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In the case of Tax Free Savings Accounts (TFSA), the dividends earned are tax-free when withdrawn.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 statements. If a MIC fails to maintain status by eluding the ITA’s requirements, the MIC will have its income taxed prior to shareholder distribution, lowering returns significantly. Audited financial statements show investors how much the MIC has borrowed, and the prospectus or offering memorandum typically shows what the MIC policy caps are for the borrow limits. (Many MICs are reasonably short term lenders, usually with a turnaround within 24 months).