A MIC is a flow-through investment vehicle which functions very similar to an investment trust. A MIC is governed by the tax regulations of Section 130.1 of the Income Tax Act of Canada. That section of the Act sets out that all dividends paid to MIC shareholders may be treated as expenses for tax purposes by the MIC. Therefore, provided a MIC pays ALL of its net profit to its shareholders each year, the MIC itself is not taxed. This is a significant advantage for MIC shareholders, increasing their yield as the two levels of tax applied to normal corporations are avoided. The following are some additional attributes of a MIC which make it a very attractive investment vehicle:
A MIC may flow through capital gains as well as interest to its shareholders.
Generally speaking, all funds received by investors in a MIC will be taxed in their hands as interest income. However, since a MIC may also invest up to 25% of its capital in the ownership of income-producing real estate property, and therefore stands the possibility of earning a capital gain on the disposition of such assets, the MIC may flow through capital gains as well as interest to its shareholders, resulting in a possible further tax advantage to the MIC shareholder as only 50% of this income is taxable when received by investors.
Investments in a MIC are primarily mortgages charging residential property.
The Act prescribes that a minimum of 50% of the MIC’s capital must be invested in mortgages charging residential (as opposed to commercial) real estate property and/or CDIC (Canadian Depository Insurance Corporation) instruments. Typical CDIC instruments are bank deposits, GICs, etc. The remaining 50% of the MIC’s capital may be invested in commercial mortgages and 25% may be invested in income-producing real estate property. All of the MIC’s investment holdings must be located in Canada.
The MIC is widely held.
By the end of its first fiscal period, a MIC must have at least 20 shareholders. In addition, no shareholder (corporation or individual) may own more than 25% of the MIC’s capital. This insures that risk of holding mortgages is highly diversified and remains diversified.