The Mortgage Investment Corporation - An Alternative Lender

Introduction

In 1973, the federal government introduced measures aimed at stimulating investments in residential mortgages by the private sector. One of those was the introduction in the Income Tax Act (ITA) of the "Mortgage Investment Corporation" ("MIC"), a corporation subject to a special tax regime. Generally, it provides its shareholders with monthly distributions from a mortgage portfolio generating stable cash flows on a long-term basis as if they directly owned this asset.

Opportunities to Be Had in Québec?

In provinces other than Québec, there exist several mortgage funds, both listed and unlisted on the Toronto Stock Exchange, many of which are MICs.

Thus, in Québec, there are no MICs with exchange-listed securities, nor probably any unlisted MICs. In the rest of Canada, there are eight MICs listed on one of the stock exchanges of the TMX Group and a significant number of unlisted MICs.

Among those that are not exchange-listed, there is a mortgage fund with a mortgage portfolio of more than one billion dollars, namely Romspen Mortgage Investment Fund.

For a listed MIC, its shares are a permanent source of capital since they usually are not subject to redemption requests by its shareholders. Also, for the investors, these securities are freely tradable on a stock exchange.

Nature of the investment

MICs, whether or not listed, are corporations subject to a special tax regime. The MIC's assets usually include only mortgages generating interest and, occasionally, capital gains. Generally, the income generated by the mortgage portfolio (interest and capital gains) is not taxed in the hands of the MIC but in those of its shareholders. The purpose of such single level of taxation is to place the investors in the same tax position as if they owned the mortgages directly.

What makes the MIC attractive for investors is the stability of its cash flow. A study conducted by Dundee Capital Markets1 reveals the following findings regarding the nature of MICs, mainly those listed on a stock exchange:2

On average, 80% of their mortgages are first-ranking. On average, the ratio of the amount of loans to the value of encumbered property is 54%, a large safety cushion in the event that lenders should run into difficulty. Loans are generally short-term, from 18 to 36 months. Where interest rates are floating, they provide a protection against interest rate increases. Furthermore, the short-term nature of the loans is another form of protection against...