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Tax Benefits of a Mortgage Investment Corporation

Few investments are as advantageous as a Mortgage Investment Corporation (MIC), when it comes to returns and tax benefits.

Because of their corporate structure, MICs do not pay income tax and are legally mandated to distribute all of their earnings to investors. On top of that, MIC dividend payouts are treated as interest income for tax purposes.

MICs are often referred to as the best investment in the world because it allows you to invest in mortgage loans on Canada’s resilient real estate market.

This does not mean there are not risks, but, generally speaking, no matter what the broader stock market is doing, the Canadian real estate market, especially major metropolitan areas like Toronto, Vancouver, and Montreal performs well.

A MIC is a corporation formed under the rules set out in the Income Tax Act, Section 130.1.

A MIC pools shareholder capital and lends that capital out as mortgages on residential and commercial real estate. The MIC earns income from those mortgages on interest charges and general fees.

The real appeal of a Mortgage Investment Corporation is the yield it provides investors compared to other fixed income investments. You will have no trouble finding a GIC that pays 2% for a one-year term, as government bonds are equally as low. It’s not uncommon for MICs to provide annual returns of 7 to 9% or higher.

Qualifying as a Mortgage Investment Corporation

There are strict requirements under the Income Tax Act that a corporation must meet before it qualifies as a MIC.

  • A MIC must be a Canadian corporation and it must invest its funds in mortgages. In fact, MICs are not allowed to manage or develop real estate property. That said, there are times when the MIC ends up owning the mortgaged property due to foreclosure, sale agreement, etc. In these cases, the MIC may have to provide management and administrative services and resell the property.
  • A MIC cannot hold property, including debts owing to the MIC, outside of Canada or debts owing to the MIC by non-Canadian residents
  • A minimum 50% of assets must be invested in residential mortgages and/or cash
  • The MIC must have 20 or more shareholders at all times
  • No shareholder can own more than 25% of the capital stock of the MIC
  • Financial statements must be audited annually

Taxation of a Mortgage Investment Corporation

Avoids Double Taxation

A MIC and its shareholders are given special tax treatment under section 130.1 of the Income Tax Act. These rules were implemented to attract more money to Canada’s mortgage market for residential financing.

A MIC will earn interest income from mortgages and any money the MIC has in the bank. As long as 100% of the profits/dividends are given to shareholders, the MIC does not pay any income tax.

Instead of the MIC paying tax on the interest it earns, shareholders are responsible for any tax. This is beneficial to investors because it avoids the double tax that corporations pay on interest income.

Eligible for Deferred Income Plans

MICs issue common and preferred shares, issuing redeemable preferred shares to shareholders with a fixed dividend rate. In most cases, these shares are considered to be “qualified investments” for deferred income plans.

This is ideal for investors who purchase Mortgage Investment Corporation shares through a self-directed registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), deferred profit-sharing plan (DPSP), registered education savings plan (RESP), or registered disability savings plan (RDSP).

Investing in a MIC can be attractive for these kinds of Deferred Plans because MICs are not subject to tax. And Deferred Plans do not pay any tax on the interest they are estimated to receive.

That said, those who hold TFSAs and annuitants of RRSPs or RRIFs may be hit with certain penalty taxes if the investment in the MIC is considered to be a “prohibited investment” according to Canada’s tax code.

That’s why it’s important to speak with your financial and tax advisors. They will ensure you have found a Mortgage Investment Corporation with “qualified investment” status. If the MIC qualifies, it could be very beneficial come tax time since the MIC does not pay tax on the interest income and neither does the Deferred Plan.

More broadly, if the MIC fails to meet the requirements set out by the Income Tax Act, the MICs income will be taxed before it gets distributed to shareholders, lowering returns significantly.

FBC – Helping Canadians Minimize Their Taxable Income

As with any investment, there are risks investing in residential mortgages and real estate. Many of these risks can be minimized though by speaking with a tax consultant and investment representative.

FBC has worked exclusively with Canadian small business owners, entrepreneurs, investors, farm operators, and independent contractors for over 65 years. Over that time, we have helped tens of thousands of customers from across the country prepare and file their taxes.

At FBC, we understand there is no one-size fits-all approach to tax planning. That’s why we have an industry-leading membership model that provides you integrated tax services on a year-round Membership basis.

For a fixed fee, Members get year-round access to our tax planning, tax preparation, consultation, bookkeeping, and financial planning services. FBC also provides all new Members with a review of their previous 3 years’ tax returns.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.