This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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- Forming a Mortgage Investment Corporation (MIC) in Ontario
Mortgage Investment Corporations (MICs) have become a popular investment vehicle in Ontario and across Canada. They offer a unique way to invest in real estate-backed mortgages while providing investors with a regular income stream and tax advantages. Whether you’re an investor, a lawyer, or a financial professional, understanding the steps and regulations involved in forming a MIC is essential. This post covers what you need to know about setting up a MIC in Ontario, including legal requirements, tax benefits, and compliance obligations.
- What is a Mortgage Investment Corporation?
A MIC is a specialized investment entity established under section 130.1 of the Income Tax Act (Canada). Its purpose is to pool capital from investors to provide loans secured by real estate, mainly in the residential mortgage market. MICs offer an appealing alternative for investors looking for steady income through mortgage interest and do not directly involve in real estate development. These corporations are structured to deliver dividends to shareholders, often on a monthly or quarterly basis, and offer the potential for higher returns compared to traditional investment products.
- Benefits of a MIC
MICs offer several benefits, particularly for those interested in diversifying their portfolios with real estate-backed investments:
Tax Efficiency: MICs do not pay corporate tax on income distributed to shareholders, which makes them efficient from a tax perspective.
Stable Income: MICs are designed to generate regular income through interest on mortgage loans, which is paid out as dividends.
RRSP and TFSA Eligibility: Shares in a MIC can be held in registered accounts such as RRSPs and TFSAs, allowing for tax-deferred or tax-free growth.
- Legal and Regulatory Framework
In Ontario, the formation and operation of MICs are governed by both federal tax laws and provincial securities regulations. Here are the key regulatory frameworks that a lawyer advising on the formation of a MIC should consider:
Income Tax Act (Canada): Section 130.1 of the Income Tax Act outlines the requirements for a MIC. A MIC must:
• Be a Canadian corporation with at least 20 shareholders.
• Have no single shareholder owning more than 25% of the shares.
• Restrict investments to Canadian real estate-backed loans.
• Distribute 100% of its net income to shareholders to avoid corporate taxation.
Securities Law Compliance: MICs are considered securities in Ontario and are regulated by the Ontario Securities Commission (OSC). This means they must comply with securities legislation, which may involve:
• Preparing an offering memorandum (OM) for potential investors, which details the MIC’s structure, management, and risks.
• Registering with the OSC or filing for exemptions depending on the type of investors the MIC targets (e.g., accredited investors).
• Regular reporting and compliance measures to meet the OSC’s requirements.
Business Corporations Act (Ontario): MICs in Ontario are incorporated under the Ontario Business Corporations Act (OBCA) or the Canada Business Corporations Act (CBCA). Under these acts, directors and officers must comply with corporate governance standards, fiduciary duties, and reporting obligations.
- Key Steps in Forming a MIC in Ontario
Establishing a MIC requires a structured approach, including legal, financial, and regulatory considerations. Here’s an overview of the essential steps:
Incorporate the Company: The first step is to incorporate the company either federally (under the CBCA) or provincially (under the OBCA). This involves drafting and filing the articles of incorporation, determining the share structure, and appointing directors.
Define Investment Mandate and Target Market: A MIC must clearly define its mortgage investment strategy, including the types of properties it will finance, loan-to-value ratios, interest rates, and target regions. It’s also essential to determine whether the MIC will target accredited investors or the general public, as this impacts securities compliance.
Prepare an Offering Memorandum: If the MIC is soliciting investments from non-accredited investors, it typically needs an offering memorandum. This legal document provides potential investors with information about the company’s financials, management, and associated risks. Lawyers play a key role in preparing the OM to ensure compliance with OSC regulations.
Rely on Other Exemptions (if necessary): For MICs targeting accredited investors, certain exemptions from securities registration and prospectus requirements may apply. A lawyer can assist in identifying and applying for relevant exemptions, which simplifies the regulatory requirements for the MIC.
Establish Compliance and Reporting Procedures: MICs must comply with ongoing reporting and record-keeping requirements, including shareholder disclosures, financial reporting, and dividend payments. Many MICs also register with Canada Revenue Agency (CRA) to ensure adherence to tax reporting requirements.
- Operational and Compliance Considerations
Once formed, a MIC must follow strict operational and reporting guidelines to maintain its tax-efficient status. Key compliance tasks include:
Monthly or Quarterly Dividends: MICs must distribute their net income to shareholders to avoid corporate tax. This can be done monthly, quarterly, or annually, depending on the MIC’s policies.
Record-Keeping: MICs must keep detailed records of all mortgages, shareholder information, and financial statements.
Regulatory Reporting: MICs need to meet reporting requirements set by the OSC, CRA, and other applicable regulators. This includes filing annual financial statements, tax returns, and compliance documents.
- Working with Legal and Financial Professionals
Forming and operating a MIC is complex and requires specialized legal, tax, and financial expertise. Lawyers play an essential role in ensuring the MIC meets all legal requirements, drafts necessary documents, and remains compliant with evolving regulations. Financial advisors and accountants are also invaluable in setting up tax-efficient structures and advising on investment strategies.
- Conclusion
Mortgage Investment Corporations offer a unique investment opportunity in Ontario, allowing investors to benefit from real estate-backed income with potential tax advantages. However, the formation and operation of a MIC involve navigating a range of legal and regulatory considerations. Whether you’re looking to set up a MIC or invest in one, partnering with knowledgeable professionals can ensure that the process is compliant, efficient, and tailored to your financial goals.
Sources:
Canada Revenue Agency
Ontario Securities Commission
Income Tax Act, RSC 1985, c 1 (5th Supp).