The offering memorandum, the risks it lists, whether the shares can be held in a registered account, and who is selling them |
MICs for borrowers
Who borrows from a MIC
MICs lend mostly on the equity in a property, so they serve borrowers that banks and B-lenders turn down:
| Borrower | Why a bank says no | What a MIC looks at |
|---|---|---|
| Seriously damaged credit | Score or recent history well below bank and B-lender limits | The equity in the property |
| Self-employed with little provable income | Not enough documented income | The equity, plus whatever income proof exists (see stated-income mortgages for the documented route) |
| Recently discharged bankrupt | Banks want a longer clean history | The equity and the plan to repay |
| Tax arrears owed to CRA | Outstanding tax debt | Whether the mortgage can pay off the arrears |
| Unusual property | Rural, mixed-use, land or construction | Broader property criteria |
| Bridge or short-term need | Banks rarely lend for a few months | Short terms are the norm |
| Second mortgage | Banks seldom lend behind another lender | Second mortgages are a common MIC product |
If credit is the main obstacle, our guide to getting a mortgage with bad credit sets out the options that cost less before a MIC becomes the answer.
What a MIC mortgage costs
Expect a rate well above current bank rates, a lender fee taken from the advance, often a broker fee, and appraisal and legal costs paid by the borrower. Terms are usually short, often one year, and many loans are interest-only, so the principal is due at the end of the term unless it is renewed or refinanced. The B-lender guide’s private mortgage example shows how those costs add up over a year.
For named MICs and other private lenders, and how they compare, see our list of private mortgage lenders in Canada.
MICs compared with other income investments
| Investment | Liquidity | Deposit insurance | Tax on the income |
|---|---|---|---|
| GIC | Locked in until maturity (non-redeemable) | Eligible GICs at CDIC members are covered | Interest |
| Bond ETF | Trades daily | None | Mostly interest |
| Private MIC | Redemption windows set by the MIC | None | Interest |
| Listed MIC | Trades daily | None | Interest |
| REIT | Trades daily if listed | None | A mix of income, capital gains and return of capital |
The extra yield a MIC offers over a GIC or a bond is the payment for taking on credit risk and, with a private MIC, for giving up easy access to the money. Peer-to-peer lending works in a similar space; see our guide to peer-to-peer lending in Canada.