Investing In Mortgage Investment Corporations: The Tax Advantages
A Mortgage Investment Corporation, commonly referred to as a “MIC,” is given preferential tax treatment under the Income Tax Act. MICs appear to be quite popular with investors. They often generate a reasonably good rate of return and also are taxed favourably.
In general terms, a MIC typically receives funds from investors who purchase shares of the MIC at a fixed dollar amount (e.g. $10 per share) and then the MIC pools those funds and lends that money out for mortgages on real estate. The borrowers pay interest on their mortgages and this interest is profit that is shared amongst the shareholders. A management company usually takes a fee for arranging the mortgages and managing the MIC.
Unlike a typical corporation that is taxed on the income it earns and capital gains it realizes before distributing those amounts to its shareholders, the income and capital gains of a MIC can be flowed through to its shareholders without first being taxed in the corporation’s hands. Any taxable dividends received by a shareholder of a MIC are included in his or her income as interest income, and capital gains dividends received by a shareholder are treated as capital gains of the shareholder. Accordingly, if a shareholder has non-capital losses or capital losses, these can be used to offset the interest income and capital gains of the shareholder.
Usually a MIC will earn interest income. The interest will come from the mortgages and from any money that the MIC is holding in its bank account. This interest income will be flowed through to the shareholders without the MIC paying any tax. This is similar to the way income trusts used to operate. The MIC therefore does not pay any tax on the interest it earns. Instead, the shareholders earn the interest income and are responsible for any tax. This avoids the double tax that can arise when a corporation earns interest income.
In addition to the “flow-through” status of a MIC, shares of a MIC are, subject to some exceptions, qualified investments for the purposes of the rules for Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans, Deferred Profit Sharing Plans, Registered Disability Savings Plans and Tax Free Savings Accounts. Note, however, that there are some potential traps for the unwary here, so professional advice should be sought if you are seeking “qualified investment” status with shares in a MIC. If the shares in the MIC qualify, it can be very beneficial from a tax perspective as the MIC does not pay tax on the interest income and neither does the registered Plan.
There are strict requirements that a corporation must meet before it qualifies as a MIC under the Income Tax Act. Before investing in a MIC, you should carefully review its Offering Memorandum, which will be updated at the time of each offering of shares, and will contain details on the particular MIC as well as a “tax disclosure” or “tax opinion” setting out how the income of the MIC is taxed.
For more information on Tax Law, contact Melodie Lind at (250) 861-1210 or firstname.lastname@example.org