mics Archives - Levy Zavet Law

Do Private Lenders need a brokerage license to lend in Ontario?

The Mortgage Brokerages, Lenders and Administrators Act, 2006, requires that a mortgage lender hold a brokerage license in Ontario. And that a person or entity is a mortgage lender in Ontario when he, she or it lends money in Ontario on the security of real property, or holds themselves out as doing so. However there are exemptions, such as financial […]

Changes to the Mortgage Syndication Rules

As of July 1, 2018, the Financial Services Commission of Ontario (FSCO) will begin enforcing the changes to the O. Regulation 188/08 Mortgage Brokerages Standards of Practice under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) that affect non-qualified syndicated mortgages.To recap a qualified syndicated mortgage is a syndicated mortgage (a mortgage where there is more than one lender) that meets ALL of the following requirements:A licensed mortgage brokerage was involved in negotiating or arranging it.The mortgaged property secured was:Primarily used for residential purposes;Did not contain more than four (4) dwelling units (remember sometimes lenders will classify multiplexes as commercial or entirely residential depending on the number of dwelling units disregarding actual zoning and use);Did not contain more than one non-residential (commercial) unit, if within a mixed use building with other residential units (again up to four (4) in total).

MIC Foreign Investors & Withholding Taxes on Dividends

The Quick and Simple is that Yes, withholding taxes (usually 25% of gross amount unless subject to a tax treaty with the resident country of the payee) do apply on Dividends paid out by a Mortgage Investment Corporation (MIC), even though they are Dividends for all intensive purposes under the Canadian Income Tax Act (dividends do not normally call for a withholding of tax when paid to non-residents). The latest tax ruling (here is the link: http://taxinterpretations.com/?p=20952) specifically outlines the following reasons and expected interpretations under the Canadian Income Tax Act regarding paying out dividends to foreign investors in a Mortgage Investment Corporation (MIC):”Principal Issues: Whether a favourable ruling could be issued that the deemed interest payments paid to non-resident shareholders of a MIC would not fall within the meaning of PDI such that the payments would be exempt from Part XIII tax.Position: We were unable to provide a favourable ruling.

Challenges in Starting a MIC: Paying Dividends

One of the biggest challenges in running a MIC is when you first realize that the investors who were once your private lenders are now expecting the equivalent of their monthly interest cheques however in the form of a dividend. With a mortgage, a private lender is accustomed to receiving a monthly cheque of interest only (usually). The formula is simple, the private lender is expecting the equivalent of the monthly interest rate applied to the principal outstanding on the loan they funded. With a MIC however, there is no direct attribution of the investor’s investment, through the purchase of MIC shares, with any of the investments the MIC makes, such as mortgage loans. Hence your once private lender, now turned investor/subscriber in the MIC, has no way of knowing what they will earn except for the expectations you leave them with.The challenge as a newly started MIC should mean no such expectations at all. Securities law and regulations require that you provide information only based on actual facts and not on a forward looking basis.

A MIC does not simply allow you to raise money from the public!

Mortgage Investment Corporations (“MICs”) are on the rise in Canada. With many of these MICs the founders and managers are confused over what regulators may or may not govern certain aspects of running their business as a mortgage lender, a mortgage dealer or arranger such as mortgage broker or agent, a mortgage administrator and being in the business of raising money for the MIC.Depending on how one operates and manages their MIC, the following is a very brief and generalized overview of which regulators may govern how you operate in Ontario.First, and foremost a MIC’s primary purpose should be to qualify as a Mortgage Investment Corporation defined under section 130.1 of the Income Tax Act (Canada), which is further explained here. This would therefore mean that every MIC would first be regulated and governed by the Canada Revenue Agency (“CRA”) in determining if at all the operations and capital structure of the corporation qualifies the MIC as one.

Annual Maintenance and Reporting Requirements of a MIC, a Mortgage Investment Corporation

Annually a MIC that issues its shares through a prospectus and registration exemption under securities law and regulations (e.g. not publicly traded companies), will be responsible for providing their investors with financial statements illustrating the performance of the MIC for its recent fiscal year end in a set of separate documents. However, in addition to appeasing their investors with proper disclosure and transparency a MIC will be required to do the following annually:A financial audit (completed by a qualified firm CA or CPA firm, does not need to be IFRS, as MICs are not automatically considered reporting issuers even though they are deemed “public companies” under the Canadian Income Tax Act);Annual resolutions to approve the financial statements;Annual resolutions to declare dividends, and possibly to catch up for dividends declared throughout the year on a monthly or quarterly basis;

What If A Mortgage Goes Bad In A MIC? What are the Investment Benefits In A MIC?

Management of the MIC must be vigilant and selective with whom they lend to, and investors can inquire about whether the MIC in question will allow investments within various percentage brackets ranging from low to high risk. This option would provide investors with the opportunity to select an investment according to their level of risk (this option does exist with certain MICs). Also, investors that are researching potential involvement in MICs should be aware that there are some MICs in limited markets, such as smaller towns, that concentrate on specific industries. Considering the location, economy and possible market downturn is essential for investors to decide if they feel that risk is not an option.However the Benefits of Investing in a MIC include:

Securities Law & Regulations of a MIC, a Mortgage Investment Corporation

A “Trade” (i.e. selling shares to investors in this case) triggers the “Registration” requirement, even if the trade is not a “distribution”. Just because there is not a prospectus requirement does not mean there is no registration requirement to sell the shares to an investor. However, most prospectus exemptions will come with a registration exemption to sell the shares.Assembling a prospectus is usually not cost-effective for most MICs, hence raising funds through selling shares needs to fall under an exemption under securities law, which will depend more so in which province your shareholders are located. Thus, most MICs will distribute their shares based on an exemption catered to the province they intend to solicit investors/shareholders from. Common Prospectus Exemptions Include:Accredited Investor: Those investors who are sophisticated or deemed to be, such as institutions, governments, persons or companies who meet an income and asset test.“Private Issuer”, i.e. Closely-held Issuer Exemption: The shares are all subject to restrictions on transfer found in the Articles of Incorporation, and all the shares cannot be owned by more than 50 persons, not including employees, former employees, or corporate affiliates. The purchasers must be a director/officer/employee of the MIC or Affiliate of the MIC, or close family, friends and business

Taxation of a MIC, a Mortgage Investment Corporation

The MIC itself will not pay income tax so long as the profits are flowed through to the shareholders and taxed in their hands. This is advantageous to an investor who has purchased MIC shares through a self-directed registered retirement savings plan (RRSP) or a self-directed registered retirement income fund (RRIF) as the tax is deferred until the funds are transferred or annuitized.In the case of Tax Free Savings Accounts (TFSA), the dividends earned are tax-free when withdrawn. Although taxable dividends received from the MIC are considered interest income, they do not qualify for any gross-up or dividend tax credit and are subject to full income inclusion by the shareholder (ITA 130.1 (2) and (3)). Although fraudulent occurrences are uncommon since MICs must produce audited financial statements each year, an investor can research to see if the MIC is subject to any lawsuits by reviewing its yearly financial

Managing A MIC, a Mortgage Investment Corporation

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.

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