The creation of a MIC is similar to other corporations in the method of organization, election of directors/officers and the faculty to appoint committees, hire employees, and issue shares. Generally, a MIC will authorize and issue several different classes of shares including common voting shares and preferred non-voting shares. All classes will have pari-passu rights to dividends, if any, and to participation on winding-up.
Provincially licensed mortgage brokers/agents and administrators are typically accountable for the management of the MIC; this involves sourcing, originating, underwriting, acquiring and administering mortgages that would provide the greatest rate of return with the lowest possible risk. The mortgage portfolio is continuously managed with newly invested share capital and the proceeds from repaid and discharged mortgages are utilized to fund new mortgages. MICs typically include a Credit Review Committee of shareholders who are responsible for the review and approval or rejection of mortgage applications in the portfolio. This is to protect shareholders’ investments while remaining cognizant of current market conditions and any potential underlying risks. Since brokers gain commission from placing mortgages, they are restricted from acting as members of Credit Committees due to an obvious conflict of interest. At the end of every fiscal year, audits of a MIC’s annual financial statements must be made by an independent accounting firm.
In Ontario, MIC’s are registered and licensed provincially and must meet additional requirements to receive tax incentives pursuant to section 130.1 of the ITA. If all conditions expected of the MIC during the course of the year are met, the corporation receives entitlement to reduce its taxable income to the extent that taxable dividends are paid by the corporation during the year, or within 90 days post year-end (ITA 130.1(1)). Depending on the particular MIC, certain investment options such as RRSPs, RRIFs, DPSPs, or RESPs and TFSAs may be eligible for MIC investment, and distributions received on MIC investments held through these investment options are taxed according to their respective regulations. Investor deposits funds into the MIC, followed by the funds’ exchange in return for company shares. Typically each investor is entitled to an appropriate number of preferred shares, entitling the shareholder to a prorated share of mortgage income earned by the MIC. When investing in an RRSP, the investor instructs the trustee to deposit funds on their behalf into the MIC, and the trustee holds the preferred share certificate “in trust”. A MIC will have to work with a trustee, as most investors have an SDRSP with a major institution/bank, and CRA requires a licensed trustee to hold RSPs.
Projected returns range (depending on the MIC) from 6-12% per year and are usually disbursed quarterly in the form of a dividend and taxed to the individual as interest income which can be received in cash or reinvested back into the MIC. Dividends may be collected by way of funds or additional shares. Shares of a MIC are not qualified investments for a plan trust even though a MIC is deemed a Public Corporation under the ITA (IT-391 and 320). A MIC must distribute 100% of its annual net income before taxes to shareholders in the form of dividends. As is commonplace for any company, a MIC’s net income is equivalent to its revenues, minus expenses. Principal expenses include management fees, audits and other professional fees. Revenue is primarily earned in the form of mortgage interest, fees, penalties, revenue from property holdings, and capital gains, or capital gains dividends, typically from the disposition of real estate investments.