Mortgage Investment Corporations, or MICs, are one of the fastest-growing alternative assets in Canada. Unlike some other alternative investments, MICs can be incorporated into your Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Registered Education Savings Plan (RESP), allowing you to grow your portfolio while enjoying tax-deferred status.
You may be asking, with so many investment options for my registered account, why should I care about MICs? The truth is, many Canadians use registered funds to help them achieve their financial goals, but the fixed-income part of their portfolio – i.e., the portion that is supposed to provide steady interest income at a much lower risk than equities – is having trouble keeping up with today’s market environment. With bond yields declining due to record-low interest rates traditional portfolio allocations do not offer the same earning potential as they did in the past.
The private mortgage market provides a fixed-income alternative for investors looking to diversify away from government bonds and corporate debt. It also provides the opportunity to generate a generally predictable yield compared to some traditional fixed-income vehicles in a low interest-rate environment, which has become the new normal following the 2008 financial crisis.
Industry data show that Mortgage Investment Corporations routinely outperform government bonds, often by a wide margin. MICs can generate positive returns for investors because they address a key segment of the mortgage market: borrowers who need liquidity to finance their home purchase. In Canada, private mortgages account for roughly 1% of the entire mortgage market. While this may not seem like a lot, it’s a $15 billion market—and one that’s growing as more borrowers seek out more flexible lending options not offered by the big banks.
How MICs Fit in TFSA and RRSPs
As an investor, you can hold shares of a Mortgage Investment Corporation in your registered account—be it TFSA, RRSP, RRIF, or RESP. As a shareholder, you are entitled to dividend payouts from the fund. Due to their corporate structure, MICs do not pay income tax and are legally mandated to distribute all their earnings to shareholders. MICs are also required by law to keep at least 50% of their holdings in mortgages backed by residential real estate. But, mortgage lending is not risk-free, borrowers can default. This risk is managed by leading MICs through careful balancing of leverage, ensuring the portfolio is geographically diversified and having strong underwriting processes.
Like other assets, MICs can become a key part of your registered investment portfolio -they can provide recurring dividend payments that can be cashed out or reinvested for compound growth. Leading MIC funds offer a Dividend Reinvestment Plan, or DRIP, which provides investors a compounding rate of return over time.
From a tax perspective, earnings made on a MIC investment are treated just as any other asset within your registered fund. In the case of a TFSA, returns can be withdrawn without any tax penalties. With respect to RRSPs, earnings are tax-deferred until retirement when you start making withdrawals.
One of the best ways to get started in the mortgage market is to work with an experienced investment corporation. CMI Mortgage Investments offers individuals and corporations a family of three diverse funds that meet various risk and performance profiles. Learn more about how CMI MIC Funds can offer seamless access to Canada’s real estate markets.
Contact us by filling out the form below for more information about our MIC funds.