COOPER PACIFIC BLENDED MORTGAGE INVESTMENT … Statements/201… · those risk assessments, ... 19...

COOPER PACIFIC BLENDED MORTGAGE

INVESTMENT CORPORATION

FINANCIAL STATEMENTS

YEAR ENDED SEPTEMBER 30, 2018

COOPER PACIFIC BLENDED MORTGAGE INVESTMENT

CORPORATION

INDEX TO FINANCIAL STATEMENTS


Independent Auditors' Report

Statement of Financial Position

Statement of Comprehensive Income

Statement of Changes in Shareholders' Equity

Statement of Cash Flows

Notes to Financial Statements

MCAVOY RULE & COMPANYCHARTERED PROFESSIONAL ACCOUNTANTS

James M. McAvoy, B.A., CPA, CGA *

Third Floor, 1600 Bay Street Kathie Logozar, B. A., CPA, CA, CGA *

Victoria, British Columbia Neil E. Wright, CPA, CGA *

Canada V8R 266

Tel.: 250.592.5542

Fax.: 250.595.6116

[email protected]

INDEPENDENT

AUDITORS' REPORT

To the Shareholders of

Cooper Pacific Blended Mortgage Investment Corporation

Karen Leslie, CPA, CGA

Stephen D. Ormond, CPA, CGA

Philip Chalmers, B.A., CPA, CGAJubal Qeb) Gordon, B. Com., CPA, CGA

Tasha Moores, B. Com., CPA, CGA

Matthew A. Barnett, B. B. A., CPA

Nathan P. Waldmann, B. Sc., CPA, CGA

denotes professional corporation

We have audited the accompanying financial statements of Cooper Pacific Blended MortgageInvestment Corporation, which comprise the statement of financial position as at September 30, 2018,

the statements of comprehensive income, changes in shareholders' equity and cash flows for the yearthen ended, and notes, comprising a summary of significant accounting policies and other explanatoryinformation.

Management' s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in

accordance with International Financial Reporting Standards, and for such internal control asmanagement determines is necessary to enable the preparation of financial statements that are free frommaterial misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit in accordance with Canadian generally accepted auditing standards. Thosestandards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe financial statements. The procedures selected depend on our judgment, including the assessment ofthe risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, we consider internal control relevant to the entity' s preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity' sinternal control. An audit also includes evaluating the appropriateness of accounting policies used andthe reasonableness of accounting estimates trade by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis -for

our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position ofCooper Pacific Blended Mortgage Investment Corporation as at September 30, 2018, and its financial

performance and its cash flows for the year then ended in accordance with International Financial

Reporting Standards. Nwa,- y

I" f- C— r yDecember 13, 2018 McAvoy Rule & CompanyVictoria, B.C. Chartered Professional Accountants


CORPORATION

STATEMENT OF FINANCIAL POSITION - SEPTEMBER 30, 2018

2018 2017

ASSETS

Cash and cash equivalents $ 123, 245 $ 532,047

Accrued interest (Note 4) 22,255 129,727

Mortgage investments (Note 4) 15, 478, 607 9,950,310

15, 624, 107 $ 10,612, 084

LIABILITIES

Accounts payable and accrued liabilities $ 376,944 $ 185, 356

Due to related party (Note 6) 418,553 56,976

Redeemable preferred shares (Note 7) 14, 828, 606 10,369,748

SHAREHOLDERS' EQUITY

COMMON SHARES (Note 8)

RETAINED EARNINGS

COMMITMENTS (Note 9)

The financial statements were approved on December 13, 2018

Approved on behalf of to Board:

Director

Director

15, 624, 103 101612, 080

15, 624, 107 $ 10, 612, 084

The accompanying notes form an integralpart of these financial statements


CORPORATION

STATEMENT OF COMPREHENSIVE INCOME


REVENUE

2018 2017

Interest income $ 1, 137, 632 $ 827, 096

EXPENSES

Administration fees

Interest

EARNINGS BEFORE DIVIDENDS ON PREFERRED SHARES

DIVIDENDS ON REDEEMABLE PREFERRED SHARES

289, 116 196, 100

440 454

289, 556 196, 554

848,076

848, 076

630,542

630,543

INCOME TAX (RECOVERED) - ( 1)

PROFIT AND TOTAL COMPREHENSIVE INCOME FOR

THE YEAR $ - $



CORPORATION

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


Total

Common Shareholders'

Shares Equity Equity

Balance, September 30, 2016 4 $ - $ 4

Loss and total comprehensive loss for the year - -

Balance, September 30, 2017 4 - 4

Profit and total comprehensive loss for the year - -

Balance, September 30, 2018 4 $ - $ 4



CORPORATION

STATEMENT OF CASH FLOWS


2018 2017

CASH PROVIDED BY (USED IN):

OPERATIONS

Profit (loss) for the year

Items not involving cashDividends paid through issuance of redeemable preferred shares 584,959 433, 186

Changes in non- cash operating working capital: Decrease in corporate tax receivable

584,959 433, 186

223

Increase (decrease) in accrued interest 107, 472 ( 41, 389)

Increase in accounts payable 191, 588 73, 456

19

FINANCING

Increase in due to related party 361, 577

Proceeds from issuance of redeemable preferred shares 4, 845, 205

Redemption of redeemable preferred shares ( 971, 306)

76

2, 913

3, 457,477

342,726)

4, 235, 476 3, 117,664

INVESTING

Increase in mortgage investments ( 5, 528,297) ( 3, 609,902)

DECREASE IN CASH AND CASH EQUIVALENTS 408,802) ( 26,762)

CASH AND CASH EQUIVALENTS, beginning of the year 532, 047 558, 809

CASH AND CASH EQUIVALENTS, end of the year $ 123, 245 $ 532,047

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid 440 $ 454

Interest received 1, 245, 104 785, 707



CORPORATION

NOTES TO FINANCIAL STATEMENTS


1. REPORTING ENTITY

Cooper Pacific Blended Mortgage Investment Corporation ( the " Corporation") was incorporated

under the laws of British Columbia on June 8, 2009 and commenced operations as a mortgage

investment corporation. The objective of the Corporation is to originate and manage long-termincome generation through a portfolio of interests in mortgages underwritten on real propertydevelopments. The Corporation qualifies as a mortgage investment corporation (" MIC") under the

Income Tax Act (Canada) and, as such, is able to distribute dividends to its shareholders on a pre-

tax basis.

The Corporation is domiciled in Canada and its registered office is 821 Broughton Street, Victoria,

British Columbia.

2. BASIS OF PREPARATION

a) Statement of compliance

The financial statements have been prepared in accordance with International Financial

Reporting Standards ( IFRS) as issued by the International Accounting Standards BoardIASB").

The financial statements were authorized for issue by the Board of Directors on December13, 2018.

b) Basis of measurement

The financial statements have been prepared on the historical costs basis.

c) Functional and presentation currency

These financial statements are presented in Canadian dollars, which is the functional currencyof the Corporation.

d) Use of estimates and judgments

The preparation of the financial statements in conformity with IFRS requires management tomake judgments, estimates and assumptions that affect the application of accounting policiesand the reported amounts of assets, liabilities, income and expenses. Actual results maydiffer from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are recognized in the period in which the estimates are revised and inany future periods affected.

The most significant estimates that the Corporation is required to make relates to the

valuation of the mortgage investments ( note 4). These estimates may include assumptionsregarding local real estate market conditions, interest rates and the availability of credit, costand terms of financing, the impact of present or future legislation or regulation, priorencumbrances and other factors affecting the investments and underlying security of theinvestments.


CORPORATION



3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in thesefinancial statements unless otherwise indicated.

a) Financial instruments

i) Financial assets

The Corporation initially recognizes loans and receivables on the date that they areoriginated. The Corporation' s financial assets are comprised of mortgage investments and

cash and cash equivalents, both of which are classified as loans and receivables. Such

financial assets are recognized initially at fair value plus any directly attributabletransaction costs. Subsequent to initial recognition, these financial assets are measured at

amortized cost using the effective interest method, less any impairment losses.

The Corporation derecognizes a financial asset when the contractual rights to the cash

flows from the financial asset expire, or when it transfers the financial asset in a

transaction in which substantially all the risks and rewards of ownership of the financialasset are transferred. On derecognition of a financial asset, the difference between the

carrying amount of the asset ( or the carrying amount allocated to the portion of the assettransferred), and the consideration received ( including any new assets obtained less anynew liability assumed) is recognized in profit or loss.

ii) Financial liabilities

The Corporation initially recognizes financial liabilities on the date that they areoriginated. The Corporation derecognizes a financial liability when its contractualobligations are discharged or cancelled or expire.

The Corporation has the following financial liabilities which it has classified as otherfinancial liabilities: accounts payable, interest payable, income tax payable, due to related

party and redeemable preferred shares. Such financial liabilities are recognized initially atfair value plus any directly attributable transaction costs. Subsequent to initial recognitionthese financial liabilities are measured at amortized costs using the effective interestmethod.

b) Cash and cash equivalents

Cash and cash equivalents comprise balances with less than 90 days maturity from the date ofacquisition, including cash and deposits with banks and cheques and other items in transit.

c) Mortgage investments

Mortgages investments are recognized initially at fair value. Subsequent to initial recognition, themortgage investments are measured at amortized cost using the effective interest method, less anyimpairment losses.

The mortgage investments are assessed at each reporting date to determine whether there isobjective evidence of impairment.


CORPORATION



3. SIGNIFICANT ACCOUNTING POLICIES (continued)

c) Mortgage investments (continued)

Mortgage credit quality is assessed at a specific and collective level for reasonable assurance oftimely collection of the full amount of principal and interest. Impairment is assessed on a specificmortgage basis taking into account past experience, credit quality, payments in arrears, generaleconomic conditions and real estate market conditions. When a mortgage is identified as

impaired, the carrying amount becomes the lower of the recorded investment and the estimatedrealizable amount. Estimated realizable amounts are measured by discounting the expected futurecash flows at the effective interest rate inherent in the mortgage. When the amount and timing ofsuch cash flows cannot be estimated with reasonable reliability, estimated realizable amounts arebased on the fair value of the security underlying the mortgages, net of expected costs ofrealization.

All individually significant mortgages found not to be specifically impaired are then collectivelyassessed for impairment that has occurred but not yet been identified. Mortgages that are not

individually significant are collectively assessed for impairment by grouping together mortgageswith similar risk characteristics. In assessing the collective impairment, the Corporation usesanalysis of past performance and the level of allowance already in place, adjusted formanagement's judgment as to whether current economic and credit conditions are such that actual

losses are likely to be greater or less than suggested by past performance.

Losses are recognized in the statement of comprehensive income and reflected in an allowance

account against the mortgage investments. Interest on the impaired asset continues to be

recognized through the unwinding of the discount if it is considered collectable and adjusted tothe allowance account if not considered collectable. When a subsequent event causes the amount

of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

d) Revenue recognition

Interest income is recorded on the accrual basis using the effective interest rate method. Whencalculating the effective interest rate, the Corporation estimates future cash flows considering allcontractual terms of the financial instrument, but not future credit losses. Loan application and

origination fees on mortgage investments are recognized by Cooper Pacific ( 1994) MortgageInvestment Corporation, a related company.


CORPORATION




e) Income taxes

Current tax is the expected tax payable or receivable on the taxable income or loss for the year,

using tax rates enacted or substantively enacted at the reporting date, and any adjustments to taxpayable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differenceswhen they reverse, based on the laws that have been enacted or substantively enacted by thereporting date. Deferred tax assets and liabilities are offset if there is a legally enforceableright to offset current tax liabilities and assets, and they relate to income taxes levied by the sametax authority or the same taxable entity, or on different tax entities, but they intend to settlecurrent tax liabilities and assets on a net basis or their tax assets and liabilities will be realized

simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporarydifferences, to the extent that it is probable that future taxable profits will be available against

which they can be utilized. Deferred tax assets are reviewed at each reporting date and arereduced to the extent that it is no longer probable that the related tax benefit will be realized.

f) Provisions

A provision is recognized if, as a result of a past event, the Corporation has a present legal or

constructive obligation that can be estimated reliably, and it is probable that an outflow ofeconomic benefits will be required to settle the obligation. Provisions are determined bydiscounting the expected future cash flows at the pre-tax rate that reflects current marketassessments of the time value of money and the risks specific to the liability. The unwinding ofthe discount is recognized as interest expense.

g) Share capital

Common shares are classified as equity, incremental costs directly attributable to the issue ofcommon shares are recognized as a deduction from equity.

Preference share capital is classified as a liability due to redemption options of theshareholders. Dividends are recognized in profit or loss as accrued. There is no maximum

with regard to what percentage of the preferred shares issued and outstanding can beredeemed in any given fiscal year, however, redemptions are subject to the Corporationhaving sufficient cash to exercise such redemption.

h) Dividends

Subject to the discretion of the Board of Directors, dividends on redeemable preferred shares are

calculated and paid quarterly. Interest income from the mortgages in arrears by three months ormore is not included in the dividend calculation until the mortgage is no longer in arrears.


CORPORATION




i) New standards not yet adopted

A number of new standards, and amendments to standards and interpretations, are not yet effective

for the year ended September 30, 2018, and have not been applied in preparing these financialstatements.

IFRS 9 deals with classification and measurement of financial assets and financial liabilities. The

requirements of the standard represent a significant change from the existing requirements in IAS39 in respect of financial assets. The standard contains two primary measurement categories forfinancial assets: amortized cost and fair value. A financial asset would be measured at amortized

cost if it is held within a business model whose objective is to hold assets in order to collect

contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows

that are solely payments of principal and interest on the principal outstanding. All other financialassets would be measured at fair value.

The standard is effective for annual periods beginning on or after January 1, 2018. As the standardhas not yet been adopted, the Company has made no attempt to quantify the impact of IFRS 9 as atthe date of publication of these financial statements.

IFRS 15 deals with the nature, amount, timing and uncertainty of revenue and cash flows arisingfrom contracts, and contains both qualitative and quantitative disclosure requirements. The

requirements of the standard represent a significant change from the existing requirements in IAS18 in that an entity must disclose more information about its contracts with customers, includingmore disaggregated information about revenue, more information about its performance, and

information about its obligations remaining at the reporting date.

The standard is effective for annual periods beginning on or after January 1, 2018. As the standardhas not yet been adopted, the Company has made no attempt to quantify the impact of IFRS 15 asat the date of publication of these financial statements.


CORPORATION



4. MORTGAGE INVESTMENTS

The mortgage investments are eight first mortgages ($ 6,009, 719) and six second mortgages

9,468, 888) ( September 30, 2017 - two first mortgages ($ 224,456) and eight second mortgages

9, 725, 854)). Mortgage investments consist of short-term financing for residential andcommercial construction projects and term loans for completed or substantially completed income- producing properties in British Columbia. The mortgages bear interest at rates from 6. 5% - 12. 0%

per annum ( 2017 - 8. 0% - 12. 0% per annum) payable on a monthly basis and are due within 24months from the reporting date. The mortgages cannot be repaid in full prior to maturity withoutpenalty and are secured by charges on real property.

At September 30, 2018, none of the mortgages were in arrears ( September 30, 2017 - none) and

none of the mortgages have been assessed as impaired ( September 30, 2017 - none).

Accrued

2018 Principal interest

Performing mortgagesMortgages in arrears

Allowance for accrued interest

15, 478,607 $ 22,255

Impaired mortgages - -

Allowance for impairment - -

15, 478, 607 $ 22,255

Accrued

2017 Principal interest

Performing mortgagesMortgages in arrears

Allowance for accrued interest

Impaired mortgages

Allowance for impa

9,950,310 $ 129, 727

9,950,310 $ 129, 727

The Corporation provides for specific losses based on a regular review of individual mortgages. In

assessing the existence of impairment in value of mortgage investments, management compares thecurrent fair market valuation data against data at the date of the initial appraised amount, monitors

changes in market interest rates whereby increasing rates will affect the discount rate used in fairvaluing properties and monitors monthly cash flows receivable to ensure repayment terms are beingmet. In addition, mortgage investments are issued on short -terms thereby limiting the period ofexposure to the negative impact of market conditions on their recoverability.


CORPORATION



4. MORTGAGE INVESTMENTS (continued)

The Corporation intends to invest primarily in second mortgages having a principal amount of not morethan 85% of the appraised value and first mortgages having a principal amount which, when added tothe other principal amounts of prior mortgages, is not more than 75% of the appraised value at the time

of committing to the mortgage of the real property against which they are secured. Cooper Pacific1994) Mortgage Investment Corporation is the manager of the Corporation ( see note 6). Investment

decisions of the Corporation must be unanimously approved by the credit committee of the managerconsisting of any three of its directors. At any given time, one project, borrower or associated group ofborrowers did not represent greater than $2. 5 million or 25% of the paid up capital of the Corporation, whichever is greater at the time of granting the mortgage.

The Corporation holds security against loans and advances to customers in the form of first and secondmortgage interests over the properties being developed. Estimates of fair value are based on the valueof the security at the time of borrowing and fluctuate based on the stage of development. The fair valueof mortgage investments and maximum credit risk at the reporting date is best represented by thecarrying amount of the mortgages above.

The corporation believes that no collective allowance for impairment is required based on the

development stage of the outstanding mortgage investments and the historical credit worthiness of theborrowers.

Payments received on mortgages that have been classified as impaired are recorded first to recover

collection costs, principal and any previous write-offs or allowances, and then as interest income.

A mortgage will be classified back to performing status when it is determined that there is a reasonableassurance of full and timely repayment of interest and principal in accordance with the terms andconditions of the mortgage, and that none of the criteria for classification of the mortgage as impaired

continue to apply. A mortgage will be fully written off and the related allowance recognized when theunderlying security is no longer considered collectible.

Diversification

The mortgage investments as at September 30, 2018 consisted of 74.4% ( September 30, 2017 - 83. 7%)

residential mortgages and 25. 6% commercial mortgages ( September 30, 2017 - 16.3%).

At September 30, 2018 there were two (September 2017 - one) borrowers that had more than one

mortgage and represented greater than 10% of outstanding mortgage investments - three mortgagesrepresenting 15. 4% and two mortgages representing 10. 7% ( September 30, 2017 - three mortgages

representing 22. 1 %).


CORPORATION



4. MORTGAGE INVESTMENTS (continued)

2018 Principal Percentage # of Mortgages

Greater Victoria 5, 223, 568 33. 8 8

Remainder of Vancouver Island $ 3, 144, 823 20.3 3

Remainder of BC 7, 110,216 45. 9 3

Alberta - -

15, 478,607 100. 0 14

2017 Principal Percentage # of Mortgages

Greater Victoria $ 3, 126, 117 31. 4 4

Remainder of Vancouver Island 3, 597,979 36.2 3

Remainder of BC 3, 224,938 32.4 2

Alberta 1, 276 1

9,950,310 100. 0 10

The maturity of loans at the reporting date was as follows:

2018 2017

Mortgages due within

0 - 6 months $ 7,430,431 $ 9,447, 189

6 - 12 months 2, 961, 670 -

12 - 24 months 5, 086,506 503, 121

15, 478, 607 $ 9,950,310

5. LINE OF CREDIT

The company has available a revolving line of credit in the amount of $750,000, shared with CooperPacific Mortgage Investment Corporation, Cooper Pacific 11 Mortgage Investment Corporation and

Cooper Pacific First Mortgage Investment Corporation ( collectively the " Borrowers"). Amounts may beadvanced to any Borrower( s) to the maximum of the total of the credit facility at the discretion of thethe Cooper Pacific ( 1994) Mortgage Investment Corporation ( the " Manager"). Interest is at the bank's

prime rate plus 1. 50% per annum, payable monthly. The credit facility is secured by a general securityagreement against all assets of all of the Borrowers and the Manager.

As at the end of the of the current year the Company was not accessing the funds available through thiscredit facility.


CORPORATION



6. DUE TO RELATED PARTY

2018 2017

Cooper Pacific ( 1994) Mortgage Investment Corporation,

unsecured, bears interest at 4. 0% ( 2017 - 4. 0%) per annum,

due on demand $ 418, 553 $ 56,976

The Corporation and Cooper Pacific ( 1994) Mortgage Investment Corporation (" CP1994") have certain

directors in common. The Corporation invests in first and second mortgages managed by CP1994 andunder a management agreement pays CP1994 an administrative fee of up to 2. 25% per annum on

capital invested. During the year, administration fees were $ 275, 349 ( 2017 - $ 186, 761) plus GST.

During the year, the Corporation paid interest of $419 ( 2017 - $ 439) to CP 1994.

Related party transactions are in the normal course of operations and are measured at the exchangeamount of consideration established and agreed to by the related parties.

The Corporation has no employees and there was no remuneration for directors during the yearspresented.

The Chief Executive Officer, Chief Mortgage Officer and Chief Financial Officer of the Corporation

are management personnel that hold identical roles in CP1994

7. REDEEMABLE PREFERRED SHARES

The Corporation is authorized to issue an unlimited number of Class A and Class B shares ( redeemable

preferred shares). The shares are non-voting, redeemable, retractable, without par value, non- cumulative and receive all dividends paid by the Corporation. The shares are retractable at the optionof the holder after eighteen months from the end of the quarter in which the shares were purchased at a

redemption price of $1 per share plus or minus any unpaid dividends or losses attributable to the share.

At September 30, 2018, there were 14, 828,606 redeemable preferred shares outstanding ( September 30, 2017 - 10, 369,748). During the year, the Corporation issued 4, 845, 205 redeemable preferred shares forcash consideration of $4, 845, 205 ( September 30, 2017 - 3, 457,477 redeemable preferred shares for

3, 457,477), issued 584,959 redeemable preferred shares in the form of stock dividends ( September

2017 - 433, 186) and redeemed 971, 306 redeemable preferred shares for cash consideration of $971, 306

September 30, 2017 - 342,726 redeemable preferred shares for $342,726).

Related parties, including directors and common shareholders of the Corporation; directors, commonshareholders and employees of Cooper Pacific ( 1994) Mortgage Investment Corporation; and their

immediate families and related corporations held 1, 362,949 redeemable preferred shares at September

30, 2018 ( September 30, 2017 - 1, 298,584).


CORPORATION



8. COMMON SHARES

Authorized:

Unlimited Voting common shares without par value, non -participating, redeemable by the Corporation

2018 2017

Issued:

4 Voting common shares $ 4 $ 4

9. COMMITMENTS

At September 30, 2018, the Corporation is committed to providing an additional $ 2,900, 759 ( 2017 - 926, 152) of short-term mortgage financing to be funded upon satisfactory completion of conditions by

borrowers ( note 4). Funding for the additional financing is to be provided by cash on hand, loan fromCP 1994, issuance of Class A shares and proceeds from the repayment of existing mortgages.

10XINANCIAL INSTRUMENTS

Overview

The Corporation has exposure to the following risks from its use of financial instruments: Credit risk

Liquidity riskMarket risk

The Board of Directors approves and monitors the risk management processes.

Credit risk

The Corporation's exposure to credit risk is on its cash and cash equivalents, accrued interest and

mortgage investments.

Credit risk relates to the possibility that a loss may occur from the failure of another party toperform according to the terms of a contract. Cash and cash equivalents consist of cash bankbalances and term deposits with high credit quality financial institutions. Credit risk for accruedinterest and mortgage investments is the risk that the mortgagor will fail to discharge the

obligation, causing the Corporation to incur a financial loss. Credit risk is reduced by ensuringthat the collateral value of the security adequately protects the advances, that there is a viable exitstrategy for each investment, that the mortgages are made to experienced borrowers and bylimiting amounts advanced in relation to the value of the property secured. The mortgage

portfolio is also diversified by location, property type and size of loan on any one property, whichfurther manages credit risk.

The credit quality of performing mortgages is directly related to their nature, interest rate and termas described in Note 4.


CORPORATION



10XINANCIAL INSTRUMENTS (continued)

Credit risk (continued)

There were no mortgages in arrears as at September 30, 2018 and September 30, 2017.

There were no impaired mortgages as at September 30, 2018 and September 30, 2017.

The Corporation' s maximum exposure to credit risk for accrued interest and mortgage investments is

the carrying value of $15, 500, 862 and for cash and cash equivalents is $ 123, 245.

Liquidity risk

Liquidity risk is the risk that the Corporation will encounter difficulty in raising funds to meetcommitments associated with financial instruments. Management controls liquidity risk through cashflow projections used to forecast funding requirements for mortgage investments and anticipatedretraction of redeemable preferred shares. The Corporation also has the ability to manage liquidity riskthrough control of redeemable preferred share retractions and the payment of dividends on the

redeemable preferred shares.

At September 30, 2018, the Corporation has the following financial liabilities: Due between Due greater

61 and 365 than 365

2018 Carrying value Current days days

Accounts payable and accrued

liabilities 376,944 376,944

Due to related parties 418,553 418, 553

Redeemable preferred shares 14, 828,606 8, 078,993 6, 7497613

15, 624, 103 8, 874,490 6, 749,613

Due between Due greater

61 and 365 than 365

2017 Carrying value Current days days

Accounts payable and

accrued liabilities 185, 356 185, 356

Due to related parties 56,976 56,976

Redeemable preferred shares 10,369,748 5, 711, 221 4,658, 527

10, 612,080 5, 953, 553 4,658, 527

The balances of redeemable preferred shares shown above are representative of the period in which the

shares have reached their first anniversary date, and are therefore eligible for redemption on demandand at the discretion of management (see also Note 7).


CORPORATION



10XINANCIAL INSTRUMENTS (continued)

Market risk

The Corporation is not subject to currency risk. Fluctuations in general market interest rates have alimited impact on the interest rates of new mortgage investments due to the nature of the lending asinterest income is fixed. The availability of funds for the Corporation's type of lending, as described innote 4, is the primary influence on the interest rates. The interest rates achieved on mortgage

investments directly influence the rate of return available to redeemable preferred shareholders. Pricerisk for existing mortgages is reduced by the short term to maturity of the mortgages.

The Corporation does not account for any fixed rate financial assets and liabilities at fair value throughprofit or loss; therefore a change in interest rates at the reporting date would not affect equity and profitor loss.

Fair value

The carrying amounts of cash and cash equivalents, accounts payable and accrued liabilities and due torelated party approximate their fair values due to the relatively short periods to maturity of these itemsor because they are receivable or payable on demand. The carrying value of impaired mortgages, afterthe allowance for impairment, approximates their fair value based on the process followed to estimate

the realizable value. The fair value of performing mortgages and mortgages in arrears approximatetheir carrying value. Due to the uncertainty of the timing of retraction, the fair value of the redeemablepreferred A shares is not readily determinable.

ILCAPITAL DISCLOSURES

The Corporation considers its capital to comprise its redeemable preferred shares, which are

classified as a financial liability on the statement of financial position. In managing its capital, theCorporation' s primary objective is to ensure its continued ability to provide a consistent return forits shareholders through investments in mortgages bearing an acceptable interest rate and level ofrisk. In order to achieve this objective, the Corporation seeks to balance risks and returns at an

acceptable level by providing mortgage financing at an interest rate commensurate with the levelof risk. In making decision to adjust its capital structure to achieve these objectives, theCorporation considers both its short-term and its long-term strategic objectives.

The Corporation is subject to externally imposed financial covenants of the Income Tax Act inorder to qualify as a mortgage investment corporation. There has been no change with respect tothe overall capital management strategy during the year.

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