An Investment Loan and Excess Cash

Back in March 2009, I posted about what happens to the Smith Manoeuvre strategy once the mortgage is paid off.  From that post, I listed 3 solutions:

  1. Keep the investment loan forever
  2. Pay off the investment loan over time
  3. Pay off a portion of the investment loan

For us, it will probably be a combination of 2 and 3 where we’ll pay off the investment loan over time, and perhaps keep a balance that we’re comfortable with.  But there is something that I did not consider, that is, what do I do with the excess cash flow now that the mortgage is paid off?  Providing that I’ve already budgeted for RRSP and TFSA contributions, there will be almost $2k/month in extra cash flow without the mortgage payment.

Being the capitalist that I am, my first thought is to continue contributing to my Smith Manoeuvre dividend portfolio with cash.  However, as the portfolio is funded by an investment loan, there may be tax issues that I’m not aware of.  With that, I consulted Tax Guy who concluded that …

Co-mingling cash contributions to your leveraged investment account “may” affect the deductibility of interest. Provided you can track each cash contribution, the worst case scenario would be a proportional split of the interest.


Assume you have fully paid off the instalment portion and end up with a HELOC of $200,000 and a portfolio valued at $300,000. At the beginning of the year, you place an additional $10,000 of cash in the brokerage account. The account earns 7% for the year and has a FMV of $331,700 at the end of the year.

The interest you can deduce should be in proportion to the amount of the account you have funded with the loan or 90.4%.

Again this would be a worst case scenario (provided you can always track each dollar). Best case scenario would that the CRA would allow you to deduct the full interest from the HELOC although this would get messed up if you decide to take funds out of the account. Withdrawals would most definitely affect interest deductibility.

I would recommend you use a separate brokerage account for cash investments and keep it separate from your leveraged investments.

So depositing cash directly into a leveraged portfolio isn’t a great idea, however, I really don’t want to open a brand new stock brokerage account to continue investing in dividends.  I want to continue building my existing portfolio.

I then came up with an alternate solution – instead of putting the cash directly into the brokerage account, use the cash to pay down the investment line of credit, then continue using the investment line as buying opportunities occur.  This way, the investment line of credit “should” remain fully deductible which was confirmed by CMA Ed Rempel.

Mr. Rempel points out that the main pitfall of using all your cash flow to pay down the investment loan to reinvest are not the tax aspects, but in the access to cash/capital.

Paying down the loan any time is fine and then reborrowing is just additional leverage. Basically, all that means though is that you are mixing your leveraged and non-leveraged portfolios. You understand that means that all your investments are leveraged, so you can’t cash in any of your investments without paying down the investment credit line.

That’s why I would suggest to keep a non-leveraged portfolio – so you have access to some money.

I can see how this would be an issue if we were to put 100% of our excess cash flow towards the leveraged portfolio, but we have a tendency to accumulate cash in a savings account as a nature of habit.

What do you think?  Do you think I should open a separate account to avoid any tax issues?  If you have a leveraged portfolio, what strategies do you use to keep a clear paper trail?

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

Posted in


FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
10 years ago

I know it’s getting late, but With Questrade you can combine multiple account into the same user name/password and with a “combo box” switch to 1 account to the other

I have a TFSA and reg account there under the same “user name” and the great thing it that it combine also the # of trade you doing, so if you’re trading enough, you can have access to better platform, level 2 quote etc. at no additional charges

10 years ago

Would this problem with tax deductions on loan interest arise if I’m leveraged using a margin account from my online broker? For example, let’s say I have $10000 worth of equities in the account bought with my own money and $5000 bought with margin, and the interest rate on margin is 3%. If I added $5000 of my own money to the account (and bought stocks with that money), can I still deduct the full $150 per year interest expense?

Thanks in advance

10 years ago

Hi Andrew & FT,
Many, many apologies. I went back and re-read several posts and comments. Please ignore my prior comments since there was a large portion of the SM I had misunderstood. Thanks for pointing out the error of my ways.

I understand now that the point of the SM is get all of your mortgage debt converted to investment debt. Thus your house is paid off and you are no longer obligated to make principle and interest payments but only interest payments, which in turn are reduced by the tax deduction. Meanwhile the money you would have set aside for principle payments are now free to use for investment thus making your investments grow even faster than interest on your HELOC ever could. On paper you would still owe the value of home but the speed of growth and size of your investment portfolio means you’re well in the back.

What happens to the tax deductions as you enter retirement? If your income decreases and you enter a lower tax bracket, then the tax deductions would decrease as well. I guess at that point the goal is to have grown the dividend income to make up for the difference.

10 years ago

Andrew F,
I’m just trying to anticipate and understand the SM end game as an SM newbie. I agree with your comment that I shouldn’t try to save a large cash amount while still paying off the conventional mortgage. My comment was a small joke at FT’s expense since I’m quite jealous of his large cash savings.

I have no plans to try to keep a large cash stash like FT. My comment was more of an understanding of why FT is not really concerned about how or when to end his HELOC since he carries nearly it’s entire value in cash at anytime.

I guess for my peace of mind during retirement, and for estate planning I’d personally like to have the HELOC paid off sometime after the conventional mortgage is paid off and before my executor closes my affairs. If you keep the SM to the bitter end, either the leveraged portfolio, the home leveraged against (which your family may want to keep) or your other assets would be used to close the HELOC.

If I understand FT and yourself, your goal is for the SM portfolio to have grown to a size, after the end of the conventional mortgage, where the dividends generated and the tax deduction would pay for the interest on the HELOC and little extra dividend income stream or you pocket both amounts and let HELOC keep on growing.

Since I’m still in the beginning phases of SM planning please correct any incorrect ideas on my part, especially the part about where you keep the HELOC to the very end. I read lots of the posts and comments on this blog and both you and FT are very balanced when it comes to the SM.

Andrew F
10 years ago


Ed Rempel would ask you why you are so fixated on repaying the HELOC. The goal of the HELOC is to create a tax deduction, to help you build a larger equity portfolio sooner rather than later. The equity you have in your house is pretty unproductive (given the very low rates on HELOC loans).

You might want to close the HELOC at some point in your future (if, say, you plan to sell your home and rent), but that should not be a primary concern in implementing the SM. It has not need for you to have a large sum of money waiting in the wings to repay the HELOC–in fact, any additional cash would be more profitably deployed by repaying your conventional, non-deductible mortgage than saving it to pay your HELOC>

10 years ago

Thanks FT.

I forgot about your massive cash supply that you maintain. Maybe that’s the secret I haven’t tried with my Smith Maneuver calculations. Being able to make large payments on the HELOC from your liquid cash account and add in dividends and tax breaks, and you’ll have your HELOC paid off in no time. Guess I need to start my planning on how to acquire my own large cash account before or during the Smith Maneuver.

10 years ago

FT, what specific method are you thinking of using to pay off the HELOC?

I’m interested in the Smith Maneuver, especially your variation but whenever I run the numbers I find either you apply your old mortgage payments plus the freed up dividends and tax breaks (after the mortgage is paid) or you sell some of the investments (hopefully they have grown faster than the interest on the HELOC).

Personally, I’m in favor of the first option since the combined power of your old mortgage payments, dividends and tax returns (diminished granted) would allow you to fully own the investments and their future dividends. If you chose to sell of the leveraged stocks to pay off the HELOC, you lose the stocks, the coming dividends and you trigger capital gains tax.

I love many aspects of the Smith Maneuver but I still don’t understand how a long-term leveraged account is either owned or sold and closed.