Building wealth in challenging economic times is a burden many investors face when trying to grow their nest egg. Traditional approaches to investing that used to be the rule of thumb are no longer sufficient for people with long-term investment goals. Low expected returns and high inflation combined with market uncertainty, have made it much harder for investors to achieve their investment goals relying solely on stocks and bonds. Portfolio managers generally agree that the definition of a “well-balanced” portfolio has shifted to include the wide world of alternative assets.
Mortgage Investment Corporations, or MICs, are one of the fastest-growing segments of alternative assets in Canada. As part of a well-balanced portfolio, MICs offer an excellent way to passively grow your nest egg without a substantial upfront investment.
MICs: Understanding the Basics
Once the primary domain of institutional investors and the ultra-wealthy, MICs are an excellent example of how private market investing is being brought into the retail wealth space. Whereas retail investors typically invest all their assets in public markets, institutional investors and high-net-worth individuals are more likely to seek opportunities in alternative, private markets. Historically, private markets have provided extra layers of diversification and protection from the type of volatility that typically befalls public markets.
Before 1973, when MICs were first introduced in Canada , private mortgage investing was only available to a select group of wealthy investors who had large sums of capital to deploy. While these programs still exist through whole mortgage lending, MICs provide the same opportunity to retail investors.
MICs allow a significantly broader range of Canadians to invest in a diversified portfolio of mortgages. As income-producing investment vehicles, MICs pool capital from a group of retail investors for the purpose of investing in mortgages. Capital deposited into MIC funds is lent to qualified borrowers primarily in the form of first and second mortgages, usually to meet short-term borrowing needs. MICs collect interest and fees from the borrowers, which are then distributed to the fund’s preferred shareholders as regular dividend payments.
Structurally, MICs operate both as an investment fund and a corporation that oversees the entire investment process, including mortgage adjudication, selection, and management. MICs are not bound by the same stringent lending requirements as traditional banks and financial institutions, giving them more flexibility for approving loans. In exchange for offering borrowers more loan flexibility, MICs charge higher interest rates on mortgages.
One of the main reasons why MICs are popular investment vehicles is they enjoy special tax treatment under Canada’s Income Tax Act. As “flow-through” investment vehicles, MICs avoid paying taxes, so long as they distribute 100% of their net income to shareholders. Every MIC requires a minimum of 20 shareholders, with no individual owning more than 25% of outstanding shares. All mortgage investments must be in Canada and at least 50% must be held in residential mortgages.
In addition to special tax treatment, MICs provide numerous benefits, such as passive income, asset and geographic diversification, lower volatility and higher rates of return than traditional fixed-income securities. Although yields on bonds and Guaranteed Investment Certificates (GICs) have increased significantly over the past 12 months, MICs still provide more competitive returns, on average. For example, CMI MIC Funds have historically generated annual returns between 6% and 11%. Through CMI MIC Funds, investors can also enroll in a dividend reinvestment program (DRIP), enabling them to reinvest regular dividend distributions in additional MIC shares automatically for compound growth.
As fixed-income assets, MICs are suitable for defensive-minded investors and those who prioritize capital preservation. MICs are also a valuable retirement and education planning tool and can be held in registered accounts such as RRSPs, RRIFs, RESPs and TFSAs.
Dive into the lucrative domain of Mortgage Investment Corporations (MICs) and explore how they can be a cornerstone in one’s wealth-building endeavors. Review the fundamental aspects of MICs and how they differ from traditional investment avenues.
MICs: Beyond the Basics
Mortgage Investment Corporations can also be incorporated into a joint investment account for spouses or common-law partners with shared investment goals. By pooling resources, investment balances can grow faster while unlocking other perks associated with joint or spousal accounts. These accounts also benefit couples who want to simplify their estate planning.
Joint accounts carry certain rules that investors should consider before going down this route. According to the Canada Revenue Agency, interest or income earned in a joint account requires proportionate tax reporting. In other words, each spouse or common-law partner must report their individual portion of the interest or income earned.
Like other investments, there are certain rules governing the transfer of MICs once an investor passes away. If the MIC investment is part of a joint account set up with rights of survivorship, the spouse or common-law partner will receive the account assets upon the death of the account holder, which has no immediate tax consequences. If instead, the joint account is set up with account holders as tenants in common, ownership of the assets is transferred to a beneficiary named in the account holder’s will. In this case, asset transfer is subject to subject to the probate process and probate fees.
MICs that are part of a registered account, such as an RRSP, can be distributed based on who’s listed as the beneficiary. If the beneficiary is the investor’s estate, the assets can be liquidated at fair market value at the time of death and reported as income in the investor’s final tax return. If the beneficiary is a spouse, common-law partner or dependent child, the investment may be transferred into their own RRSP or RRIF account without immediate tax consequences.
While these are general considerations, investors should contact a tax professional for advice based on their unique needs and circumstances.
MICs: A Strategy in Retirement Planning
One of the biggest concerns people have when planning for retirement is running out of money after they’ve stopped working. Strategies for minimizing taxes, boosting savings, and reducing market downside risk can help investors manage their capital during retirement. However, these strategies can be further improved by investing in income-producing assets.
As RRSP-eligible investments, MICs are suitable for investors who want another source of income during retirement. Through an RRSP, investors can purchase shares in a MIC and earn dividend payments without having to worry about tax implications. By enrolling in a dividend reinvestment program , or a DRIP, investors can grow and compound returns on their MIC portfolio over time and put themselves in a stronger position for retirement.
Investors should consider MICs as part of a much broader retirement plan that includes traditional securities and other alternative investments. Like other fixed-income investments, MICs may help to stabilize an investment portfolio and provide more predictability the closer you are to retirement. As history has shown, private MIC funds pay more predictable interest rates over time, based on the composition and investment objectives of the portfolio, whereas rates of return can fluctuate widely for Guaranteed Investment Certificates and government bonds. MICs have the added benefit of being backed by real estate.
For over a decade, CMI Financial Group has helped thousands of investors boost their income, grow their wealth and increase their retirement savings through mortgage investments. Since our inception, we’ve originated more than $2 billion in mortgages across Canada, becoming one of the most trusted names in the private mortgage industry. CMI MIC Funds provide a seamless entry into the competitive world of private mortgages. If wealth building and retirement planning are among your top goals, contact CMI today to speak with one of our investment professionals.
