When it comes to alternative investments, mortgage investments are an excellent option for many investors. There are many benefits to investing in the Canadian real estate market, and individuals looking for an alternative to the standard investment plans know all about these benefits. When it comes to investing in mortgages through a Mortgage Investment Corporation (MIC), there are a few tax-related benefits you may have forgotten about.
The major benefits to investing through a MIC are the “flow-through” status on the taxation of income and capital gains as well as interest income. MICs enjoy preferential tax treatment under the Income Tax Act of Canada. This means that when a Mortgage Investment Corporation receives income and capital gains from the mortgages they’ve invested in, these gains flow first to the shareholders, or investors, rather than being taxed first. This “flow-through” benefit is the same for interest income from an investment or money in the MIC’s bank account. This “flow-through” model benefits investors as they’re not double-taxed on their investment income.
A Mortgage Investment Corporation with “qualified investment” status allows investors or shareholders to invest in MICs through a self-directed deferred income plan such as an RRSP, RESP, TFSA, RRIF, etc. The interest or capital gains received can then go directly into one of these accounts, and the estimated interest these plans receive won’t be taxed.
All these benefits are dependent on the Mortgage Investment Corporation’s “qualified investment” status. However, if the MIC’s investment is a “prohibited investment” under Canadian tax law, there may be penalty taxes. And if the MIC doesn’t meet Canadian Tax Act requirements, the interest may be taxed before reaching the investors. In other words, you’re looking at double taxation on any gains or interest income.
Like we said, mortgage investments are a great alternative option. However, this rings true only if the Mortgage Investment Corporation responsible for managing the funds is a “qualified investment.” Make sure to consult a tax specialist or financial advisor and thoroughly vet any MIC before investing money with them. If all is well with the MIC you choose, this alternative investment strategy will be well worth it. Thanks to the “flow-through” taxation status and the setup and use of a deferred plan, you’ll enjoy several benefits.
Interested in learning more about MICs and how taxation works on your investment? Contact our colleague Jordan. He’s here to help you learn more about mortgage investments and what Cooper Pacific can offer you.