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?

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Interesting. I know that you can’t co-mingle the investment loans with non-investment loans, but I didn’t realize that co-mingling the investments might cause a problem.

I guess it’s just better to keep everything separate.

So, why would you want to co-mingle? There is no tax advantage. It’s best to keep the minimum amount of your cash tied up as possible in the leveraged account.

The only difference between:

(i) Using additional cash flow to buy non-leveraged portfolio, and
(ii) Repaying investment loan and reborrowing to invest

is that (ii) imposes more restrictions on what you can do with that additional investment.

Unless I’m missing something, it’s at best pointless and at worst tying your hands.

Something doesn’t make sense to me here. Until/unless you withdraw, I don’t see why co-mingling should be a problem.

If I borrow $100k and buy an $100k income-generating asset, the interest on the loan is deductible.

If I borrow $100k and a $200k income generating asset (e.g. a rental property), the full interest on the loan is deductible, not 50%.

In your case, at worst it’s like the 2nd case (I would actually argue that it’s more like the 1st – you bought some financial assets with the loan, and are now buying some more assets with other money.) Why would CRA care, and why (and by what argument) would they claim it’s different?

Of course, if your $200k now grows to $250k and you withdraw $50k, then you get into a big issue of which $50k it was. That’s another story.

Can someone help unconfuse me?

Poor FT… is going to have all that excess cash flow and nothing to do with it :)

Now that I got my jealousy out, I’d probably try to keep your situation simple. A new account is just one extra username and password to remember.

Oh no, not at all. I just jumped into a mortgage recently and can fondly remember the good ol excess cashflow days…

This is quite interesting. I’ve heard about issues with splitting the use of a loan between investments and other purchases. He is suggesting that to be safe, an investment account should only have money from one source, the investment loan.

This seems like a high hurdle to meet so I’d question where Tax Guy is getting their information from. Especially since you seem to be choosing your strategy based upon this advice.

Splitting a loan is not prohibited, you just have keep track of the proportions so the math is easier if you don’t. I’m not sure the same logic applies to an investment account.

Mr. Rempel’s solution does make the accounting very clear.

I would just open another brokerage account. It keeps your paper trail easy and simple.

This reminds me of something a friend once said. “There’s no such thing as no problems in life. You just trade your problems for bigger and better ones”

I think you should use the money to buy another income property A commercial one this time. Stocks are calm and uninteresting. You need more action. :)

Aside from having an extra statement, I see no difference in having 500 shares of ENB in one account or having 400 in one account and 100 in another account.

I have a second brokerage account, I would never consider anything else. I’m not sure why you would consider buying stock A in that account a “new position”.. My position is the sum of my accounts. Its not uncommon for me to have duplicates. The dividend you collect adds up to the same. Unless you are in a DRIP of some sort where you can add to the position without any fees. My DRIPs are all artificial, and I can’t add extra money anyway.

I find the flexibility of having the separate account much cleaner, even if there were a slight cost difference. Its hassle enough to track ACB’s on re-investments without having to figure out what percentage or parts of my account is covered by the investment loan… Especially since I automatically put small amount of cash on that loan every week. I simply consider that money “gone” like a mortgage payment until the loan is eventually paid off.

I recently started a leveraged portfolio based on my HELOC. I opened a new brokerage account and the HELOC is solely dedicated to investment. This should keep any tax issues simple to handle.


On a tangential note, have you ever considered rolling the investment loan into a variable rate mortgage once your current mortgage is paid off? You can take advantage of even better borrowing rates (discount to prime rather than prime). The only disadvantage is that you’re giving up the option to repay the loan if you choose to liquidate your positions. This is something you should think about, given how soon you will have your mortgage paid off.

I just want to say that I am sure that contributing to your investment account, even when funded by an investment loan can never cause the interest on the loan to become non-deductible. (the reason why is because at this point you KNOW that 100% of the investment loan is invested in income producing property) However there could be issues with taking the co-mingled money out of the investment account for personal reasons.

Even still, the income tax act and regulations are completely silent on how to determine whether the money that you have withdrawn is part of the capital of the loan or if it is funded from other sources. Therefore as long as you keep separate balances which segregate the amounts on paper, it would be “possible” to co-mingle the funds. However, the accounting needed to do this would be a serious pain in the ass. It would be FAR easier to simply maintain a second investment account at your brokerage where you make deposits and transfer any income from your investment portfolio to this other account.

Another question: if you had only the leveraged account, why would you be unable to withdraw from it without paying down the loan? (It may be imprudent to do so, but not impossible.)

Your loan is a HELOC backed by your house, right? So you should be able to freely withdraw any investment funds and decide not to pay down the loan. As long as you own your house free and clear the bank is happy.

(In contrast, a conventional margin account at a broker may force you to pay down the margin loan if you sell something. But in your case the loan source and the investment account are separate, so they should not be tied together, right?)

David: the issue is maintaining the tax-deductibility of loan interest. It’s not the bank you have to satisfy but Canada Revenue Agency. Check out some of the Smith Manoeuvre posts here.

I would concur that you have to know the CRA rules since they are the ones that could end up negating your advantage of a a tax-deductible loan. Once you find their framework for establishing a tax deductible loan then I wouldn’t stray too far.

Guys, I’ve thought about it some more and this co-mingling problem still makes no sense.

Year 1:
I borrow $100k and purchase 1000 units of a $100 stock (with a reasonable expecation of income generation).
Interest is deductible and if CRA asks I show them the paper trail indicating the borrowed money went to purchase the stock.

Year 3 (for example).
I deposit another $100k and buy another say 500 units of the stock, now at $200 (lucky investment in Year 1).
Nothing has changed about the paper trail regarding the use of the $100k borrowed in year 1. Why would the interest on it now not be deductible?

I buy that you have a mess if/when you sell part of your holdings:
Suppose in year 4 the stock is now at $250. I now own 1500 units with ACB $200k. If I sell 500 units, then I have a taxable gain of $58k and going forward I have a mess as to how much of my loan interest is tax deductible.
If I put the 500 units in a new account, then I could explicitly sell those ($25k taxable gain) and keep the other 1000 and the loan interest would clearly be tax deductible. But until I sell, I don’t see any difference.

Happy to be proven wrong, but I just don’t get it….

I thought it would make more sense to just repay the HELOC with dividends and excess cash you have (such as tax refunds). Like you said, paying down the HELOC and borrow again for investment will keep the loan 100% deductible. If you are worried about needing some funds for personal use in the future, then I suggest you keep it separate from your existing portfolio.

If you feel like you need the cash for personal use, then try to spend the dividends first. After all, dividends are taxable income and you can spend on anything you like!

However, it does get complicated if you need a lump sum amount for personal use. mmmmmmmm……

Just send it to me. Problem solved…. ;-)


Hi FT,

Can you answer Houska’s posts #3 and #20 please? Those are exactly my thoughts and questions too….and you are most likely thinking…these two dumb minds think alike..!


I think Houska did answer the question. There is no problem until you do a withdrawal. That is the problem. :)

If you withdraw the entire account then this can be avoided, but it makes more sense to just have two accounts.

I’ll say it again: there is no advantage in contributing additional equity to your leveraged account, except perhaps some slight savings in transaction fees from only having one account. I’d say that the complexity and restrictiveness of contributing both pots to the one account far outweights the added account fees.


Even with an artificial DRIP you can be in a situation where you could have “earned” one more DRIP share if you had all your shares of company “A” in a single account. Since dividends are usually paid quarterly, this could mean up to 4 extra shares per year. Of course you would have less cash in your account so I’m not sure how significant this would be to your portfolio over the long term.

I have a question regarding a less obvious tax situation for a loan. I have a personal business with some savings and a rental property. I recently purchased a primary residence and needed to borrow some money from my company to help with the down payment. My accountant advises me that the interest on this loan can be tax deductible if I leverage my rental property (i.e. the loan essentially becomes a second mortgage). Needless to say I would love to have the interest tax deductible but I am having a tough time getting my head around the reasoning. Anybody with an opinion/experience with this scenario?

FT open a new account. It takes less than 5 minutes online.
In my opinion any benefit in co mingling your investments will pale in comparison with any problems you may encounter with CRA.

what about just keeping the cash flow as just that, cash flow. why do anything with it? why not just keep it handy and us it as needed or for emergencies?

i feel these days people try to over invest and it gets them into a bind where they are wound to tight and don’t have flexibility to do things as they come up.

Love the comments about keeping the accounts separate. Simplicity is well worth it.

FT, what is your long term plan for this leveraged account? I understand the benefits of this leveraged account, namely the dividends you collect and the tax break from interest payments on the HELOC, all from investments bought with the bank’s money.
Yet at some point the HELOC must be paid, either by using your old mortgage payment, or having investments that pay sufficient dividends to cover the interest charges and some principle, or do you plan on keeping this leveraged portfolio and having your estate sell the investments to cover the HELOC after your death?

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.

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.


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>

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.

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.

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

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