How Mortgage Investment Corporations Work
A mortgage investment corporation is a Canadian tax-exempt entity that invests in a variety of mortgages and other real estate transactions. While it is allowable for a MIC to accept money from those outside of Canada, it cannot engage in mortgage lending or other real estate deals outside of the country.
The Rules a MIC Must Abide By
There are several criteria that must be met for a MIC to be declared such by the Canadian government. First, there must be at least 20 shareholder with no one shareholder owning more than 10 percent at one time. It must use 50 percent or more of its cash for investment into residential mortgage investments, and it may use leverage when necessary to earn the best possible return for shareholders.
Are There Any Risks Investing With a MIC?
As with any other investment, there are risks that you have to take into account. However, a MIC has its financial records audited every year, which reduces the risk of fraud, and it allows investors to track past performance. This may reduce the odds that an investor chooses an investment manager who isn't good at or doesn't care about shareholder return on investment. The biggest risk comes from the fact that a MIC may use debt to finance its investments in mortgages or other real estate transactions.
How Do You Get Your Money Back?
While you get your dividends distributed to you on a regular basis, you may have to actually sell your shares to lock in profits on previous investments. Each MIC will have its own rules as to when you can sell and how. In some cases, you can't sell for 90 days after your first investment while other MICs may not sell unless shares can be liquidated in an orderly fashion. Therefore, you should consider liquidity in a given MIC before you invest.
You Can Invest Through Personal or Retirement Accounts
Investing in a MIC is considered a qualified investment when done through a RRSP or RRIF account. If you invest using an individual account, your returns are passed directly to you, and you are taxed on that interest income. The entity itself is not taxed as that could significantly reduce returns realized by investors. Instead, all dividends and other profits are distributed directly to shareholders and is taxed at the shareholder level.
If you think mortgage rates are on the rise because the housing market is about to rebound or keep growing in a certain area, a MIC may be a great investment. It allows you to invest in real estate without having to actually buy a house or building, which means you can diversify your portfolio without having to spend tens of thousands of dollars to do so.