There has seem to be an anti-Smith Manoeuvre movement across some Canadian finance blogs as of late. For readers out there who don’t know about the Smith Manoeuvre, you can read about the strategy here. The SM is basically a financial strategy to convert your non-tax deductible debt (like a mortgage) into good tax deductible debt (like an investment loan).

Here are some of the arguments against the Smith Manoeuvre:

Maxing out your RRSP and investing for the long term will outperform the Smith Manoeuvre.

  • I will agree with this statement due to the fact that your RRSP can grow tax free where the Smith Manoeuvre, even with tax deductible interest, is taxed on the dividends and capital gains. However, I don’t believe the SM is a replacement for your RRSP, but a replacement for your non-registered portfolio. The optimal strategy would be to maximize your RRSP, then if you have any money left over, pay down the mortgage, which in turn would increase your HELOC balance. Take the money from the increased HELOC balance and put it into stable dividend paying blue chips. For those of you who don’t understand what I’m talking about, you’ll have to read my article on the Smith Manoeuvre again.
  • There is a increased risk involved with leveraging your investments, so before you attempt any of this on your own, you better be pretty darn comfortable with investing. Either that, or find a good financial planner to put you in tax efficient, low-cost ETF’s or mutual funds.

Paying off your mortgage then start investing in a non-registered portfolio will out perform the Smith Manoeuvre.

  • I will argue against this because with the Smith Manoeuvre you are paying down your mortgage at an accelerated rate AND investing in a non-registered portfolio at the same time. Time and compound interest should make the difference. Not only that, you pay NOTHING out of pocket to maintain your HELOC. You simply withdraw the interest owed monthly from your HELOC and re-deposit it. The only issue is that in order to make the SM work, you’ll have to reach an investment return that is greater than the interest that you are charged. For example, today’s HELOC will charge 6%, if you’re in a 40% tax bracket, your effective interest is 3.6% after your tax deduction.
  • If you have a non-registered portfolio before you start the Smith Manoeuvre, all the better! Sell your investments, and pay down your mortgage, then re borrow and re-purchase the stocks again! Now you have a head start in paying off your non-deductible mortgage AND you can use the HELOC funds to repurchase your investments.

There is simply too much risk in betting your home on the market

  • I will agree to this to a certain extent. You are in effect leveraging your home to invest in the market. HOWEVER, you are also using fairly stagnant home equity that would just sit there otherwise. I think it really depends on how aggressive you are with investing and what stage of life you are in. As a young investor, I feel that now is the time for me to be aggressive.

Do you have an argument against the Smith Manoeuvre? Comments are now open for discussion.

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  1. George on February 7, 2007 at 8:08 am

    The biggest argument I can think of against the Smith Manoeuvre is that the lender for the HELOC usually has the right to “call” the loan at any time, which is possible if the loan amount keeps increasing without significant payments being made on it.

  2. FrugalTrader on February 7, 2007 at 8:19 am

    George: I haven’t heard of anyone having their HELOC called, have you? Why would the banks call a HELOC if it’s secured against your home AND they get 100% profit payments (interest)?


  3. George on February 7, 2007 at 8:26 am

    I could see it being a possibility if, for example, the HELOC is constantly maxed out, only the minimum (interest) payments are made (both of which are key features of the Smith Manoeuvre), and something else happens to make the lender question the creditworthiness of the borrower (say, they build up a lot of credit card debt at some time, or default on another loan). I’m not saying it’s likely, I’m just saying that it’s a possibility.

  4. Chris on February 7, 2007 at 10:20 am

    Generally I’ve found that when discussing the Smith Manoeuvre with anyone most people seem to have a difficult time with the concept of leveraging their home equity. We’ve had it drilled into our heads that maxing out RRSPs and paying off our mortgages as quickly as possible are the most sound financial options available and anything else isn’t wise. I’m also amazed at the number of people I talk to who fail to realize that RRSPs are tax-deferred…not tax free.

  5. Canadian Capitalist on February 7, 2007 at 11:54 pm

    I think I am one of the anti-Smith people you are referring to :)

    A couple of comments: I dislike making statements such as “will outperform”. Investing is a field of probabilities and I’ve always said that the SM works logically.

    The trouble is people panic when they see losses in the market. When they panic they might do something silly like sell their investments (its so easy. Just the click of a mouse or a phone call). Its very different with a house. They will see that houses are not selling in their neighbourhood but they are hardly going to call their broker and say “I want to sell my house!”. I’ve noticed that people generally overestimate their risk tolerance.

    I also disagree that home equity is “just sitting there”. We’ll take a simple example. Say I own a $250K home that is mortgage-free. Let’s say that I would rent a townhouse for $1,500/month if I did not own a house. Also, let’s assume that maintenance + property taxes are $6,000 a year. My house is providing me a benefit equal to $12,000 a year or almost 5% return. But remember that I pay no taxes on this return. In my world, that is a pretty darn good guaranteed rate of return.

  6. FrugalTrader on February 8, 2007 at 6:57 am

    Hey CC,

    Great points. As I mentioned in my articles, it is VERY important that investors are comfortable with the risk involved with leveraged investing, otherwise the SM is not feasible.

    Your 2nd argument about the equity is NOT “sitting there”. I agree that everyone has to live somewhere, and you could equate the paid off mortgage to the rent that you would have paid. However, even still, there is still a bunch of equity that could be tapped for a greater than 5% return on your investment. Albeit, with greater risk.


  7. Ezboy on February 8, 2007 at 12:33 pm

    Canadian Capitalist: “I also disagree that home equity is “just sitting there”. We’ll take a simple example. Say I own a $250K home that is mortgage-free. Let’s say that I would rent a townhouse for $1,500/month if I did not own a house. Also, let’s assume that maintenance + property taxes are $6,000 a year. My house is providing me a benefit equal to $12,000 a year or almost 5% return. But remember that I pay no taxes on this return. In my world, that is a pretty darn good guaranteed rate of return.”


    When a person applies Smith Manoeuvre on his/her principal residence, he/she still enjoys that darn good tax free return of saved rent. And, on top of that, he/she can enjoy the investment return (or loss) generates by the manoeuvre. The manoeuvre provides the mean to get the fund for investment, but never gaurantee any return on the investment.

    By the way, your “anti-SM” perspective is good for the SM prospectives and promoters like myself, it makes us think through the entire investment strategy carefully. As you pointed out, SM is not for those who chase after rally and run after crash. SM will work for investors who truely understand the power of the dollar cost averaging investment strategy. And, apply it to the appropiate investment vehicle like index funds or dividend funds.


  8. Fernando on February 8, 2007 at 2:04 pm

    I did the research and I am implementing the SM now, by myself, using Scotia’s Total Equity Plan and a discount brokerage (Interactive Brokers). A couple of comments:

    – Yes, this takes understanding a number of elements, from taxes to investing and some financial math, but it is not rocket science. If antyhing, I dislike the approach that Smith took in his book of constantly referring people to purchase the Calculator and to talk to a financial planner. It gives the SM an aura of “mystery” that is not warranted, IMHO.

    – People should not forget that another fundamental part of the SM is the *INVESTMENT* afterwards. There was hardly any discussion of that on Smith’s book, and people should be VERY careful about what they select. To me, the SM only makes sense if the investments make more than the after-tax lending rate on the HELOC…

    Hope this helps.

  9. FrugalTrader on February 8, 2007 at 2:24 pm

    Fernando: If you don’t mind me asking, what is your investment strategy?


  10. Fernando on February 8, 2007 at 2:58 pm

    No prob. Two things to keep in mind:
    – THIS IS NOT INVESTMENT ADVICE. Obvious, I know, but it bears saying that people should make their own choices and accept responsibility for them…
    – I have made my investment choices based on my full financial profile, including age and family situation, employment status, home ownership, insurance, etc… One consequence, for example, is that I’m reducing our bonds holdings to zero until I have paid off my mortgage (or transferred it via the SM).

    I’m a strong believer (though not a zealot) of indexing, and the majority (75-80%) of our investments are indexed. We follow a geographical distribution of approximately 1/3 Canada, 1/3 US, 1/3 Elsewhere. Canada and US are more heavily indexed than EAFE and Emerging Markets. I have about 5-7.5% of ‘play money’ for looking into specific stocks, otherwise it is mutual funds (active from a variety of sources, index via TD e-series) or ETFs.
    Most of it (75%+) is registered right now. As I build the non-registered side I am focusing on dividend-paying Canadian stocks and indexes (XDV or CDZ, take your pick).
    As always, I’m open to input from others on how to optimize things. Comments are welcome.
    Hope this helps.

  11. FrugalTrader on February 8, 2007 at 3:03 pm

    Fernando: ETF’s is an area of investing that I need to do more research in. Is it common for an ETF to have capital distributions throughout the year? I’m looking to minimize taxes while using the SM.


  12. Fernando on February 8, 2007 at 3:17 pm

    The distributions from each ETF will vary and you should check the prospectus for each fund. I’ve chosen XDV (Canadian Dividends) which pays quarterly distributions which will be mostly, if not all, dividends. There may be some CG in year end. One benefit of index funds is reduced portfolio turnover compared to active ones, so potentially less CG…
    Personally, I think a buy-and-hold posture of individual stocks and index funds is the easiest way to minimize CG tax. My choice was to augment that with dividends that for now can be applied against the mortgage as per the SM.

  13. Star on February 13, 2007 at 12:59 am

    Seems SM is nobrain for person who has paid off morgage. The worst case, you sell your investment. Your home will not be in risk.

    Anybody wants to discuss what kind of investment is qualified for tax deduction? Have anyone got any trouble from RCA on any investment cost claim?
    It is very unclear to me if you read Tax Guide. Index fund has no income or dividend will not be qualified?
    Thanks for comment.

  14. FrugalTrader on February 13, 2007 at 7:02 am

    Star: In 2003, according to Tim Cestnick who is Canada’s tax guru, the govt put in a tax rule that stated that in order for an investment loan to be tax deductible, the investment must have an expectation of profit. This means that your dividend return must be greater than the interest that you’re paying. This is difficult in this environment as interest rates are around 6%, however, with strong dividend paying stocks INCREASING their dividends every year (historically speaking), it’s only a matter of time before your dividends exceed your interest. The Smith Manoeuvre has been challenged in court a couple of times, and the supreme court has ruled it legit.

    An index fund may be legit as there is POTENTIAL for a dividend.  The rules are a little cloudy and you should consult a tax professional.

    Hope this helps.

  15. Star on February 13, 2007 at 4:46 pm

    Thanks for comment. I called RCA and the agent said as long as there is “potential” you will earn income or dividend from funds/stocks you buy, you can claim the cost. Even US funds is ok.
    I am ready to go that direction, but I don’t see any funds has anual dividend more than 6%. Any suggestion on what combination should I go for?

  16. FrugalTrader on February 13, 2007 at 6:36 pm

    Star: If you want dividend distributions in the 6% range, you may have to look into the income trust sector, I wouldn’t do this though as that market is shakey to say the least. My plan is to buy strong dividend paying companies that INCREASE their dividends regularly. That way, you’ll get returns under the 6% mark initially, but as the dividend grows, it will only be a matter of time before your dividends beat your interest payments.

  17. Star on February 13, 2007 at 9:34 pm


    Is 6% a good HELOC rate for now? All banks pretty much are the same in that rate.


  18. silverm on February 22, 2007 at 3:14 am

    I’m not completely against SM, but the tax savings must recover the following costs:
    – HELOC setup fee.
    – Capital gain tax when you sell your investments (Even when you plan to repurchase them back.)
    – Transaction fees (Whether it’s trade commissions, mutual fund DSC or exchange rate spread.)
    – On going opportunities lost on the above costs. For example, if you lost $1000 in capital gain tax today, it’s not enough to recover $1000 in tax saving 5 years down the road due to present and future values.
    – 0.9% spread between your Variable Mortgage Rate and your HELOC rate. I’m using VRM for apple-to-apple comparison.

  19. Sandor on February 27, 2007 at 1:41 am

    Answering FT’s comment from Feb 13th:

    FT: “In 2003, according to Tim Cestnick who is Canada’s tax guru, the govt put in a tax rule that stated that in order for an investment loan to be tax deductible, the investment must have an expectation of profit. This means that your dividend return must be greater than the interest that you’re paying. This is difficult in this environment as interest rates are around 6%, however, with strong dividend paying stocks INCREASING their dividends every year (historically speaking), it’s only a matter of time before your dividends exceed your interest. The Smith Manoeuvre has been challenged in court a couple of times, and the supreme court has ruled it legit.”

    I am afraid my deat FT, your memory deceives you. The relevant section says “a reasonable expectation of earning an income,” so, you can invest in anything as long as you have that reasonable expectation. This doesn’t mean that a certain level of performance is expected from the investment, nor that it must be a certain type of investment. It goes without saying that GIC’s woudn’t qualify, while stocks, funds, real estate and many other types would.
    This was also the outcome of the Singleton case in the Supreme Court, that opened up even farther the possibilities of benefiting from taking some risk by leveraging.


  20. FrugalTrader on February 27, 2007 at 6:45 am

    Sandor: Thanks for stopping by, I hope that you’ll stick around and share some of your knowledge with our readers. With regards to the Singleton case, yes, I am aware of that, but I’m fairly certain that there was an “extra” provision added to the tax law in 2003 as I stated above but they do NOT reinforce it for some reason.  I’ll have to get the exact quote from Tim Cestnick’s book.

  21. Sandor on February 27, 2007 at 9:08 am

    Dear FT:

    To your first comment about the donation of life insurance I must say that it doesn’t have to be a whole life type policy. In fact, the charity would be better served if it were a universal life policy, because, as the owner of the policy, the charity could access the accumulated cash within the policy, (just like any other “person”), even during the life of the donor. (The pertinent CRA document is this: IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donation)

    Your other coment about the management fees of segfunds is a bit too general. I do know that many people share this opinion, but the security is richly worth the 0.1-0.5% of extra fee. Particularly as they are combined with other neet features that wouldn’t be available othervise and also save money.

    As to the book; I don’t know it, but I am certain, the author made damned sure that he is quoting the relevant passage correctly. But since the CRA is really the authority and not the book, I suggest you look it up on the CRA website.
    My source (PriceWaterhouse Cooper) is quoting CRA:
    “To deduct interest expense on borrowed money, generally four conditions must be satisfied:
    • The interest must be paid in the year or payable in
    respect of the year.

    • There must be a legal requirement that the borrower
    pays the lender interest.

    • The borrowed funds must be used for the purpose of
    earning income from a business or property..

    • The rate of interest on the borrowed money must be reasonable under the circumstances. This means that if the interest rate on a loan is 10% but the market rate for a comparable loan (i.e., a loan of the same term, same principal and same risk) is only 6%, interest of only 6% will be deductible.

    The requirement that the borrowed money must be used by the borrower for the purpose of earning income from a business or property can be the most difficult condition to satisfy. Accordingly, when disputes concerning interest deductibility arise between a borrower and the Canada Customs and Revenue Agency (the ‘CCRA”), this condition is often the focus of the dispute.”

    Well, If we can believe Fraser Smith, in the case of the Smith Maneouvre CRA never raised a challenge in twenty years, so I think everybody should do it, if they qualify for it and are comfortable with the vagaries of the complicated process.

    Thanks for the gracious welcome


  22. Sandor on February 27, 2007 at 9:15 am

    Dear silverm:

    You apear to be too rigorous in your demand to cover all costs from the tax refund alone.
    Wouldn’t you be satisfied if the accumulated yield of the Maneouvre did the same thing?
    Remember, there is gains on the investments as well, helping out.
    In any case, I must take issue with your method here, because a rtue picture can be obtained only if you add up all the incomes and deduct all the costs. Then you include the time element.
    THis is the fair and realstic method.
    See you


  23. silverm on February 28, 2007 at 1:53 am

    >> “In any case, I must take issue with your method here, because a rtue picture can be obtained only if you add up all the incomes and deduct all the costs.”

    Let’s test with an example. Please verify the numbers.

    Suppose you’ve been holding BNS for 5 years. You started with $10,000 and now it’s worth $23,000. You have 2 choices: continue to hold, or sell it and reborrow from your HELOC to repurchase. If you sell, and you’re in the 40% tax-bracket, then you lose ($13,000 x 50% x 40%) $2,600 to capital gain tax. Now you only have $20,400 remaining to pay down your mortgage to reborrow. With a smaller capital, your portfolio won’t grow as quickly as before.

    If your mortgage rate is 5.1%, then $20,400 would’ve $1,040 of interests or ($1,040 x 40%) $416 of tax saving. Since HELOC has 0.9% higher interest, it would’ve cost you an extra $183.6 of pre-tax interests or $110 after-tax. So you net positive is $416-$110 = $305/Year.

    The lost $2600 could’ve generated $260/year of tax-deferred capital gains assuming 10% rate of return. $390/year if you assume 15% rate of return.

    So it’s not a clear cut. You can also play around with the example by increasing the capital gain built in to the BNS investment, or by adding in DSC if you own a mutual fund. What if you throw in $150 for the DSC, plus another $150 for the HELOC setup fee? Add that to the $2,600 for a total of $2,900 of lost capital.

  24. Ezboy on March 21, 2007 at 6:05 pm

    Silverm: You are right, it is very difficult to make a clear cut decision on whether one should sell off and repurchase or just leave the portfolio alone. In fact, I have done some simulation on a spreadsheet with historical TSX index fund as the investment vehicle and historical prime rate as the interest cost. The benefit of sell and repurchase doesn’t make a big difference. For a 25-year mortgage, the final portfolio value is only a few percentage points different. It doesn’t worth the trouble.

    The Rempel’s Maximum is much better, it gives you additional investment return ranging from 50% to 100%. Thank’s to Ed Rempel.


  25. Sandor on March 22, 2007 at 12:26 am

    Dear Silverm and Ezboy,

    I am afraid you are both mistaken, because you regard this transaction as a one time occurence. This however, is a process that is completed over a few years. While it is true that initially the set-up will cost some money, the repeated and increasing tax refunds combined with the rapid conversion of the mortgage into line of credit will break even in 1 or 2 years and make gains after that.
    There are als a couple of intangible benefits as well.
    First; it will enable people, who can barely make ends meet, to accumulate some investments, that otherwise they would never be able to do.
    Second; the elimination of the mortgage in short order, that by itself is worth a great deal.
    So I ask you, wouldn’t you pay a fee of $2900 for reducing the pay-off of your mortgage in 12 years, instead in 25?
    I think you would both agree that it is worth that price.
    By the way if you are reluctant to pay it the SM can be done without it too, except it may take an other year to complete.


  26. George on March 22, 2007 at 1:14 am

    Sandor: It’s fairly easy to reduce the pay-off of a mortgage to 12 years instead of 25, without paying any extra fees – just switch to accelerated biweekly payments (this alone drops a 25 year mortgage to about 18-19 years) and make extra principal payments (say, an extra $100-200) every two weeks. As long as you’re willing to put the extra cash into paying down the mortgage, you can do so within the limits of most mortgages in Canada today, and you won’t have to pay a fee of $2900 for the privilege of doing so.

  27. Ezboy on March 22, 2007 at 2:49 am

    Silverm: Don’t get me wrong. I am all for the SM, but my simulation shows that trying to speed up the conversion through selling and repurchasing investment doesn’t neccessarily increase the investment return. Sometimes, it reduces it.

    By the way, my simulation is conducted as a series of 300 monthly transactions and all tax refund and dividends are reinvested.


  28. FrugalTrader on March 22, 2007 at 8:37 am

    One benefit of selling off your non-reg portfolio to pay down the non-deductible debt is that it’s easier to track for tax purposes. IF you only use borrowed funds for your non-reg portfolio, there will be no “mixing” of funds.

  29. silverm on March 22, 2007 at 1:50 pm

    >>”So I ask you, wouldn’t you pay a fee of $2900 for reducing the pay-off of your mortgage in 12 years, instead in 25?”

    I’d if you can show us the math. By the way, I never assume it’s a one time transaction. Not only must SM make up the lost $2900 capital, but also all the future “could’ve” profits.

  30. Ezboy on March 22, 2007 at 2:35 pm

    Ezboy: “Silverm: Don’t get me wrong. I am all for the SM, but my simulation shows that trying to speed up the conversion through selling and repurchasing investment doesn’t neccessarily increase the investment return. Sometimes, it reduces it.

    By the way, my simulation is conducted as a series of 300 monthly transactions and all tax refund and dividends are reinvested.”

    Sorry silverm, the above comment was supposed to direct to Sandor, I mistakenly addressed it to you.

    Sandor: Just like silverm, I would appreciate if you can show us the math behind your logic. I’ve been trying to figure that out for a while without too much success.


  31. on March 22, 2007 at 3:31 pm

    Gentlemen, Silverm and Ezboy,

    You must excuse me for not providing a full plan for your SM, but it is impossible without the numbers necessary for the calculations. So no exhortations can lead me to do that, nor would it be responsible for me to do so.
    However a reduced version, based on the above $20400 would look something like this:
    So, you paid your 2900 “fee”
    Now your mortgage is reduced by 20400, so you can re-borrow the same amount; your investment is: 20400 add 10% gain, (as you stipulated,)a year later you have 22440. Plus you get a tax refund of 538 Total balance at the end of year 1:22978. So, at the end of year 1 you are only few dollars short of recapturing the 2900 fee.
    In year two you can pay down on the mortgage 2578, then re-borrow it and add to the investment. At the end of year 2 you have:25276 investment, plus a 551 tax refund. In total: 25827.
    By this time not only recuperated the initial cost, but you are ahead by 1827. (1089 of which is the tax refund!)
    Now, as you notice above. the tax refund is growing year after year as you increase the amount borrowed. This has the distinct advantage of adding to the gain. But even beyond that, as long as you keep the investment fund in place, you will receive the tax refund regardless the fact that you may have paid off the mortgage a long time ago.
    Of course, relying on this small amount alone will not pay off your mortgage, but if you combine it with the other components of the SM it will make a very substantial effect.

    But the 260 opportunity cost in comparison to the 551 tax refund in the second year alone seems to be a really paltry sacrifice.


  32. silverm on March 23, 2007 at 12:06 am

    I see a lot of key errors in the calculation.

    >>”Plus you get a tax refund of 538 Total balance at the end of year 1″

    $20400 x 5.1% (mortgage) x 40% (refund) = $416

    >>”In year two you can pay down on the mortgage 2578″

    You forgot to pay tax on the 10% gain. It should be $20400 x 10% (return) x 80% = $1632. Add the $416 refund for a total of $2048.

    >>”So, at the end of year 1 you are only few dollars short of recapturing the 2900 fee.”

    No. Why did you compound the $20,400 by 10% for the SM scenario, but not do the same the non-SM scenario? $23,000 x 10% = $2,300. After tax is $1840. The difference is only $2048-$1840 = $208. It’ll take you many years to catch up.

    The difference will shrink to $86/year if you increase the rate of return from 10% to 15%.

  33. Ezboy on March 23, 2007 at 6:13 pm

    Sandor, Silverm: Thanks to both of you for sharing the math. Despite Sandor has left out the 10% gain on the non-SM scenario, it appears that the SM scenario indeed can catch up with non-SM scenario much faster than I originally thought. Allow me to re-do the math for both scenarios.

    For the non-SM scenario, at the end of year one, we have 23,000 x (1.1) = 25,300 of investment. Factoring in the capital gain tax pending of (25,300 – 10,000) x 50% x 40% = 3,060, the after tax worth of the investment is 25,300 – 3,060 = 22,240.

    For the SM scenario, we have 20,400 x (1.1) = 22,440 of investment. Factoring in the capital gain tax pending of 2,040 x 50% x 40% = 408, the after tax worth of the investment is 22,440 – 408 = 22,032. The interest cost from HELOC is at 6%, so we pay 20,400 x 6% = 1,224. The tax refund at 40% will be 1,224 x 40% = 490. If we had left this investment alone, we only would have paid the lower mortgage rate of 5.1%. The difference in interest rate is 0.9%; therefore, the interest cost is 20,400 x 0.9% = 184. Substract this extra interest cost from the tax refund, we get 490 – 184 = 304 dollar left. So, the after tax worth of the SM scenario will be 22,032 + 304 = $22,338. This is $98 ahead of the non-SM scenario.

    If we repeat the calculation for a 15% investment return rate, the SM scenario will be $6 behind at the end of year one. But, it will catch up by second year because of the surplus of tax refund against the extra interest cost.


  34. silverm on March 23, 2007 at 9:27 pm

    >>”it appears that the SM scenario indeed can catch up with non-SM scenario much faster than I originally thought.”

    Did you figure out how many years to recover $2900? I think it’ll still take a long time.

    To my defense, I never said I was against SM, but it wasn’t life changing.

    When I used President’s Choice for my HELOC, they wanted to charge me $125 just to increase my limit if I pay down some mortgage. Manulife One has automatic increases but their 5 yr rate is 5.25% while ING Direct has 5.10%. I can’t find an institution that offers the 5.10% 5 yr rate and free HELOC limit adjustments. If you throw in the $125/year fee, you’ll have to catch up to that too.

  35. FrugalTrader on March 23, 2007 at 10:55 pm

    Silverm: Did you check on the Firstline Matrix Mortgage? The RBC Homeline is offering 5.38% and has free HELOC adjustments.

  36. Ezboy on March 23, 2007 at 10:57 pm

    Silverm: “Did you figure out how many years to recover $2900? I think it’ll still take a long time.”

    Do you mean the $2,600 capital gain tax plus $300 transaction cost?

    If it is, I would look at it this way, the $2,600 capital gain tax belongs to CRA in the first place, the SM scenario just pay it earlier than the non-SM scenario. As the previous post illustrated, the after tax worth of the SM scenario is ahead of non-SM scenario after the end of the first year.

    For the $300 transaction cost, it probably takes about 2 to 3 years to catch up. Once I can get access to my other computer, I will post the spreadsheet I used to calculate this. You can play around with it to see what is the effect of variation of interest rate and investment ROR to the 2 scenario.


  37. silverm on March 23, 2007 at 11:21 pm

    >>”The $2,600 capital gain tax belongs to CRA in the first place”

    Ahh… that’s where the difference is. Personally I think converting all figures back to after-tax is unfair because that dicounts the advantage of tax-free loans from the government. The power of the non-SM scenario is preciously the higher earning power coming from the larger pre-tax capital. I’ll demonstrate:

    Non-SM scenario is easy. You start with $23,000. Compound 10% over 15 years and you get $96,076 pre-tax. ($76,860 ONLY IF you decide to cash out, but you SHOULD NOT. Just leave it alone.)

    SM scenario is complicated. You start with $20,400. Each year you earn 10%, but you pay capital gain tax, so after tax return is only 8%. You take that 8%, pay down your mortgage and reborrow it back for reinvestment.

    That same year you also receive tax-refund, which is 6% interest of your investment loan times 40% tax rate. That equals 2.4% of the investment loan. This is offset by the extra 0.9% interest rate over regular mortgage rate. 2.4% – 0.9% = 1.5%. Again, you pay down your mortgage and reborrow it back for reinvestment.

    Now your investment is really growing at 8% + 1.5% = 9.5% annually. Compound 9.5% over 15 years and you get $79,586 after-tax.

    At the end of 15 years, you might say the after tax figures are in favour of SM, but who in his right mind is foolish enough to cash it out all at once? If both parties stay invested and compound @ 10%, non-SM will receive $9,607 of capital gain per year, while SM will only receive $7,986. Non-SM’s portfolio has HIGHER earning power, even though the after tax capital is lower.

  38. silverm on March 23, 2007 at 11:24 pm

    I said, “…tax-free loans from the government.”

    Pardon me. I meant “interest-free loans from the government.”

  39. Bootsie on March 23, 2007 at 11:31 pm

    Has anyone used the SM with the BMO Mortgage cash account?

  40. Ezboy on March 24, 2007 at 2:45 am

    Silverm: I thought this capital gain realization is just a one time deal. What I mean is that you have an investment siting outside of SM which cost $10,000 to purchase, and now it has a market value of $23,000. The decision is whether to sell the investment and use the proceeds for converting the mortgage loan to tax deductible investment loan. I believe this is how Sandor understand it (correct me if I am wrong, Sandor).

    After we re-purchase the investment through the HELOC loan, we can just leave that investment alone and let it compound at the full 10% ROR.

    Here is the link to the spreadsheet I use for comparing the two scenarios:

    As you can see from the spreadsheet, the before tax worth of the investment for the SM scenario will catch up with non-SM scenario in about 10 years time. The after tax worth will catch up much earlier in about 3 years time (because of the $300 transaction cost).


  41. silverm on March 24, 2007 at 3:55 am

    Thanks for producing the spreadsheet. I will adopt to your method of only swapping once at the beginning.

    I’m not following the formulas behind HELOC interest and Mortgage interest. How come they are in relation to “InsideSMInvestment”? As you said, the swap is a one-time deal. The investment should grow at a rate of 15%, while the HELOC balance should grow independently at a rate of 6%. If you use the “InsideSMInvestment”, I think you might be over estimating the HELOC interests, thus over estimating the tax-refunds.

    I added a new column for HELOC balance, and changed to formulas to base on the HELOC balance. According to the new spreadsheet, it took 8 years for SM to catch up afer-tax, and 20 years pre-tax. By the end of 25 years, SM has $764,356 pre-tax while non-SM has $757,136. SM has a very slight edge in earning power.

    Again, this is not a clear cut. If you lower the tax rate to 32%, non-SM wins. If you lower the rate of return, SM wins again.

  42. David on March 24, 2007 at 1:13 pm

    silverm said: SM scenario is complicated. You start with $20,400. Each year you earn 10%, but you pay capital gain tax, so after tax return is only 8%. You take that 8%, pay down your mortgage and reborrow it back for reinvestment.

    In his book, Smith does not indicate that anything other than re-investment occurs with the portfolio. In his examples, the “additional” moneys that are paid against the mortgage principal are from two sources only: the tax refunds, and the extra money that the homeowners had been putting aside into tax-disadvantaged accounts on a monthly basis. All of Smith’s graphs shouw the portfolio growing at a rate faster than the HELOC, thus there must be retention of profits. He does state that any extra moneys should flow through the mortgage before buying investments, but he does not suggest using investment income to reduce the mortgage. Remember, Smith’s premise is to convert the mortgage to non-deductible debt, and pay less tax — the reduced mortgage amortization is a side benefit that is derived from liquidating a current tax-paid (CSBs and GICs) portfolio, and ‘laundering’ all future investment moneys through the mortgage. Thus the SM portfolio should grow at 10% (or what ever rate you choose for your general investment return). You then should only need to factor the HELOC costs less tax returns, adjust for the reduced amortization’s interest savings, and account for the additional sums that you would have available to invest once the mortgage is paid, until the end of the original amortization period! Simple!

    The real growth of the portfolio in Smith’s graphs begins only after the debt is fully converted, and the former mortgage principal is fully invested in the portfolio. This becomes more noticible, if you have homeowners like me who have made a concerted to pay the mortgage, rather than build an investment portfolio — the portfolio barely exceeds the HELOC value, until the mortgage is paid, as there are few extra dollars to place against the mortgage for re-investment purposes.


  43. Sandor on March 24, 2007 at 1:18 pm

    Well gentlemen, first thanks for the very interesting spread sheet and allow me to conclude that even if it takes for ever for the SM investment to catch up to the outside investment, we must not loose sight of the goal, namely to get you rid of your mortgage in a few short years.
    Supposing, but not allowing, this small shortfall in investment results, their duration is as long only as you pay down your mortgage. After that your disposable income increases, your ability to save is magnified and the quality of your life is elevated.
    So, if you don’t think it is “clear cut” based on the investment results alone, then you must agree that it is certainly clear cut if it includes the benefit of retireing the mortgage in a fraction of the time.
    I hope you agree.


  44. silverm on March 24, 2007 at 2:23 pm

    David said, “You then should only need to factor the HELOC costs less tax returns, adjust for the reduced amortization’s interest savings, and account for the additional sums that you would have available to invest once the mortgage is paid, until the end of the original amortization period! Simple! ”

    It seems the spreadsheet didn’t follow the steps exactly. If instead the difference is used to pay down the mortgage which is returning only 5.1% tax-free, wouldn’t this work against SM? In my example, I reinvested the difference into an investment with 15% rate of return.

    >>”So, if you don’t think it is “clear cut” based on the investment results alone, then you must agree that it is certainly clear cut if it includes the benefit of retireing the mortgage in a fraction of the time.”

    I think the point you’re missing is that mortgage is a debt. You’re only converting your mortgage into a different form of debt. Yes, the new debt has tax-free interests, but you didn’t really get rid of your mortgage. Just giving it a different name.

    I said not clear-cut because many factors must be considered. For example, I recently sold my home, but it would have taken me a total of 9 years to paid it off completely. SM doesn’t work in my case. You assume you have all the time you need for SM to catch up, but any responsible family will want to pay off the mortgage debt in well less than 25 years.

    I’m not going to “conclude” a winner, because you have to look at your specific situation.

  45. David on March 24, 2007 at 2:52 pm

    The advantages of the SM are much reduced in the instance you describe. Smith’s examples depend very much on not only the conversion of debt, but also the conversion of the Black’s from conservative investors with a long term mortgage, to what you & I would call responsible mortgage payers. I commented on this on Canadian Capitalist’s blog,
    where I indicated that though there are some advantages to implementing the SM, they aren’t always as great as the book suggests. The SM returns also depend on being in the early years of a long term mortgage. Based on my calculations, at the time my mortgage is paid out (which is about the same time as I could take early retirement) the increase in net worth would be about $17,000. not a huge amount. However, were I to continue contributing (& working) the portfolio takes off.


  46. Ezboy on March 24, 2007 at 3:45 pm

    Silverm: “I think you might be over estimating the HELOC interests, thus over estimating the tax-refunds.”

    Silverm, thanks for catching that error in the formulation. You are right, the HELOC interest was overstated. In addition, the same error has occured on the mortgage interest calculation too. I have added two more columns to keep track of HELOC and mortgage balance. In addition, I have seperated the tax rate (TaxRate and WithdrawalTaxRate) for evaluating the after tax worth of the two portfolios. So, we can choose whatever tax rate that make sense to us to compare the after tax effect. Here is the revised spreadsheet:

    Looking at the revised spreadsheet, it appears that the SM portfolio is only marginally better than the non-SM portfolio. At 10% ROR and 40% tax rate, in 25 years, the SM portfolio is only 7% ahead of the non-SM portfolio. If the ROR is 15%, SM portfolio is indeed 1% behind the non-SM portfolio after 25 years.


  47. silverm on March 24, 2007 at 10:39 pm

    David, thanks for the link to Canadian Capitalist. You raised some good points including that in real life, you may not start implementing SM at the very beginning.

    Ezboy, thanks for updating the spreadsheet. According to it, the pre-tax performance breaks even at around the 15th year for 10% ROR.

  48. Ed Rempel on March 24, 2007 at 10:57 pm

    Hi, Guys,

    This is an intereting scenario you are working on, but I hope you realize you are not actually talking about the Smith Manoeuvre.

    You are working out a 1-time “Flintstone Flip” in which you pay some tax many years sooner, in order to pay an amount down on your mortgage and make some of it tax-deductible forever. But BOTH scenarios could be enhanced by doing the Smith Manoeuvre, investing bi-weekly by readvancing from your mortgage principal payment.

    I’ve been leaving this blog alone, so the anti-SM people could have their say. But you shouldn’t blame the SM if your 1-time Flintstone Flip scenario doesn’t work.

    The actual SM does not need to “catch up”. It is a strategy in which you readvance from each mortgage payment, and may or may not involve flipping an existing investment or adding a lump sum.

    I also read your comments, David, but we find in practice, the benefits of the SM are much higher than Fraser showed in his book. You need to “shoot the Sacred Cow” and stop focussing on paying off debt and start focussing on building wealth. Paying off the mortgage a bit earier is just a side benefit of the SM. The main benefit is the building of a large nest egg that is normally triple your current mortgage after 25 years.

    Your scenarios stop at retirement, but the SM is best done as a strategy for life. The largest benefits are after retirement when your large nest egg pays you a comfortable retirement income with little tax from your tax-efficient investments, while you can continue to claim your interest deduction for life. The interest deduction is probably the only tax deduction you will have once you retire.

    Run your scenarios for life and you will be impressed by the Smith Manoeuvre.


  49. silverm on March 25, 2007 at 2:04 am

    Here’s the truth. I’ve never read the Smith Manoeuvre by Fraser Smith, but I was running some sort of manoeuvre even before I read articles about the SM. Let’s face it, Smith didn’t invent this manoeuvre. Many people have been practicing the manoeuvre even before he published the book. If you know a thing or two about tax-deductability, you can come up with different manoeuvres based on the problems that you’re trying to solve.

    >>”But BOTH scenarios could be enhanced by doing the Smith Manoeuvre, investing bi-weekly by readvancing from your mortgage principal payment.”

    What I’m confused about is I thought SM is a tax strategy, not an investment strategy. A tax strategy should simply work without changing the risk profile of the investor. It should not be necessary to INCREASE his leveraged portfolio for SM to work. SM should be able to operate within the scope of the existing investments and mortgage.

  50. David on March 25, 2007 at 2:28 am

    Unfortunately, Smith’s book is all I have as a reference to consider, so have difficulty commenting on other possibilities. Were there other published examples, then, of course, there would be further ability to assess financial opportunity.

    My scenario stops at retirement, in large part because I expect to lose the ability to continue to contribute to the portfolio at the rate I did to my mortgage. If you can suggest the means to find the moneys that I recieve while working to continue those payments once retired, I’d be happy to learn of them. As it sits, I’m looking at an early retirement date in 10 years, far short of the 25 you suggest, just shortly after my mortgage would be paid. At that point, I expect to have an income of about 85% of my then current income, and will be depending on the lack of a ‘mortgage’ payment to help manage my finances. The main reason that I felt that for me the SM is not going to meet Smith’s goals, is simply because I no longer have the opportunity to make contributions for 15+ years after the mortgage is paid. Were I looking at having 25 years to effect the Manoeuvre, then I could agree with the numbers presented.


  51. Ezboy on March 25, 2007 at 3:05 am

    Silverm: “What I’m confused about is I thought SM is a tax strategy, not an investment strategy….”

    I never read the SM book either, I just learn about it on the internet. The way I understand SM is that it just makes the investment fund available through the home equity loan. As long as the investment return beats the cost of borrowing, you win. The tax deductability just lower the borrowing cost or boost the investment profit. After all, it is the investment part that will make you richer or poorer.


  52. Ezboy on March 25, 2007 at 3:25 am

    David: “If you can suggest the means to find the moneys that I recieve while working to continue those payments once retired, I’d be happy to learn of them.”

    David, you can get “extra” fund for investment by re-appraise your house and increase the credit limit on your HELOC. by the time you retire in 10 years, the market value of your house will probably be much higher. Therefore, you can use the extra credit to capitlize the interest and make another series of monthly investment for 10 more years.


  53. silverm on March 25, 2007 at 6:20 am

    >>”SM is that it just makes the investment fund available through the home equity loan.”

    Surely we don’t need a fancy name to describe a leveraged investment. :) I’m glad I didn’t squander money away on this book.

    >>”you can get “extra” fund for investment by re-appraise your house and increase the credit limit on your HELOC.”

    This falls outside of the Smith Manoeuvre, which is to make current mortgage interests tax-deductible. The extra HELOC limit coming from the reappraisal is available to both SM and non-SM, and doesn’t affect the existing mortgage balance. The balance can only be lowered if you feed money into it.

    Since I haven’t read the book, I don’t know which tax problem he’s trying to solve, but who cares? Already amoung ourselves, we came up with a few and surely we have enough brain muscles to solve them. Here are what we uncovered so far:

    1) Investment Equity
    If you have an investment portfolio with a positive equity, how can you make your mortgage interest tax-deductible? You can swap the equity with mortgage debt, but that will trigger capital gain tax and other expenses. The pre-tax portfolio balance will have to over come these losses. The duration depends on a number of factors. This may not be a clear cut.

    2) Differencial Investment Profits
    When your investment portfolio returns profits each year, how can you make your mortgage interest tax-deductible? You can either leave the profits alone, or trigger the capital gain tax and swap with mortgage balance. This is similar to (1) above. This may not be a clear cut either.

    3) Tax-Refunds
    What to do with the tax refunds? I think to make this a fair comparison (and in favour of SM), use the tax refunds to pay down the mortgage, but reborrow to invest. Reason is keep the net debt balance the same between both cases. Secondly, the reinvestment will boast SM’s performance. Clear cut.

    4) New Investments From Regular Principal Payments
    Ed talked about buying new investments by reborrowing the principal back from regular mortgage payments. Looking at regular mortgage payments in isolation (without mixing external money), if the person is determined to invest, he has no choice but to leverage the capital from HELOC since he has no more funds outside. This is not a debate between SM and non-SM. He simply doesn’t have a choice. If he still has left over cash after making regular payments, then the cash would fall under (6) below. It’s a separate decision.

    Couple that we have not covered
    5) Business
    If you own a business, how can you make your mortgage interests tax deductible? A business has revenues and expenses. Apply your revenues against mortgage principal, and reborrow from HELOC to pay for your expenses. Clear cut.

    6) A Windfall
    This is a broader category of (3) above. Anytime you have new cash to invest, you should automatically apply it against the mortgage first, and reborrow to invest. Clear cut.

  54. Ezboy on March 25, 2007 at 12:29 pm

    Silverm: “When your investment portfolio returns profits each year, how can you make your mortgage interest tax-deductible? You can either leave the profits alone, or trigger the capital gain tax and swap with mortgage balance.”

    If your investments produce dividends (like the bank stocks or dividend income funds), you can apply the after tax portion of the dividend to your mortgage and borrow it back from the HELOC. This is a clear cut too.


  55. Bootsie on March 25, 2007 at 12:38 pm

    With respect to #5 above, I believe Smith calls this the “Cash Flow Dam” (though I have not read the book either). A lot of people seem to question how the CRA would view this. I’m not sure how one would go about filing their taxes in this case (i.e. for rental properties).

  56. silverm on March 25, 2007 at 3:35 pm

    Ezboy: “If your investments produce dividends (like the bank stocks or dividend income funds), you can apply the after tax portion of the dividend to your mortgage and borrow it back from the HELOC. This is a clear cut too.”

    Good one here. We can file the after-tax portion under (6) Windfall. Yes, it’s clear cut. I’m a huge fan of dividend investing.

  57. David on March 25, 2007 at 9:21 pm

    Ezboy: Thanks, I had forgotton about the never-ending spiral of interest capitalizion. I was focussed on the idea of making continued mortgage payment equivalents. Smith’s book indicates that the homeowner would continue to make ‘mortgage payments’ for the full 25 years. It is the period between the bank being paid, and the 25 years expiring that really builds the portfolio. At the end of the 25 years (the Black’s retirement day) no further payments are made to the portfolio. As I indicated, I plan to retire before the 25 years are up.

    Also, of course, depending on the market you are in, the house value may not have increased that much — ask FT about his local housing market. Now if we were in Toronto, Calgary or Vancouver……

    Smith repeats ad nauseaum about the twenty-five year mortgage, even when his example (the Balcks) has the ability, within their current income to pay the mortgage in far fewer years, admittedly without creating a portfolio. For those who are not looking at a 25 year time horizon to invest, the numbers of course, are much smaller. However, Ed Rempel sent the following comment on the Whites of my earlier link to Canadian Capitalist’s site: “Your story of the Whites is interesting, but essentially shows the “Sacred Cow” – the way Canadians normally do it. A fair comparison is not the Blacks to the Whites, but the Whites to the Whites with the SM. I put your numbers into the SM Calculator and the benefit over the first 7 years until the mortgage is paid off is $43,428. The investments are up to $193,428 from $150,000 borrowed over 7 years.” So, while not an astronomical figure, not exactly pocket change either. Ed further states: “From that point, the $193,428 would grow to $977,676 over the next 17 years at 10% [with no further contributions – David]. The interest cost over the 17 years would be $102,000 (your example assumes prime is 4%) and the tax refunds would be $31,620. The net benefit of adding the SM to the Whites plan over 26years would be $757,296. Of course, the expected benefit will be far higher when you include the benefit during 25 years of retirement.” Ed closes with: “So, but why not get an extra $757,296 from doing the SM, since it requires no extra cash flow?”

    So, accordingly, here are the numbers
    Smith’s Blacks $1,962,770
    David’s Whites $1,154,723 to $1,762,556
    Rempel’s Whites $757,296 (17 years post mortgage)
    (who make no further contributions after the mortgage is paid, but keep the LOC)
    Bright Whites $2,439,470 – $5,577,380
    (who do the full SM for 25 years, and obtain 10% to 14% on their investments)

    silverm: Smith’s twist on the use of the use of home equity was to encourage Van City Credit Union to create the re-advancable mortgage. This enabled investors with less equity to enter the market, use dollar cost averaging to advantage, and start to build their portfolio sooner. Previous to that time, most advisors would suggest one or more “Flintstone Flips” where large amounts of equity would be converted at less frequent intervals, or the “Garth Manoeuvre”, where you waited until the mortgage was paid before engaging in the use of the equity. The main thing Smith did was to popularize the idea, and suggest the means by which anyone could engage in building a portfolio. As Sandor said, it could help a homeowner with little extra cash at the end of the month to build a portfolio where previously financially impossible. The other twist is getting all those people (me included) to buy the book!

    Re: 1) Investment equity — This is known as the ‘Flintstone Flip’ and I believe Singleton was the one who first challenged this idea in the courts and won, paving the way for the rest of us.

    2) Differential Investment profits — Unless you have a huge portfolio, this would not make a big difference to your mortgage. Step 1 would have beter effect.

    3) Tax refunds — your comment is exactly what Smith recommends.

    4) Smith will tell you to ‘capitalize’ the interest by re-investing the mortgage principal reduction LESS the interest cost of the loan. In effect, you will make ever smaller investment purchases each month, as your interest cost climbs. This is how he claims that no additional cost is incurred. It is twisted logic to try and follow.

    5) Is described by Smith in the book as ‘The Cash Flow Dam’

    6) Or put it in your RSP (or buy something to keep the spouse happy?!?) (A little bit of ant & grashopper here!)

    Bootsie: The cashflow Dam has been court tested. It will only work in a closely held sole proprietorship. Tax Accountant David Ingram describes it in his November 2001 newsletter:
    I think the ‘Shoe Store’ example describes your ideas.


  58. Ezboy on March 25, 2007 at 10:05 pm


    I have built another spreadsheet. This spreadsheet applies to home owners who already paid off their mortgage or have a big HELOC limit available to invest. The approach is similar to SM, you just withdraw an equal amount monthly from a HELOC for investing. You can choose how many years you want to spread out the investment. You can also choose which year you want to start reaping the fruit of the investment. Here is the spreadsheet:

    The model base on these rules:

    1) During the investment contribution period, interest payment is made by HELOC withdrawal.

    2) Once the HELOC reached its credit limit, interest payment is made by selling the investment.

    3) All tax refund are re-invested.

    4) Investment withrawal is inflation adjusted. For example, if you enter $1,000 in WithdrawalAmount, 15 in WithdrawalYear and 3% in InflationRate, the actual amount of monthly investment withdrawal on year 15 will be $1,513.

    If the formulation is correct, a home owner can create an indefinite stream of monthly withdrawal of $1,700 in 15 years time provided:

    1) There is an $300K available credit limit in the HELOC.
    2) The investment return rate is 12%.
    3) The interest rate is 10%.

    You guys can play around with different parameters in the spreadsheet to see how things will work out for yourself. Have fun.


    P.S. If you find any error in the formulation, please let me know.

  59. Ezboy on March 26, 2007 at 11:38 am


    Quick question for you. If a person get non-sheltered capital gain regularly, do you know if CRA will ask for tax instalments on the capital gain?



  60. FrugalTrader on March 26, 2007 at 11:50 am

    EZ: Quarterly tax installments are required from all individuals who receive more than 25% of their income from sources that do not withhold tax.

    David: Great comment, would you mind if I used it for a post?

  61. Ezboy on March 26, 2007 at 3:01 pm

    FrugalTrader: “Quarterly tax installments are required from all individuals who receive more than 25% of their income from sources that do not withhold tax.”

    That is what I thought. I just wonder how it works for one-off capital gain. When I liquidate a significant investment position that has a lot of capital gain, like ten times the size of the BNS position Silverm mentioned in his example, what will happen? If I report the $130,000 capital gain in April and pay the $26,000 tax then, will CRA come to me next year and ask for tax installment?


  62. FrugalTrader on March 26, 2007 at 3:06 pm

    EZ: Perhaps it would be best to contact CRA directly for situations like that.

  63. David on March 27, 2007 at 12:51 am

    In Post 57, I said:
    So, accordingly, here are the numbers
    Smith’s Blacks $1,962,770
    David’s Whites $1,154,723 to $1,762,556
    Rempel’s Whites $757,296 (17 years post mortgage)
    (who make no further contributions after the mortgage is paid, but keep the LOC)
    Bright Whites $2,439,470 – $5,577,380
    (who do the full SM for 25 years, and obtain 10% to 14% on their investments)

    However, I should further add that Ed Rempel suggests maintaining the tax strategy far beyond the 8 years to pay down the mortgage. Thus the $757,296 represents the benefit of early investing, and the Bright Whites represent a combination of wise financial choices in mortgage selection (low rate, short term, rapid payout) with a re-advancable mortgage option such as the SM.


  64. Ed Rempel on March 27, 2007 at 1:17 am

    Hi All,

    My god, have any of you read the book (other than David)? No wonder you are anti-SM!

    Just a couple comments:

    Silerm, the SM is BOTH an investment and tax strategy, which is why the potential benefits are many times higher than pure tax strategies, such as the Cash Dam. Good comments on the options.

    There are some unique differences between the SM & ordinary leverage. They include investing with each mortgage payment (dollar cost averaging benefit), capitalizing the interest, and using the tax refunds to pay down the mortgage & reinvest. The extras mean you need to get the right mortgage.

    Being a tax guy (accountant), I always liked leverage, but the extras in the SM make it a strategy usable by almost anyone with a home or a mortgage, while regular leverage is mainly appropriate for higher income & more aggressive investors.

    David, what is your plan once the mortgage is paid off – retire right away? One unique idea in the SM is to keep your leverage for life. It requires zero of your cash flow while you have a mortgage. Once it is paid off, until you retire, you can make the payments on the credit line from your cash flow. They will be less than your mortgage payment and will be fully tax deductible. This is better than getting used to spending all this extra money – and then having to cut back when you retire.

    Once you retire, then the investments send you money to pay the interest, plus a lot more – and the interest is probably your only tax deduction after you retire. So, you don’t keep buying investments after you retire if the mortgage is gone, but you do keep the investmetns for life.

    This is why the benefit of the SM can continue for life.

    EZ is also right in that you can continue to increase your credit line as your home value rises. Perhaps you can use this to continue to compound the interest.

    By the way, the benefit of the Rempel’s Whites of $757,296 is IN ADDITION to the benefits of David’s Whites.

    Also, the Cash Dam is specifically allowed by CRA. They have an IT bulletin on it. It works for non-incorporated business owners (as you mentioned) and individuals.

    EZ, CRA aks for instalments if you owe $2,000 or more when you file your return. You don’t have to pay the instalments, but they will charge you interest if you don’t and end up owing. Therefore, if you have a 1-time large capital gain, CRA will ask for instalments, but just ignore them if you can make sure you get a refund the following year.


  65. David on March 27, 2007 at 12:23 pm

    Unless I receive a windfall, retirement can reasonably occur any time after my mortgage debt is paid (about 10 years). I might hang on at work through the winter months, and enjoy retirement in the warmth of spring. While I had originally planned to retain investments, I had not considered retaining the LOC, however, you make compelling points.

    Interesting that the combination of “Rempel’s Whites” & “David’s Whites” is closer to the Blacks, rather than the “Bright Whites.”

    Still awaiting the opening of your ‘BC Branch’ ;-)


  66. silverm on March 27, 2007 at 3:01 pm

    >>”No wonder you are anti-SM!”

    Oh, it is not fair to label me. I’ve outlined the different options and sited clear cuts for most of them, except only a few situations where it didn’t make sense.

  67. Ezboy on March 27, 2007 at 7:28 pm


    Thanks for the info on the capital gain tax instalment. I will factor that into the spreadsheet when I revise it.


    Once you use up your extended HELOC credit limit, you can keep your investment contribution going through borrowing on investment margin account. Most online brokers, including those own by the big banks, offer interest rate of prime plus one. If your loan balance is high enough ($100K or above), some broker even offer you prime rate. For example, RBC Direct offer prime rate on their Royal Circle Investment Account for loan margin over $100K at 6% :

    Of course, if you decided to use margin to finance the investment contribution, you have to be very careful on your investment choice and proper margin management. On blue chip investment which rise in value faster than the long term interest rate, i.e. 10%, I will do no more than 30% margin. For any other investment, I will do none.


  68. cannon_fodder on March 27, 2007 at 11:12 pm


    Are you saying that once you pay off the mortgage and are still working that you do not continue to invest the equivalent of mortgage payments into investments or did I misinterpret something?

  69. David on March 28, 2007 at 10:59 pm

    Cannon Fodder,
    In message 57 above, where I quoted Ed Rempel, was for a particular example, where I had compared an SM strategy against a non-SM strategy. Ed did a comparison of MY non-SM (the Whites) by using the SM for the period of the rapid payout of the mortgage, showing that with no change in costs, the family would be nearly $800,000 better off by implementing the SM. Thus it was ME, not Ed that suggested stopping payments after 8 years. From the correspondence I have seen from Ed, he would undoubtedly suggest maintaining the SM for the longest possible period.

    Hope that clears the confusion.

    Having read all the opinions I can find on the ‘net, I can see that the SM has definite advantages for those who wish to engage in it. I would want to be very choosy in my selection of an advisor, though.


  70. silverm on March 29, 2007 at 12:40 am

    I believe most of the benefit is wrongly attributed to SM, because of how you draw the line between SM and non-SM. Whenever there’re shared benefits, they’re thrown into the SM bucket only.

    I maintain that SM is ONLY a tax strategy, because it must work without increase leverage or risks. For example, if you have a $10k investment and a $10k mortgage, selling the investment (ignoring capital gain), paying down the mortgage, re-borrowing to buy back the identical investment back, is SM. This is a very good move, but it doesn’t change your risk-profile. You still hold the same investment as before. You are only REARRANGING your financial affairs.

    Mortgage payments are mandatory. Even if you don’t practice SM, you still have to make your mortgage payments. If you re-borrow the principal to invest, it’s not a SM/tax decision. If you decide NOW that you want to buy stock ABC, that’s an investment decision. You’ve made a conscious choice to take on more risks. This has nothing to do with rearranging your existing financial affairs. This is a completely new scenario. If you borrow from your principal to invest in this new stock, you’re not practicing SM because you’re not converting an existing mortgage debt to a tax-deductible debt. You have added NEW debts. Mortgage payments are mandatory, so the principal must be paid anyway. The benefit of dollar cost averaging from regular mandatory monthly payments can be applied equally to both SM and non SM. I don’t think anyone should throw this into the SM bucket only.

    SM is about converting your mortgage debt into something that’s tax-deductible. Any benefits resulting from regular leveraging without reduction of mortgage is not SM. When your house appreciates and you increase your HELOC limit to invest, this is not SM, because you’re not touching your mortgage.

    There is no such thing as practicing SM for life once your mortgage is paid. You can no longer make your mortgage tax-deductible because you have NONE. Letting your debt hang around is simply ordinary leveraging, which everyone can practice.

    I believe the net advantage of SM is restricted to:
    Tax refunds + Future profits from tax refunds – Cost of SM setup – Difference of mortgage rate and HELOC rate.

  71. David on March 29, 2007 at 11:59 pm

    silverm said: “If you re-borrow the principal to invest, it’s not a SM/tax decision.”

    Smith would disagree with you. In the book, he clearly describes the manoeuvre as not requiring an existing portfolio. He suggests the leverage is adopted when the mortgage is first assumed, and the Manoeuvre is a rearrangement of those finances. In many cases, the adoption of the SM does require the homeowners adopt a different (usually highrer) risk level with regards to the investments they might hold in their new portfolio.

    The SM REQUIRES that you reborrow the equity you build as the mortgage is paid down, and slowly purchase an appropriate portfolio that will generate tax deductions. There is no expectation in the SM that the home will increase in value, though if it does, that may provide additional opportunity, should the homeowner choose to use it. The combination of the two loans, mortgage & HELOC does not exceed the original mortgage amount. The appropriate application of additional funds to the mortgage before reborrowing, and adding the tax refund to the mortgage accelerates the payout of the mortgage. IF you choose to borrow additional funds due to your home increasing in value, that IS leveraging, and may or may not be appropriate, depending on the individual borrower’s situation.

    Smith also states that the investor should keep the (now deductible) HELOC in perpetuity, as the portfolio continues to grow faster than the interest cost. Your estate pays the bank.

    While you may not agree with Smith’s postulates, that does not change them. If you do a comparison of non-SM vs SM as described by Smith, it is quite easy to seperate the two. I have looked carefully at this from a very skeptical point of view, and have found that there is a financial advantage to following Smith’s thesis. How great the value, and the individual’s comfort with engaging the SM may vary, but that does not change the fact that there is some advantage to applying this financial plan.

    Google “Smith Manoeuvre Powerpoint” and read the speaker’s notes there attached, and you will be able to confirm this. While I can agree with you about some of the returns you have described, I suggest that you review the book, or the PPT, to more clearly understand Smith’s comments.


  72. Sandor on March 30, 2007 at 10:47 am


    Answering David’s remarks above, I must point out that although I do practice doing the SM for clients, and I do agree with Smith that the original mortgage was the actual leverage, many financial institutions and the regulatory bodies are changing their attitude towards leverage.
    In general, no matter how safe, they view the borrowing for investment purposes as leverage, regardless of the circumstances. Even if you have two collaterals, (the portfolio and the equity,) still leverage takes place.
    Now the risk of leverage is in its inherent nature of magnifying gains and losses, but if tere is no risk of margin calls then the down side is actually eliminated. (Except perhaps if your house looses a lot of its value and so you are deeper in debt than the value of your collateral. In this case however, you can take advantage of the provision of your loan contract, if you have such, that excludes margin calls. I am not sure how many HELOCs has such provisions, but the one I use surely does.) The regulators however disregard this, because there is no guarantee that the investor will stay in the lower risk investment.
    There is no real practical use for this added layer of regulatory pussilanimousness, but I thought you should know about it.

  73. silverm on March 30, 2007 at 6:21 pm

    David, I have complete trust in you regarding what’s said in the book.

    I’m sorry. English isn’t my first language, so sometimes I have problem expressing myself.

    The way I imagine is looking at a pie with many slices of possibilities. One slice says swapping good and bad debts. SM took that slice. But hold on. He’s not done yet. He wants the leveraging slice too. He keeps claiming the good slices and leaving the bad ones to the non-SM. The problem I have is the non-SM guy should be free to adopt leveraged investment slice without the debt swapping slice. If both are practicing the leveraged investment, then effectively, they cancel each other out. My point is the advantage of a leveraged investment shouldn’t be in the SM’s bucket only when comparing SM vs non-SM. Am I making any sense? Otherwise people are over estimating the power of SM. Yes, swapping good and bad debts are good, but not that great.

    Truth is, I don’t like how the name “Smith Manoeuvre” is stuck, because I was already practicing these techniques even before I knew about Fraser Smith. I know I’m not the first person either.

  74. David on March 31, 2007 at 3:10 am

    The Smith Manoeuvre is not really meant for individuals who are already efficiently invested in the market. It is meant for the “ordinary Canadian” who wishes to build a portfolio in a cost effective mannner, with no more cash input than for the original mortgage. It is a multiple “slice” product. The Calculator that Smith distributes allows comparison of a number of scenarios. I’m also not sure how a home owner would swap good & bad debts if he had nothing to swap; Smith creates that, albeit one mortgage payment at a time.

    I’m not sure what you mean by “non-SM guy should be free to adopt leveraged investment slice without the debt swapping slice” as usually leveraging allows the tax deduction, and the purpose of the SM is not to create huge levels of leverage. Smith never suggests an investment any greater than the original mortgage. If however, you were to use the equity in the home to pay the interest on an investment loan (I believe that is similar to the Rempel Maximum), then you could gain even more, but that entails a higher level of leverage and risk than the SM promotes. If you wish to discuss leveraging, then you have to compare the levels of risk.

    In conclusion, the Smith Manoeuvre is whatever Smith described it as, and trying to call it something else, or call something else the SM is not really on the table. I have run the numbers a variety of ways, and am satisfied with Smith’s claims. I still feel that he created an example that specifically promotes his idea, but the basic premise seems sound. I have presented the same here as the Blacks and the Whites, and have further discussed them on Canadian Capitalist’s site. I invite you to publish your findings using the input numbers of the Blacks, and show how they might compare to that presented by others.


  75. silverm on April 2, 2007 at 3:34 am

    David, I’ll make a few comments below in no particular order.

    (1) Earlier I said SM is a tax strategy, not an investment strategy. By investment strategy, I meant extending ordinary leveraging by increasing risks and expected returns. Ed Rempel countered saying SM is both a tax and investment strategy. Now you are saying “Smith never suggests an investment any greater than the original mortgage.”. If the 2 person who have read the SM book can’t agree on the boundary of SM, how did you agree on the manitude of SM’s benefits?

    (2) A manoeuvre is a tatical action. If an action is mandadory, then it’s not tatical, therefore not a manoeuvre. Another way of saying it is that if you’re gonna call someting the SM, then there must exist a non-SM counterpart. In Ed Rempel’s post 64, he said, “There are some unique differences between the SM & ordinary leverage. They include investing with each mortgage payment (dollar cost averaging benefit)…”

    How can DCA through regular mortgage payments fall under SM? Regular mortgage payments are mandatory. The principal portion within the payments are also mandatory. The investor didn’t deposit the principal out of free will. The decision to buy incremental securities is an investment decision. If the investor has no cash available, then leveraging the principal is the mandatory action.

    How is it possible that in Ed Rempel example, he’s able to throw the benefit of DCA into SM’s bucket when there isn’t a non-SM counterpart?

    (3) Ed Remple went on, “David, what is your plan once the mortgage is paid off – retire right away? One unique idea in the SM is to keep your leverage for life. It requires zero of your cash flow while you have a mortgage. Once it is paid off, until you retire, you can make the payments on the credit line from your cash flow.”

    Not exactly for LIFE. The reason why SM is able to pay off the mortgage earlier is because of the tax-refunds. The shorter amortization is a result of the tax-refunds, so please don’t double count. The non-SM guy won’t hold the mortgage for life, it just takes longer. Once the mortgage is eventually paid off, non-SM guy too can leverage for life.

    A second point is that keeping leverage for life doesn’t involve debt swapping, since the bad debts are already paid in both instances. This is simply an ordinary leverage, which IS NOT “one unique idea” of SM. Hence, I disagree with Ed’s statement, “This is why the benefit of the SM can continue for life.”

    The advantage of SM ends as soon as both the SM guy and non-SM guy have no more bad debts to swap.

    (4) Ed Remple said, “So, but why not get an extra $757,296 from doing the SM, since it requires no extra cash flow?”

    The majority portion of the $757,296 comes from the SM guy’s willingness to leverage heavily. Leveraging is an investment decision. This has nothing to do with swapping good and bad debts. The non-SM guy, who didn’t bother with swapping debts but kept the capital gain tax, is free to match the risk-level. Do you agree? In fact, I think it’s necessary in order to make it a fair compairson. Non-SM guy can equally leverage the same incremental investments through the principal contributed by the mandatory regular mortgage payments and the appreciation of the home.

    You made a related comment, “If however, you were to use the equity in the home to pay the interest on an investment loan (I believe that is similar to the Rempel Maximum), then you could gain even more, but that entails a higher level of leverage and risk than the SM promotes. If you wish to discuss leveraging, then you have to compare the levels of risk.”

    There is no “to gain even more” here. Since you agree that leveraging beyond the original mortgage debt is NOT the Smith Manoeuvre, then you agree that allowing the HELOC debt to accumulate by not paying down the interests is not SM. Both SM and non-SM guy can participate in this same strategy essentially making it a moot point.

    My beef is that $757,296 is an exaggeration.

    (5) In my original posts, I (and you) stated that if the capital gain tax is too high and the amortization period is too short, that will negate the tax-advantage of SM. Ed came along and suggested “You need to “shoot the Sacred Cow” and stop focussing on paying off debt and start focussing on building wealth. … the SM is best done as a strategy for life.” As I said earlier, SM cannot be done for life. If the SM guy is unable to catch up with the “Flintstone flip”, he’ll never catch up with additional leveraging, because the non-SM guy has an equal opportunity to add leverage to match the same risk profile.

  76. silverm on April 2, 2007 at 2:24 pm

    Ezboy, in relation to my previous post, I found another error in the spreadsheet which I didn’t notice before.

    The SM guy pays the capital gain tax, setup fees and extra interests to rearrange his finances, but he hopes to catch up through tax refunds. The error is that the tax refunds column is always growing, but we have to factor in the amortization of the debts. Non-SM guy with 100% mortgage will redirect 100% of cash flow to the mortgage. The SM guy will have a split between investment loan and mortgage. He will initially direct 100% of the cash flow to mortgage until it’s paid. Then he’ll redirect the cash flow to his investment loan. At this point, the tax refunds will start to decline. Therefore the shorter the amortization, the less tax refunds SM guy will receive, which means he may not catch up.

    Again, if the SM guy wishes to leverage more without any existing bad debts to swap, then it’ll no longer falls under the Smith Manouvre umbralla. It’s like having a little brother brags, “Yah you’re 2 year older than me now, but wait 3 years. I’ll be older then you and kick your sorry butt!”

  77. Ed Rempel on April 3, 2007 at 12:25 am

    Hi, Silverm,

    You really do need to read the book! English may not be your first language, but you express yourself well and your logic is impeccable – you are just not talking at all about the SM.

    Let’s get this straight. The SM is a leverage strategy – it is not a flip stategy. The flip is an optional extra sometimes done with the real SM. From experience, we find that only 5-10% of SM implementations involve an optional added flip.

    Fraser would argue that it is a debt conversion, since the original leverage happened when you bought your home. With the SM, the leverage happens at exactly the same rate as your mortgage declines.

    Your spreadsheet is a comparison of 2 non-SM guys figuring whether or not it is worth it to do a flip that involves paying a large capital gain now. But I reiterate my comment – BOTH guys in your example would be greatly enhanced if they added the actual SM.

    Since the SM is a leverage strategy, a SM guy vs. non-SM guy is a leverage guy vs. a non-leverage guy. David is exactly right – the SM is whatever Fraser says it is.

    Back in the 90’s, we did “Conservative leverage” similar to Talbot Stevens describes. It was a strategy for more aggressive clients in higher tax brackets.

    For the real eager clients, we would have their home reappraised every year or so, and increase their leverage. There were no readvanceable mortgages back then (except the credit union Fraser persuaded to do it all manually).

    I learned the details of the SM at a CFP conference. It is the same as the leverage strategy with a few important enhancements:

    1. Leverage is done bi-weekly by readvancing every mortgage payment – not with a lump sum every year or 2.
    2. Now that we have readvanceable mortgages, there is no cost to increase the credit line – no appraisal, no legal, no setup – no cost at all.
    3. The interest is capitalized, instead of being payed out of the client’s cash flow.
    4. The leverage is kept for life, instead of being paid off at retirement.

    While these enhancements may not seem that major, the make the difference between leverage being a strategy for high-income, aggressive clients, to leverage being a strategy that is appropriate for almost anyone with a home or a mortgage.

    Since leverage is combined with Dollar Cost Averaging & is maintained for a very long time horizon, the risk is drastically reduced. There is no risk of margin call, nor is there a risk regarding the client’s ability to pay, since no cash flow is required. It is not only for clients with excess cash flow. And there are no cost trade-offs – if the investments make more money after tax over 50 years than the cost of the interest after tax, then it is profitable.

    The SM has many bonuses and enhancements. The difference between my comments and David’s are these bonuses. The simple SM is purely converting the mortgage to tax-deductible by leverage at exactly the same rate as your mortgage declines, which means debt does not increase.

    Often the simple SM is enhanced by leveraging more highly by using extra “freeboard equity” in the home or sometimes an additional leverage loan. It is also sometimes enhanced by flipping existing non-RRSP investments.

    We’ve found the real profound benefits come when the SM is combined with a comprehensive, written financial plan. We look at what the client needs to do to have the retirement they want and how the SM fits in, combined with SM enhancements and RRSP’s to work out the most effective and appropriate solution.

    We also look at all the debts and debt payments and refinance in the most effective way, while setting up the SM. The National Post published a great article on this about us about a year ago. It is an enhancement we call it the “Debt Miracle” that can be an amazing turnaround for clients with equity and high debt payments.

    There is an enhancement involving investing in a fund paying out a monthly distribution that is not taxed, because it is considered “return of capital”. This enhancement has limited use, however, since receiving the ROC distribution means the interest on the investment loan becomes non-deductible. This is useful for retirees, however, that are want income now instead of building up the large nest egg that the SM usually provides.

    The SM is also being abused a lot by calling ordinary leveage SM (no bi-weekly investing from the readvanceable mortgage), and by using the funds with high distributions and not disclosing to clients that the investment loan becomes non-deductible (and the client is required to keep track of how much is & is not deductible).

    So, there are many versions, bonuses and enhancements on the simple SM. But the SM in its plain form is “leveraging by dollar cost averaging”. Therefore, the long term benefits are many times higher than any pure tax strategy (such as an investment flip or the “Cash Dam”), since the vast majority of the benefits come from the “magic of compounding” of the investment growth.

    The SM Calculator compares the SM to Garth Turner’s strategy, which is a more conventional leverage. Turner recommended paying the mortgage off completely, then borrowing once to invest from the equity. The SM is obviously superior since the leveage starts far sooner and happens bit by bit, instead of by one large lump sum at the end.

    The benefits of the SM are calculated comparing the SM to what the client is doing now before implementing the SM. Even if a client is already doing leverage, we calculate the additional benefits of the regular investing with the SM, which can be significant with many years of investment compounding.

    So, Silverm, this is what the SM really is. DCA from regular mortgage payments does not just fall under the SM – that is the definition of the SM.


  78. silverm on April 3, 2007 at 5:10 am

    A few more random comments:

    (1) >>”The simple SM is purely converting the mortgage to tax-deductible by leverage at exactly the same rate as your mortgage declines, which means debt does not increase.”

    Technically for the purpose of comparion, the debt does increase relative to the non-SM guy. You never compare with yourself. You always compare yourself with your opponent. The non-SM guy chose to leave the principal alone, therefore his mortgage debt is lower than the SM guy.

    (2) On to leveraging itself, doesn’t this sound an alarm bell? Fraser Smith and tax planners may be great statisticians, but they’re not psychologists. You can put up pretty graphs, but they’ll never explain how an investor will react when their losses are amplified. I read a report a while back, although I can’t cite the source. Over a long period of time, the market compounded 10%, but average retail investors compounded only 3% because of fears and greed. Leveraging your home and leveraging a stock portfolio aren’t the same beast.

    You must agree that most investors tend to over estimate their risk tolerance. Right? When you meet a fresh client, you assume that he is already beyond his comfort zone without knowing it. I would say the application of the SM is inappropriate for 90% of the general population.

    (3) “The SM is a leverage strategy – it is not a flip stategy.”

    Although I haven’t read the book, I’ve read plenty of literatures about the SM. The guy from the Canadian Capitalist said the book is confusing and has a lot of ranting anyway.

    It sounds weird that a pure leveraging strategy without debt swapping can still be called the SM. So a person who never heard of SM has $50k in his HELOC. If he borrows this $50k without swapping good and bad debts, then he’s practicing the SM? I’ll have to run this by the Financial Webring forum.

  79. Douglas S. Anderson on April 10, 2007 at 11:10 pm

    In my opinion, using the stock market for debt conversion like this is far too risky.

    Lucky there are numerous other options where steady double digit rates can be obtained safely and securely.

    Remove the downside, and strategies such as this are extremely profitable.

  80. […] Anyways onto the good stuff. Spring is here which means my wife and I are on the house hunt. With this comes the opportunity to use the Smith Manoeuvre on our future home, but I would like to discuss some of the numbers that I came up with to make sure that they made sense. From the comments on the article “Anti-Smith Manoeuvre“, it appears that some of you are better at analysis that I am. :) […]

  81. Sandor on April 25, 2007 at 7:26 pm

    Answering to #80 note, without name:

    It is possible to apply the SM to the purchase of a new house, but it would be somewhat different from the “usual” conversion of mortgages.
    Indeed, your best first step would be to clearly define what your budget allows and what your needs are.
    As it was pointed out and confessed by some in previous postings, the majority of those offering opinions about the SM hasn’t even read the book, never mind actually doing this strategy.
    It is one thing philosophising about it and an other to put pen to paper and calculate the numbers.
    So, if I may suggest, please see the book first, or failing that, talk to someone with some experience in the subject. The numbers are alone are not enough either, there are a few more rules that must be observed in order to retain the tax-deductibility.
    But it works and it works beautyfully.


  82. […] Anti-Smith Manoeuvre? […]

  83. Kevin Malone on October 28, 2007 at 4:26 am

    Dear Ed,

    “Have any of you read the book” is a great comment, I’m an SM success story and have nothing at all to gain from talking about it other than to hopefully help other people the way I have been helped, but it is amazing to see how many people are more interested in protecting their own egos than actually investigating it fully – beyond reading the book, they could bloody well go and see an SM professional and run their own scenario, ask all their anti-Smith questions, and just generally get educated.

    That is no less than I did before starting SM, and I would expect at least that if not more from the sorts of people who run investment blogs and related websites. It is incredibly selfish and self-serving to use what they do know (and use their ability to speak with the authoritative use of financial language) to not only protect their own egos but also to dissuade others from a strategy based on false information.

    The Smith Manoeuvre is not “risky” in the least. If you own 25% of your home when you begin, and (as is always recommended by any competent SM professional) you put your money in secure and predictable investments, then the only risk is a prolonged bottoming out of the market in excess of 25% that never recovers, in which case you are screwed whatever your investment strategy.

    I’m an ordinary guy with an ordinary employment income, but I paid off my mortgage in half the time, and I am now in the process of doubling my investment portfolio such that the loan will no longer be tied to the house (I’m not worried about that, but it’s a fun goal isn’t it!) and then when that is done, the income from my investments will replace my work income and I will retire (if that is what I want) quite early.

    Before starting SM, I was doing what the bank wanted me to do – a nice big mortgage and building investments in an RRSP. Believe me, with that strategy the dream of an early retirement with an income as much or more than what I make from working was NOT HAPPENING no way no how. It is happening now, and without any nervous eyes on what the market is doing. SM is boringly effective, and all I can figure is that the naysayers are either ignorant or deliberately misleading themselves or others for reasons that only they can know.

  84. DAvid on October 28, 2007 at 11:56 am

    One of the challenges that consumers face is finding a true Smith Manoeuvre Professional. As has been discussed on other threads on this site, even some of the Financial Advisors who promotte the SM do not seem to suggest appropriate investments. The discussion here allows many of us to gather the knowledge to select a competent advisor.


  85. Sandor on October 28, 2007 at 12:59 pm


    The appropriate investment is fully in the eye of the beholder. I do have my personal preferences to offer, but it may not be to everybody’s liking.
    I just recently completed somebody’s SM. This person lives in an other city. We never met, don’t know each other’s looks, we are personal strangers, but financial soulmates. We had a great rapport in letters and on the phone. He bought his new property with my advice, will invest in 100% guaranteed investments and I will make him a handsome profit soon.
    But as Kevin attests, (in #84) the importance of the investments are secondary. You can invest well, or poorly, but the important thing is to do something about the crippling mortgage payments: make them tax-deductible. Grappling with the choices of investments would be a task, regardless of the SM, you are faced with the same conondrum. The rest are simply just technicalities.
    But whatever your choices are for investments, the SM will make you more money, pay off your house much faster, and lower your taxes. That is all expected from it.

  86. The Financial Blogger on October 28, 2007 at 3:13 pm

    I agree with Kevin. I just started the SM and I post my results on a monthly basis. Over a long term period, this is definitely a great way to increase your assets without taking much risk. The only risk that you really bear is your cash flow. But as long as you can keep up with your SM payment, you will not experience much risk.

    I prefer using more stable fund such as the NBC Dividend fund. It has a great history and also a very low volatility compared to other dividend funds.

    As Sandor said, it is really up to the person who implements the SM to decide whether or not an investment is suitable for him!

  87. Sandor on October 28, 2007 at 5:33 pm

    Sorry, but the good word, coming from The Fine. Blog. has reminded me that I forgot to include my take on investment choices in my previous letter.

    Starting on the 29th of this month, one of my favoured investment companies is introducing a new group of guaranteed funds. The interesting part is that here you can choose how much guarantee you want. The cost of the extra guarantee, if for instance you choose 100% from day one, is 0.25%. I consider this a realy good deal. However, since there is no historical record, there is a degree of leap of faith.

  88. telly on October 28, 2007 at 8:18 pm

    Reading through most of these comments has me even more confused!

    Could the SM be advantageous to someone with a relatively small mortgage, fairly high income and a fairly large cash flow (which is generally directed to mortgage pre-payments after maxing out the RRSPs)?

    Retirement is (hopefully) ~15 years away. We also have two rental properties with high monthly income but also fairly large expenses (we pay utilities). It seems to me that taking advantag of the Cash Dam would be even more advatageous in this case.

    Would love to hear what anyone thinks (especaily SM professionals) as I’m starting to get the impression that the SM is generally for people with large mortgages which eat up a fair amount of cash flow or income.

  89. The Financial Blogger on October 28, 2007 at 10:12 pm


    You can use the SM both ways. It is useful for people that have large mortgages because it allows them to gradually switch a non-tax deductible debt into a tax deductible debt.

    However, if you have a large equity in your property, you can use it to leverage and invest. This borrowed amount will be tax deductible as well. It is not the exact definition of the SM, but the principles are the same.



  90. Sandor on October 28, 2007 at 10:51 pm


    The situation described in your letter is typically one that offers quite a bit of latitude in what you may do.
    You can take a relatively small LOC and althougy paying the house off relatively slowly, say in 3-6 years, you could build up a large portfolio and substantial tax write offs.
    Or you can max out your borrowing limit, get rid of the mortgage immediately and amass an even larger portfolio, while paying slightly higher monthly interest costs.
    Exactly because of the wide latitude, it is best to calculate the proper strategy in different versions.
    Suggesting anything more concretely would be irresponsible.
    If you get in touch with me I can do some preliminary calculations for you.

    But in any case, making payments to the mortgage and to RRSP is definitely and absolutely the inferior way of preparing for retirement


  91. FourPillars on October 29, 2007 at 12:43 am

    The Smith Manoeuvre is not “risky” in the least.

    Kevin – this is ridiculous, the effect of leverage is to increase the risk of your portfolio which will magnify the returns (for better or for worse). The more leverage you have, the more risk you are adding to your portfolio.

    I’m glad the SM worked out so well for you but that doesn’t mean it will automatically work out exactly the same for someone who is starting it now. Someone starting it now might do better than you did or they might do much worse, only time will tell.

    The SM is leveraged investing, plain and simple – the idea of tying it your mortgage and giving you the idea that it will pay your mortgage off faster is just marketing from FAs. If you do any kind of leveraged investing and it’s successful then you will make money from that strategy. If you choose to put it in your mortgage then it will get paid off quicker.

    I’ve seen similar comments from you on other blogs and it’s hard for me to understand why you put so much effort into insulting the vast majority of investors who don’t automatically believe everything their SM-pushing financial advisor tells them.


  92. The Financial Blogger on October 29, 2007 at 8:27 am

    But Mike, honestly, if you invest your money into the S&P or TSX index, over 25 years (the normal life of a mortgage), what are the risk that your yield (considering that you compound interest on your investment and not on your debt) will be lower than your mortgage rate (which is a little bit below prime according to most product suggested by Ed Rempel on this blog)?

    The question is the following: Do you think you can average a yield of return of 8% over the next 25 years? If so, you should consider the SM. If not, stop investing in the market period only you want to buy T-Bills!

  93. Telly on October 29, 2007 at 11:51 am

    FB, I don’t have large equity in my property. It’s a fairly inexpensive house with a relatively small mortgage. I’m not sure this would be a great advantage to me. At this point I think margin may be more appropriate.

    Sandor, can you explain why you believe that “making payments to the mortgage and to RRSP is definitely and absolutely the inferior way of preparing for retirement”?

  94. FourPillars on October 29, 2007 at 1:24 pm

    FB – I do think there is a good chance that the equity returns over the next 25 years will be better than the average mortgage rate but it’s not guaranteed as you and Kevin insist.

    Even if I didn’t believe that equity returns would outperform my mortgage that still isn’t reason to invest in t-bills. I don’t think the only two choices are “do the SM or invest in T-bills”.

    I’m not against people doing the SM who are comfortable and knowledgeable with the fact that they are really doing leveraged investing and increasing their risk profile. As you know I do leveraged investing myself.

    My problem is with people (like Kevin) who try to sell the SM as some risk free, easy way to pay down the mortgage quicker which is a lie. My other problem is with consumers who sign up for the SM thinking they are taking some kind of easy financial short cut. There’s no such thing as a free lunch. Someone who does leveraged investing and is successful might think that they are getting something for free but they took on extra risk which is a cost.

    If a home owner is knowledgeable about investing and is ok with leverage and wants to raise their risk profile (I put myself, FB and Telly in this category) then I would suggest they look into some kind of leveraged plan and see if it makes sense for them. If they don’t have the financial know-how to do leveraged investing without the help of a financial advisor then I would suggest they shouldn’t be doing any leveraging at all until they achieve that knowledge and experience.


  95. FourPillars on October 29, 2007 at 1:27 pm

    Telly – the main advantage to having a home equity line of credit is the lower interest rate – typically prime (or lower if u lock in) compared to prime + x for margin. The only problem is that there are fees involved in setting one up so you would have to weigh out the pros/cons. You can always start with margin/unsecured LOC and later on get a HELOC.

  96. Telly on October 29, 2007 at 1:38 pm

    Thanks Mike. The fees are one of the reasons I think a margin account might be the better bet. If we only plan to borrow ~$100k, the advantage to a HELOC is much slimmer.

  97. FrugalTrader on October 29, 2007 at 1:47 pm

    Telly, the only issues I can see with investing with margin is the potential for margin calls. If, however, you are comfortable with this I would suggest that you look into IB as they have the lowest margin rates around (less than prime last time I checked).

    With regards to the fees with a HELOC, CIBC will pay for the legal/appraisal fees providing that you get a credit limit of at least $25k.

  98. FourPillars on October 29, 2007 at 1:57 pm

    Ditto what FT said.

    I didn’t realize you were going to borrow $100k – if you save 1%/yr interest that’s a $1000. The fees to set up a LOC are less than that (assuming you even have to pay all the fees).


  99. Sandor on October 29, 2007 at 1:59 pm

    Dear Telly and Frugal,

    I wouldn’t under any circumstances take the risk of market, fees, and margine combined.
    I would choose a type of loan that doesn’t have margine calls, have no fees and would invest in guaranteed investments where the risk of losses are minimized.
    But the greatest disadvantage of the suggested method is that you will have to make monthly payments on both: the mortgage and the LOC.

    I advocate replacing the mortgage completely with a LOC. That enables you to invest the principal payments and may even lower the monthly payments as well.


  100. Sandor on October 29, 2007 at 2:11 pm

    Sorry, I forgot to include in my previous a very important point.
    Investing in treasury bills or GICs would not qualify for the tax write-offs, because they don’t offer the expectation of making an income, since they would most likely loose money after tax and inflation. They would also render the SM a loosing proposition. If you are not prepared to invest in dividends and equities the SM is not suitable for you.


  101. Telly on October 29, 2007 at 2:33 pm

    Mike, we wouldn’t borrow $100k upfront. It would be on a much smaller scale at 1st (~$10k to start) and move up to $100k as more of the mortgage is paid off.

    FT, our cashflow is good so I don’t worry much about margin calls. With IB’s rate, it seems that could be more advantageous than SM. However, I would not be as willing to leverage as highly (would probably not ever see a margin call).

    Sandor, I’m not interested in investing in FI at this point, especially not with leverage! I am still curious however, why it is you think paying off the mortgage and using RRSPs is an inferior way to invest for retirement?

  102. Sandor on October 29, 2007 at 2:43 pm

    And now onto #94, your question:

    “Sandor, can you explain why you believe that “making payments to the mortgage and to RRSP is definitely and absolutely the inferior way of preparing for retirement”?

    Your RRSP contributions are limited and at the withdrawal gains and the principal are both taxed. The tax advantage is only a reduction, not a refund in the accumulation period.
    In the SM investments the principals are not only after-tax money, but tax-deductible and also, only the gains are taxed, at a preferencial rate and you can boost the amount with the tax refunds.

    The extra mortgage payments although they are lowering the length of time you will pay interest, but they would earn income instead in your SM investment fund. The savings by these payments are equal to the mortgage interest, perhaps 5.25% yearly, but they could earn a higher percentage invested in dividends, or equities in the SM fund.


  103. Telly on October 29, 2007 at 3:04 pm

    My situation definitely throws a fly in the ointment however. Our mortgage is in my name only. I currently work in the US / live in Canada (husband works in Canada) so tax deductible interest would be better in my husband’s name as I 1st need to use up my foreign tax credit and any amount left (if any) could then be reduced by deductions. Last year, I had very little tax owing after the foreign tax credit was applied.

    If the interest is no longer deductible, obviously this method loses it’s advantage (but then so too does the RRSP).

  104. Sandor on October 29, 2007 at 3:15 pm


    The tax write-offs can be accumulated and taken advantage of in subsequent years.
    Since however, this situation is complex, you should set up the proper system with your accountant. He or she will find the proper set-up.


  105. FourPillars on October 29, 2007 at 4:05 pm

    Telly – you’re probably right that margin is the way to go for you – (obviously the account would be in your husbands name to get the tax rebate).

    On another topic – our house was in my name and we changed it to joint ownership (costs around $500 I think) for estate planning purposes. If you were to die then there would be probate fees on the house since it’s in your name. If the ownership is joint then it just goes automatically to the surviving joint owner without probate fees.

    I would consider changing it to joint or if you are planning to buy another house in the next few years then put the new house in joint ownership.


  106. Cannon_fodder on October 29, 2007 at 5:03 pm

    Trying to weigh in objectively, I was not left with the impression that the SM proponents implied “risk free”. Perhaps one could argue there is a significant, yet implicit, premise that there is nothing inherently risky in the investments themselves that are due to using the SM (they don’t care how you paid for them) but there are inherent risks in any investment. However, the message seemed to be that over sufficiently long time periods, one can, through careful selection of investments, minimize the risk to one’s net worth in spite of using a leveraged strategy.
    I would say that it is a challenge to present a fully balanced point of view when it comes to this initiative, since those that do the SM tend to take for granted the details and caveats, while those that don’t tend to overemphasize the negatives.

    If you could find an individual who would take a buy and hold strategy to their investments within an SM structure, they would only have to generate a CAGR of about (1 – MTR)*HELOC_INT_RATE over a 25 year period to come out even. For people with the highest Marginal Tax Rates, that means you require a little more than half your HELOC’s interest rate.

    As for Sandor’s statement that GIC’s or TBills would not qualify, I’m confident that is wrong. I would say it would not be a great idea because of the tax treatment of the income, but I’ve seen it posted many times that the CRA only stipulates that there is an expectation of income. Certainly GIC’s and the like generate income – it is investing in equities which don’t pay dividends that had some people concerned. The argument I’ve seen put forth is that a stock could at some point decide to issue a dividend and thus they qualify. I’ve not seen anyone reference a case where CRA denied the interest investment claim simply because it was an equity that was purchased with the borrowed money. If there was such a case, I would have expected that this would be talked about front and center from many different respondents.

  107. The Financial Blogger on October 29, 2007 at 7:55 pm

    FT, my point was not to determine that there is only two options : SM or T-bills. But if you don’t expect to beat the mortgage rate on the market, why would you invest money in the market with or without leveraging?

    I mean, why would you bother reading financial statements, looking at charts, reading financial news and so one and expect to make 5-6% a year? It seems to be a lot of work for not much rewards! You are better off buying bonds and T-bills that will most likely follow the mortgage rate returns without any hassles.

    I don’t pretend that there is no risk while doing the SM, but I don’t think it is significant.

    There are several what if’s when you are looking for risks:
    What if market crashes? What if you loose your job? What if your wife dies tomorrow and you go on a depression for a year? What if?

  108. The Financial Blogger on October 29, 2007 at 10:25 pm

    In my last answer, I meant FP, not FT… sorry ;-)

    Telly, there are several free of charges HELOC and some of them are paying for the setup fees as well (besides CIBC, NBC is doing the same thing and the all-in-one doesn’t have any monthly fees).

    You don’t need to change names on title in order to get the HELOC in both names. Your spouse can be hold liable for the debt only.

    I agree with Cannon Fodder, I’m sure you can defend that T-bills, GIC’s and bonds generate an income. Therefore, the investment will be tax deductible.

  109. FourPillars on October 29, 2007 at 11:52 pm

    FB – where did I say I didn’t expect equities to beat mortgage rates? In fact I said (in comment #95) that I do expect this to happen.

    My point is that it’s not guaranteed which is not always how the SM is presented. I think the SM is perfectly good way to implement a leverage plan if the investor knows the risks involved and can handle that amount of leverage.


  110. The Financial Blogger on October 30, 2007 at 12:21 am

    FP – Sorry, I misread this part:
    “Even if I didn’t believe that equity returns would outperform my mortgage that still isn’t reason to invest in t-bills.”

    I agree with you that nothing is guaranteed in regards to the Smith Manoeuvre. However, you only need equities to equal your mortgage rate in order to make money (considering the compounding factor and the tax return). Therefore, I don’t see the risk over time.

    I do feel that chances of having the S&P or the TSX beating mortgage rates over 25 years are pretty high. My guess would be that you will have much bigger concerns than only the your SM results if it ever happens ;-)

    I you would be paying a rent of $1,500 a month, would you consider this risky? If not, you rather buy a house, put $1000 in interest and invest the difference. You only have to worry about your cash flow in both cases. However, with the SM, you have strong chances (not guaranteed) to build assets over time.

  111. Acorn on October 30, 2007 at 5:35 pm

    The main reason to utilize SM is to pay off your mortgage in 10-15 years instead of 25. The savings on the mortgage interest is enormous. It will beat all “fantastic” incomes from your complicated investment portfolios. Change your thinking. Forget a huge gain from your investments for now. Don’t try to beat the interest rate all the time.Instead, make sure that your monthly cash flow from investments is steady and tax defferal! Add it to the mortgage payments. Use conservative monthly distribution funds (Series T8) which will provide a tax deferral return of capital with very small portion (even zero) of taxable capital gain. Pay off your mortgage sooner and start to follow an investment strategy you like.

  112. Ed Rempel on November 2, 2007 at 1:21 am

    Hi Acorn,

    It sounds like you are another victim of the Smith/Snyder sales pitch. If you buy a monthly distribution fund (T8) and pay this onto your mortgage, then your investment loan or investment credit line become non-deductible by the amount of the distribution.

    This is the #1 most common error in the SM. If you take a distribution, you must pay 100% of it onto the tax deductible credit line or investment loan. If you pay any onto your mortgage, you have messed up your tax deductions.

    You are referring to the Smith/Snyder which we consider to be a strategy for retirees needing income. If you are trying to pay your mortgage off, do the real SM instead.


  113. Ed Rempel on November 2, 2007 at 1:34 am

    Hi Cannon Fodder & FB,

    If you borrow to invest in T-bills, GIC’s or most bonds, some or all of the interest is NOT tax deductible.

    The main issue is you need to invest with an “expectation of profit”. If you borrow at 6% and invest at a guaranteed 4%, you cannot expect a profit, so most or all of the interest is NOT deductible.


  114. Ed Rempel on November 2, 2007 at 2:02 am


    The SM would still work well for you. Here are a few suggestions:

    With a small mortgage, you are probably paying off quite a bit of principal with each mortgage payment, so you can readvance a large amount. You can use this larger readvance to fund your leverage (and probably much more).

    You can use a large principal readvance for the Rempel Maximum, which would allow a larger investment. You sound comfortable with leverage. This can get you to your goal of $100K leverage or more very quickly without using any of your cash flow.

    Your tax situation is not a problem, since your husband can borrow against your house to invest. The legal and tax ownership of investments and tax deductible loans can be different, if you show it clearly. It sounds like having it all taxed to your husband is best, so he will get the tax refunds.

    FB is right that changing your home and your investments to joint names is generally adviseable for estate planning purposes. Even if you change your home to joint names and invest in joint names, you can have your husband claim the interest deduction and any tax on the investments.

    You can get an SM mortgage for no fees. (See my posts on the best SM mortgages.) Neither NBC nor CIBC have one though. Both of them only have credit lines, but no readvanceable mortgage. With a no fee SM mortgage below prime, you have a significant interest saving over margin – plus no margin call risk.

    With your 2 rental properties, you can do 3 SM’s, which can be very powerful. We have one client doing 7 SM’s and you won’t believe how that can build wealth!

    You can also do the Cash Dam to convert the last of your home mortgage to tax deductible more quickly. It may not have much benefit for you, though, since your non-deductible mortgage is small.

    The Cash Dam expected gain is generally much less than the SM (and definitely in your case), since it is a pure tax strategy, while the SM is a tax strategy combined with an investment strategy. The main advantage is the long term compounding of the investments, which is not part of the Cash Dam. However, you can still do it on top of the SM for some additional benefit.

    Your strong cash flow gives you several options. You can accelerate your SM in a variety of ways, or use it for RRSP’s. RRSP’s are still effective as well, especially if you use the tax refund well, since you get a larger tax refund with RRSP’s than with the SM for the same amount of investment. This depends on how you implement the SM and how much you leverage, though. Your larger tax refund can be used to accelerate the SM.


  115. FrugalTrader on November 2, 2007 at 2:16 pm

    Ed, my understanding is that you can withdraw dividend distributions from your leveraged portfolio and still keep it deductible. Is this not true? Or is your comment referring to Return on Capital (ROC) distributions?

  116. Ed Rempel on November 2, 2007 at 9:53 pm

    Hi FT,

    You are right. Dividends are fine. I was referring to ROC distributions from a mtual fund or from an income trust.

    The general rule is that taxable dividends are fine, but any distribution that is all or partly not taxable will reduce the interset deductibility of an investment loan.


  117. Acorn on November 8, 2007 at 2:23 pm

    Thanks for your comment. You are right, I can’t use the T8 distributions to simple pay off my mortgage (comments 112-113). What I meant was that I can use this distribution to pay portion of mortgage and than IMMEDIATELY re-use an equal portion of HELOC (which becomes available) to support another investment loan (similarly to your Rempel Maximum strategy). So, a portion of HELOC equal to T8 distribution that wasn’t eligible for tax deduction became eligible again in several days that were necessary for banking transactions. What You think?

  118. Harjit Sandhu on November 11, 2007 at 12:11 am

    I work as a Financial Planner with Investors Group and I am an avid supporter of the SM.

    Everybody here says the SM exposes you to risk. I put all my clients into our Segregated Funds which come with a 100% maturity guarantee. And you don’t need an insurance policy in order to hold a Segregated Fund.

    When you are borrowing for investment purposes there are two main reasons why people do not do it:
    1) Risk of Losing Capital
    2) Potential for Profit

    So by using a Segregated Fund as an investment vehicle, we have eliminated problem #1.

    Problem number 2 is eliminated by itself when we use a long term time horizon. Ask any financial advisor and they would be willing to bet their life that any properly diversified balanced portfolio will make you money over any 10 year period. Remember the market as returned over any 10 year period on average 8 to 10 percent.

    Now for my clients we just keep it real simple, our most popular fund, it’s top 5 holdings are the chartered banks. It has been around since 1962 and it has returned on average 8.33% every year.

    You combine the SM with our “All In One Account” and your total debt (mortgage) payments do not change at all.

    If you are in the Lower Mainland area, I would be more than happy to sit down with you and show you how we can implement the SM in your case, just drop me an email

  119. Ed Rempel on November 12, 2007 at 12:28 am

    Hi Acorn,

    Your strategy sounds fine for tax purposes, since you pay 100% of the distribution onto the investment loan.

    What are you doing with the readvancing principal? You mention using the equity created by paying down the distribution onto the loan, but could you not fund the other investment loan by readvancing the principal from your mortgage payments?

    Your case sounds to me like simple leverage – not the SM.


  120. Ed Rempel on November 12, 2007 at 12:40 am

    Hi Harjit,

    I’m surprised to read your post. I’ve been told by a few IG advisors and former IG advisors that IG does not support the SM. Do you have any trouble getting your manager to approve it?

    I understand your use of segregated funds. Many people might feel more comfortable with the guarantee, which might motivate them to do the SM when they otherwise would not.

    We don’t use them at all, however. The fee for the guarantee is a complete waste of money, since these diversified funds will never by down for 10 years – and even if they are, the client won’t stay in them for 10 years.

    We’ve found that most people greatly exaggerate the risk of the stock markets in general over the long term. Once it is explained to them, we’ve found people are just fine without the guarantee.

    The IG All-In-One does not work properly for the SM, however. You should read the articles here about the best SM mortgages. IG uses National Bank, which does not readvance unless you leave everything as a credit line – which would mean the mortgage would be at prime. Instead of using your in-house product, you may want to consider some SM mortgages that do readvance automatically.


  121. Harjit Sandhu on November 12, 2007 at 1:02 am

    Hi Ed,

    IG endorses a strategy called “Home Equity Diversification”, same thing as the SM.

    You will have a mortgage which will consist of a mortgage with two sub accounts “Mortgage Sub Account” and “Investment Loan Sub Account”.

    The “Mortgage Sub Account” is your origional balance and you will make interest and principal payments on it. The “Investment Loan Sub Account” starts off at zero and you will make interest only payments on it. As the balance in your “Mortgage Sub Account” is reduced an equal amount will be taken from the “Investment Loan Sub Account” and that amount will be invested.

    The Dividend Fund by IG is our most popular fund, especially amongst a lot of our senior consultants. It is also available in a Segregatged Fund through Great West Life-IG Alliance. The MER on the segregated version versus our regular Series C is the same. The Deferred Sales Charge, though is less on the Segregated Fund then compared to our regular Series C funds. And the segregated funds comes with a 75% guarantee at no cost.

    Now I agree with you about not needing the 100% guarantee but let’s find out what it costs first of all. For $100,000, the 100% guarantee will cost you $1.10/day. So if a $1.10/day let’s you go to sleep at night knowing your $100,000 is 100% secure, then it is money well spent. Particulary since the number one reason most people will NEVER EVER borrow money for investment purposes is the potential to lose all that money.

  122. Sandor on November 12, 2007 at 1:56 am

    I agree with you Harjit that the extra cost is worthwhile, but why so much?
    I also use them, but my cost is only 82 cents or less. (depending on the fund)

  123. Ed Rempel on November 13, 2007 at 12:22 am

    Hi Harjit,

    The “Mortgage Sub Account” with National Bank or IG must be a credit line, though, does it not? That means it is at prime instead of prime -.5% or more.

    We realize that it is much easier to sell SM with a seg fund, but it is much less likely to work. Using a seg fund is clearly far more risky with the SM and means the client gets far lower growth over time with compounding.

    This is because the risk of losing principal over 10 years with a diversified fund is negligible, but the risk of losing money with the SM is significant. For example, over time and after tax a client may need to make 4% to break even with the SM. The risk of not making 4% in the long run is obviously many times higher than the risk of not making 0%.

    Since the seg fund reduces the return by about .5%/year, the risk of not making 4% is much higher.

    Once clients fully understand that segs don’t protect against the real risk – the risk of losing money by not making 4%, then we find nobody really wants segs.

    Personally, I would have much more trouble “sleeping at night” invested in a seg fund.

    Looking at returns, we are talking about a net profit of 4-6% if the fund makes 8-10% long term and the after tax cost is 4%. With a seg fund, we give up 1/10 of the profit for really nothing. When you take this 10% less profit and compound it over many years, the net profit is far lower.

    We decided we would only recommend a seg fund if the client absolutely will not do the SM without it, but we are still confident the client is right for the SM. But we would explain the real risks of the SM. Up until now, we have several hundred families that would rather make more money and have less risk than feel more comfortable with a guarantee. And none insisting on the guarantee.

    I guess in the end, if we ever came across a prospect that would not do the SM without a guarantee, we would probably not accept them as a client. You have to ask – are they suitable for the SM?

    The SM should be for investors as opposed to savers. If they are focussed on the guarantee, will they continue to add money when the fund is down? Will they dump in money when the fund is up? Their behaviour will probably wipe out any SM benefit.

    If you really agree with me that the guarantee is really worth nothing, then why not focus on what works for our clients instead of on how to sell it?


  124. Sandor on November 13, 2007 at 1:13 am


    With all due respect, in fact affection, I think what you say here is outright nonsense:
    “This is because the risk of losing principal over 10 years with a diversified fund is negligible, but the risk of losing money with the SM is significant. For example, over time and after tax a client may need to make 4% to break even with the SM. The risk of not making 4% in the long run is obviously many times higher than the risk of not making 0%.”

    This, of course, is mathematical sophistry. Of course, the risk is higher, but here we talk about likelihood, not risk. Making 0% is less likely than making a modest 4% over 10 years.

    Segfunds are duely diversified.
    The chances of making a return in a segfund are the same as any other mutual fund, minus the cost of the guarantee. If you compare any segfund with the underlieing mutual fund, you will find that they are fluctuating in tandem, the difference being the slightly higher MER.
    Any decent equity segfund returned 12-15% in the last six years, that include the post bubble decline as well. Dividends were around 8-12%.
    You don’t really mean, do you, that making 4% is in any doubt?
    There are people whom are weary of risk and debt, so the guarantee makes a lot of sense to them. And if they are not weary of the risk, the guarantee still makes a lot of sense to them.
    I wouldnt worry for a moment, if the client would take an extra month before reaching the 1 million mark, just because he chose the guarantee. This should be their greatest problem.

  125. Houska on November 13, 2007 at 11:50 am

    Ed’s argument makes complete sense. I look forward to someone actually running the numbers, but the approach is as follows.

    Suppose an investment vehicle expects to make a return, r, say 8% per year on average. Over time, the actual return will have a certain probability distribution around r. This probability distribution will be narrower the greater the time period.

    If you are investing without borrowing, you may care about the chances actual r is less than 0. A segregated fund with a 100% guarantee will reduce those chances in return for a reduction in r overall – if the numbers above are to be believed, by about 0.5%. Personally, I find that too expensive, and care more about whether r is less than inflation than r is less than 0, but to each his own.

    If you are investing with the SM, you actually care about the chances actual r is less than 4% (approx borrowing costs, on a tax adjusted basis). The risk (probability) r is between 0 and 4% is greater than the risk r is negative.

    If you use a seg fund in this instance, your 0.5% premium does protect you from the risk r is negative. However, it does not protect you from the risk r is between 0 and 4% and in fact hurts you, since reducing r by 0.5% significantly increases the chances that r is between 0 and 4% after the 0.5% penalty.

    I’m willing to be persuaded (as I’m sure Ed is…) that somehow the arithmetic in this case works out, but it appears very unlikely.

    Seg funds have their uses for a) very risk averse investors, and b) investors with a significant nonlinearity in their risk tolerance (who can live with fluctuation up to x, but need to “insure” themselves against *excessive* losses), but those in category a) should not be doing the SM. For some in category b) it might work, but I suspect it will be a very special case.

  126. FourPillars on November 13, 2007 at 2:56 pm

    I think the other problem with seg funds is that if they are not 100% equity then their expected return would be lower which would reduce the success of a leveraging strategy.

    I think Ed’s right – either a client should be able to tolerate a proper SM with 100% equities (no guarantee) or a safer version where they don’t borrow as much but still invest in the same equities. If they aren’t able to deal with that kind of risk then they shouldn’t be doing any leveraging at all.


  127. Peter S. on November 14, 2007 at 1:59 am

    I’m sorry to have not read all the comments (I just found this blog, and don’t have that much time), but the anti-SM’s seem to focus on stock market downturn as the risk. But what about a housing crash: suddenly the HELOC is secured against a diminishing equity value. Isn’t this a big risk? Or perhaps I missing something obvious?

    — Pete

  128. Ed Rempel on November 14, 2007 at 2:51 am

    Hi Pete,

    In the past, the banks have not reduced the credit line limits when the house value declines. I was in Calgary in the late 80’s after most of their homes had declined about 50%. Many people were going into the bank to hand in their keys, since they could buy the neighbours house and have a smaller mortgage.

    The banks, however, did not reduce the credit line limits in any case I heard of.

    Therefore, even if your home goes down, you can still keep doing the same SM.


  129. Peter S. on November 14, 2007 at 3:13 am

    Ed: Interesting. So I’m guessing in the Calgary case LOC limits, while not being reduced, weren’t being allowed to increase? That would be awefully hard for the bank to justify.

    Why weren’t they decreased? Were the banks expecting the home values to increase in short enough time to be manageable? Or were they afraid, unmotivated, or legally unable to pull the rug from under the borrowers’ feet?

    — Pete

  130. DAvid on November 14, 2007 at 11:57 am

    In the Calgary, or any other case, the loan whether LOC or MOrtgage, is really based on the mortgagor’s ability to pay, not the value of the underlying asset. So, when the housing price drops, or your new car takes an immediate depreciation, the loan is not immediately called. If, on the other hand, you cease making payments……


  131. Peter S. on November 14, 2007 at 1:22 pm

    Ah yes, of course, that makes sense …

  132. Acorn on November 14, 2007 at 3:07 pm

    I’ve heard that CRA is considering to change a tax deduction rule. For example, if an investment loan is $100,000 and current value of holdings is $90,000, only interest on this $90,000 is eligible for tax deduction. Any comments?

    • FrugalTrader on November 14, 2007 at 3:32 pm

      Acorn, do you have any sources that support your claim?

  133. Acorn on November 15, 2007 at 10:16 am

    I’ve asked a financial adviser I know if there are any pending or anticipating taxation changes that can suddenly hit me (in particular, monthly distribution funds taxation). She told me that in their community there is a rumor that something might happen with distribution funds. One of the options I’ve described in the previous post. So, nothing official yet…

  134. FrugalTrader on November 15, 2007 at 10:18 am

    Acorn, that is interesting. Let us know if you hear anything official.

  135. Man From Atlantis on November 16, 2007 at 5:13 pm

    Seg funds and lines of credit:

    I would agree that if someone thinks that the markets will be down after 10 years then they probably shouldn’t be doing SM. At .5%/year in a seg you will be down 5% in 10yr. if matched up against the same underlying fund. The other thing with a seg fund is you can not deduct a portion of the MER. Maybe Standard life is an exception if you invest over $250,000.

    I have used National All in one and they gave P -0.25. The real risk is using it as a revolving line of credit and not paying it down. The way people behave is a greater risk than investment risk

  136. Acorn on December 1, 2007 at 12:24 am

    Hi Ed,

    Somehow, I’ve overlooked your comment 120. Thank You… Yes, I have another investment loan and I’m using my readvancable mortgage portion to support this loan. So, I don’t have to do monthly investment contributions, I have this all investments from the day one…But I’m still not sure if it is better to use these monthly distributions to pay mortgage principal and than re-use this equity to support investment loans, or to pay investment loan interest directly, without making an additional payment against my mortgage principal.
    Also, I’ve noticed that funds that do monthly distributions are eligible for RRSP
    contributions. How taxes work in this case?
    General comment to all participants to this site: Let’s discuss strategy tips and REAL lessons learned. Please, don’t discuss investment dangers, transaction fees and other teenager’s worries… If your stomach is not strong enough to do investments, enjoy your saving’s account interest rate… If you have a successful investment strategy or scheme that can enhance SM approach, please let us know. Thank you.

  137. lorne on December 2, 2007 at 6:19 pm

    Harj and Ed,

    I have just found this post and have read through lot’s of the entries here.

    From your November 13th comments. I am also an IG consultant, and a fan of the strategy. IG does have a similar plan that we have named the “Home Equity Diversification Plan” I have been researching the best way to set it up for my clients and have found the only thing that IG does not support (in product or plan) is the capitilization of the LOC interest. I think this is an important feature and have been working with a couple of mortgage brokers to make sure my clients get the best product available to them.

    Harj, how have you set this up with our AIO account in order to capitalize the interest?

    Ed, what product do you most commonly use to implement the strategy for your clients?

    any suggestions would be appreciated.

  138. Ed Rempel on December 3, 2007 at 12:08 am

    Hi Acorn,

    I doubt there will be any new tax legislation on leverage. CRA often makes statements in order to see what response they get and then decide what to do. They floated a trial balloon on limiting interest deductions a few years ago. There was an overwhelming response and many well-written letters from our industry against their idea.

    Since then, they have said nothing, so we are assuming they have given up. The trial balloon was with the last government as well.

    There are still rumours floating around and I believe there are still some background informal discussions going on. Several fund companies have tax experts that are at the forefront of this.

    Changing the tax rules would be difficult, though. The same tax rule that allows leverage (and the SM) is the what all companies in Canadaa use to claim interest as a business expense.

    The SM is still beneficial, even without the tax benefits, but the tax benefits help a lot.

    You mentioned new rules regarding distribution funds. Those rules are well established. If you take a non-taxable distribution from a fund and don’t pay 100% of it onto your investment loan, then part of the loan becomes non-deductible.

    You asked whether it is better to pay your distribution onto your mortgage or the investment loan. Paying it all onto the investment loan is definitely better. If you pay any of it onto the mortgage, then you need to start doing the Snyder Tax Calculation to figure out how much of your investment loan is no longer tax deductible. There are no benefits at all from paying any of the distribution onto your mortgage and it makes complex calculations required for your tax returns.

    Using distribution funds in an RRSP has no tax consequences. Everything that happens inside an RRSP has no tax consequences.

    I have a question for you, though, Acorn. Why are you using a distribution fund? With the SM, there are no benefits at all of using a distribution fund, unless you need it to pay your leverage interest (since the mortgage principal readvancement is not enough). Only a small percentage of mutual funds are available with a monthly distribution and almost none of them are among the best mutual funds.


  139. Ed Rempel on December 3, 2007 at 12:19 am

    Hi Lorne,

    The best SM mortgage depends on the situation. I’ve written 3 articles on the best SM mortgage on MDJ that should help you.

    Does IG allow you to work with mortgage brokers or use whatever mortgage product is best? Some IG advisors have said that they are pressed into using their in-house mortgage with National Bank (All-In-One), even though it is not a readvanceable mortgage.


  140. Acorn on December 3, 2007 at 6:57 pm

    Hi Ed,
    Let me explain how distribution funds work for me. Yes, I need this monthly cash flow to pay my leverage interest since the mortgage principal readvancement is not enough. Yes, this kind of funds is not designed to give you a fantastic return. BUT PERFORMCE OF THESE FUNDS IS NOT SO IMPORTANT FOR ME. I don’t have to hold “the best” fund to receive the distributions. What I need is a safe and steady cash flow that will support my investment loans, reduce the mortgage portion and, as a bonus, give me some tax money back. I’ve calculated how much I need to invest in distribution funds to achieve these goals. Remaining portion of the investment portfolio was designed based on my personal preferences.
    Probably I wasn’t very clear trying to explain why I’m going to take these distributions, PAY A PORTION of the mortgage and immediately RE-USE the readvacement for an investment purpose to keep tax benefits. You can create a simple table (unfortunately, I can’t attach one to my comment), which will show you how all these “RE-USED / READVANCED” monthly distributions (except the very first one) become “interest tax-deductable” again and, in the same time, KILL YOUR MORTGAGE PORTION EVEN FASTER by increasing your monthly mortgage payments. Overall mortgage interest savings will compensate a relatively weak (still 6-8%) performance of the distribution funds. The distributions can be a 100% return of capital (ROC), so you don’t have to immediately pay taxes.
    As you know, monthly distribution funds are relatively conservative (dividend based and etc.), so a risk holding them is relatively low. A steady monthly cash flow helps me in several ways. First of all, to run a scheme described above. Secondly, in case of emergency or any life time event, when I might have difficulties (I hope not) to pay my mortgage. In this case, I’m going to stop described above accelerated mortgage payments and also stop to pay the regular mortgage payments from my pocket. Instead, I’m going to use the distributions money to make payments ( to buy some time). To me, it is better to have a plan “B” to ensure my mortgage payments (as my main expense) instead of waking up in the middle of the night or forcing myself to be too conservative in investing and, as a result, to loose some potential gain…
    The reason for my RRSP question is that I have a feeling that RRSP investments somehow can help me enhance SM related activities. I don’t know how, but it must be a way… For example, if I’ve invested in RRSP eligible distribution fund, used tax money to pay mortgage and also used monthly distributions (even paying taxes) to support SM, will this scheme produce OVERALL positive result? Don’t know…

  141. Sandor on December 3, 2007 at 7:38 pm


    This is an awful lot of complications for very little benefit.

    If you had only replaced your entire mortgage with a line of credit, your monthly payments would have dropped by the amount of the principal payments of the mortgage. So you wouldn’t have to depend on the distributions.

    Your feeling about using the RRSP is a vague, misleading feeling.
    Concentrate all your resources on the SM. This will give you more or less the same tax benefit, in fact probably better, and you would have paid off the house sooner. The RRSP is just diverting you from the important thing.

  142. Acorn on December 3, 2007 at 10:49 pm


    I wish to know an easier way to pay off my mortgage… It took almost 5 moths to gather all information do develop my scheme ( there are not too many people who will give you all related information without hiding important details – thanks to Ed again). And I still have some questions left, well…this is a risk I’ve accepted. I understand that it LOOKS complicated. But in real life what I have to do to support this scheme is to make one transaction per month manually. Everything else is based on several pre-authorized payments / transactions, so you don’t have to closely monitor your cash flow every day. By some reasons, you are under impression that I’m depending on distributions to pay the mortgage. I’m not. I need these distributions to pay off the principal faster and support my investment loan without paying a buck from my pocket. I’m not trying to look as a financial guru, I just feel that somebody might be interested in a slightly different SM approach, so I can save some research time for this person.

    About very little benefit. I’m 45 now… IF, again IF everything developed as planned, I’ll pay off my 530K mortgage in 10 years instead of 25 and end up with 750K investment portfolio. Mortgage interest savings – approx. 250K. “Conventional” SM approach is not even close to these numbers.

    RRSP… I hate RRSP, but I still feel that it must be something in the RRSP scam to take an advantage from… Let’s think together!

  143. Cross the River on December 11, 2007 at 10:12 pm

    One question is still lingering in my mind after reading all these posts and others. What does the SM do to your credit score if you only pay interest but never capital?


  144. Maxwell on December 27, 2007 at 8:12 am

    Acorn, can’t you actively manage a part of your RRSP account? Putting off the tax on the gains essentially means you’re using the govt’s money to grow your RRSP.

    Also, if you’re married, you can each take out up to 20K for your first home purchase without tax penatly. There is more information on that topic in ths blog. Just use the search function.

  145. […] Anti-Smith Manoeuvre […]

  146. Acorn on January 4, 2008 at 3:39 pm

    Maxwell, thank you for comments.
    Although I have a large RRSP contribution room, I don’t contribute at all. Let me explain why. From my point of view, RRSP has been designed for people who don’t feel comfortable to actively manage their finances. An average person is dreaming that he or she will retire with tons of RRSP money. The Government and banks probably have their own reasons to blind people and promote RRSP contributions. Let’s take a look at facts. For “RRSP oriented” people I’d like to suggest to play with an investment calculator, which can be found here:,,5854,00.html?strmid=54.

    This calculator shows the difference between the nominal value of investments and actual, “inflated” value. I was using the following assumptions: Initial investments-$0, rate of return – 8%, annual investment – $10,000 (which is may be very optimistic), years of investing – 25, inflation rate – 3%, tax rate – from 0% – to simulate RRSP CONTRIBUTIONS to 30% to simulate RRSP WITHDRAWALS. Here are the results:
    1. If a person contributes to RRSP (0% tax rate), the final NOMINAL investment value is $ 789,544. Fantastic! That’s what banks keep telling you.
    2. Let’s apply inflation rate (3%) – the ACTUAL dollar value dropped to $377,090. Yoops..
    3. In order to get this money, a person have to pay taxes (let’s say 30%) during several years. So, let’s forget about further inflation… For simplicity, let’s assume that we can withdraw ALL money and pay 30% taxes. The final number is …$261,216. That’s all. Risk and uncertainties of 25 years period are on top of that.
    $250,000K …That’s all a person can have after contributing $10,000 money during 25 years, probably by borrowing RRSP loans with non tax deductable interest and suffering to pay these loans off. Is it enough for retirement?…

    The same result can be achieved in 15 years by borrowing $100K investment loan (use the same calculator). After tax deduction, loan’s monthly interest payment is aprrox. $350 (vs. $833 for mentioned above RRSP example).

    The same story with borrowing RRSP money to buy a first house… Yes, you can do it. But don’t forget, you have to almost immediately start to pay this money back in order to avoid tax conservancies. Where this money will come from? Do you think that you will be immediately richer after buying your first house… and furniture… and dishwasher…and…

    Again, I’m not a financial guru, but I feel that instead of investing in RRSP and trying to GROW money it is better to SAVE money by paying a mortgage as soon as possible and make your house generate an income in one way or another.

    • FrugalTrader on January 4, 2008 at 4:03 pm

      Acorn, to defend the RRSP camp, you neglect to point out that the leveraged portfolio will have to pay tax at some point also. If you invest in dividend paying stocks, then you’ll have to pay tax over x amount of years. If you sell in the future to fund your retirement, you’ll still have to pay tax. The RRSP however, compounds tax free (this is huge), and when it comes time to withdraw, hopefully the tax bracket is lower than when contributions were made.

      It really depends on your tax bracket/province etc, but I generally don’t think that leveraged portfolios should be used to replace an RRSP. It should be used in conjunction with.

  147. DAvid on January 4, 2008 at 5:17 pm

    Acorn, I believe there are a number of fatal flaws in your hypothesis:

    The monthly contribution to have a $10,000 RRSP contribution is about $540 (in the 35% tax bracket) once you factor in the tax return.

    You have not included the inflation rate in your non-registered calculation. Does this mean that you expect the non-registered portfolio to grow at 3% greater annual rate than the RRSP?

    If you use the calculator as you describe, ($100,000 intitial balance, 8% return, 15 years of investing, [3% inflation rate], 35% tax rate), you end up with $137,302. You will have paid $350*180=$63,000 interest, and still have to pay the principal, leaving $37,302 (less the $63,000?)

    If we extend the investment window to 25 years, you will have $169,615, but will have paid another $42,000 in interest, so you have $69,615 (less $105,000 interest costs?).

    Further, as FT stated, you have not allowed for the taxes on the gains in your portfolio, nor those on withdrawl of dividends. Further, you seem to assume that your tax rate will be the same on retirement as prior. If nothing else, your RRSP tax deduction is at your marginal rate (on the last dollar earned) while your RRIF is taxed at your average tax rate.

    This topic has been discussed elsewhere on the net, and the professional opinion is that non-registered investments will outperform RRSP over the life of the investment (including taxation on withdrawl), if the tax return from the RRSP conrtribution is spent. However, if the tax return is also invested in the RRSP, it will outperform the non-registered investments. Since you are investing the tax return with the non-registered plan, you should similarly invest the tax return into the RRSP.

    Additionally, it is likely that the contributions to the RRSP would be indexed, further benefiting the RRSP.

    Your final paragraph sums up my position pretty well — I recommend that you seek a financial guru to help you fully understand the financial benefits of various contributions. I also agree that extra payments in the early years of a mortgage (at least until your interest costs are less than your principal payment) may have more value than RRSP contributions, and the use of leveraging such as the Smith Manoeuvre can benefit individuals outside their RRSP.


  148. DAvid on January 4, 2008 at 7:21 pm

    Further to my earlier comment, Here’s a link that describes the issue:


  149. Ed Rempel on January 19, 2008 at 5:36 pm

    Hi Acorn,

    I just noticed your last couple of posts. There is a tax problem with the leverage strategy you are doing.

    You mentioned taking a distribution from the fund and paying your mortgage off in 10 years instead of 25. Then you reborrow in order to “maintain the tax deductibility”. This is the Smith/Snyder strategy. You do not maintain the tax deductibility.

    This has been mentioned in various places on MDJ, but let’s be clear. You take a leverage loan to invest in a fund that pays a ROC (return of capital) distribution. This distribution means you are getting a bit of your original investment back (and is almost exactly the same as selling a bit of the fund each month).

    Then you pay the distribution onto your mortgage. This does not reduce your non-deductible debt though. If you get $10,000 in distributions that you pay down onto your mortgage during the year, then $10,000 of your investment loan is NON-deductible. This is because you have taken back $10,000 of your original capital by taking the distribution.

    Therefore, paying the distribution does not change the amount of tax deductible or non-deductible debt. Now your non-deductible mortgage is $10,000 smaller, but $10,000 of your investment loan is NON-deductible.

    What is more, the NON-deductible investment loan is probably at a higher interest rate thant the mortgage, so you are actually losing money doing this.

    You now also have to do the “Snyder Tax Calculation” to figure out how much of your investment loan interest you can deduct. If you have taken 10% out of your fund with a 10% distribution, then only 90% of the interest on the loan is still deductible.

    Then your reborrow from a credit line to invest. There is no problem deducting this new leverage interest.

    The strategy your are doing does not have a higher expected benefit than the standard SM (assuming the same level of leverage and that the investment has the same long term return). In fact, as long as you reborrow the full amount to invest, it is the identical return (less the higher interest rate on the non-deductible investment loan vs the mortgage.

    The main difference is that you are doing what we call the “4 Meaningless Transactions”. You take the ROC distribution, pay it onto the mortgage, reborrow from the credit line to invest, and then do the Snyder Tax Calculation to figure out how much of the investment loan interest is still tax deductible. These 4 steps in total do nothing at all. You have the same amount invested, the same amount of tax deductible debt and the same amount of NON-deductible debt.

    Our advice is to reinvest the distributions (especially any ROC distributions) and most importantly, you should invest based on the risk/return of your investment. Give preference to funds that are 100% tax-efficient, or that pay zero distributions.


  150. Ed Rempel on January 19, 2008 at 6:20 pm

    Hi Acorn,

    I have an answer for you on your RRSP question. The only ways we’ve found to use it effectively together with a leverage strategy involve using the tax refund effectively.

    David is right that the benefits of RRSP’s are usually lower than non-registered investments if you spend the refund. However, if you invest the refund effectively, RRSP’s can usually beat a non-registered investment of the same amount.

    We tend to look at our client’s entire financial situation, which means we are working with RRSP’s and the SM, in many cases. The RRSP creates a larger refund, in addition to the SM tax refund. All of this can be paid onto the mortgage and then reborrowed to invest.

    This is how to use RRSP’s effectively together with the SM.

    You have a point, though, in comparing leverage to RRSP’s. It is difficult to compare the SM to RRSP’s, since the SM does not require and cash flow. However, you can compare strategies with the same cash flow.

    For example, you can contribute $6,000 to an RRSP or you can use the same $6,000 to pay the interest on an investment loan of $100,000. In both cases, the entire $6,000 is tax deductible, so your tax refund should be the same.

    However, with the leverage option, you have $100,000 invested, instead of just $6,000. Clearly, this is better, assuming you invest effectively. This is a big assumption, though, since many people are not emotionally able to stick with their investments during the inevitable market downturns, which means they probably should not be doing leverage.

    I agree with you that it is a valid comparison to consider a leverage strategy as an alternative to RRSP’s. (Not the leverage strategy you mentioned though, since it causes tax problems.)

    RRSP’s are still an effective strategy for most people, though, assuming you do something useful with the tax refunds.


  151. Cannon_fodder on January 20, 2008 at 12:04 pm


    In your example where you compare a $6,000 RRSP contribution to a $6,000 deductible interest charge for a $100,000 loan, you skipped over the part where you have to think long term. You would compare continually making $6,000 RRSP contributions to $6,000 deductible interest payments.

    There may be points in time (during negative growth periods especially near the beginning of this process) whereby the dollar cost averaging of annual RRSP payments may result in a better position than the lump sum non-reg investments. Over sufficiently long periods of time then one would anticipate the benefit of the ‘big bang’ non-reg portfolio to exceed and accelerate the benefit.

    Also, would you not agree that the various investment products held in these two scenarios might be significantly different? You very well might hold income producing products in the RRSP, but you would try to hold tax-advantaged products exclusively in the non-reg portfolio. Also, when dealing with relatively large amounts of $ to invest, you sometimes get access to certain products not available to those with monthly contributions of only hundreds of dollars.

  152. Ed Rempel on January 20, 2008 at 8:26 pm

    Hi Cannon,

    Good, in depth comments (as always). I was just comparing the strategies. So if you assume the investments are the same and the return is decent long term (say 8%/year or more), the leverage strategy will outperform RRSP’s.

    However, you are right that in practice there may be differences in how the strategies are often done. For our clients, we tend to invest somewhat more conservatively with leveraged investments (SM) than in RRSP’s, since it is from borrowed money. Clients often have lower risk tolerance in down markets when they borrowed the money.

    We don’t use income products much (meaning bonds or GICs), since few of our clients will be able to achieve their long term goals if a significant part of their portfolio makes such low returns.

    If by income products you mean income trusts or dividend stocks, we just consider these to be equities.

    You are right that larger amounts of money can give you access to other investment products, but this has less effect than you may think. Higher end mutual funds tend to still be available for most RRSPs.

    More sophisticated investments such as hedge funds can give you a similar or higher return than mutual funds with less volatility, but there is a theoretical risk that makes them generally inappropriate as leveraged investments.

    I am a Certified Hedge Fund Specialist and use some exceptional hedge funds for some clients. However, even though their return is generally higher and volatility lower than the stock markets, we only use them in RRSPs or non-leveraged non-registered accounts – not in SM or leveraged accounts.

    In short, there may be differences in the way different people invest in RRSPs vs leveraged investments, but there is not a standard “proper” way that you can build into any analysis. And leveraged investments don’t necessarily have all kinds of advantages not available in RRSPs.


  153. jh on January 31, 2008 at 11:30 pm

    ezboy post 58….

    I’d appreciate the spreadsheet you’ve created and sited on this post…for some reason my net connection doesn’t like your link…is it still there? please repost.

    We’ve been using leverage for 10 years with fantastic results, increasing the amount each year as our mortgage dropped.

    I’m interested in blogs that are current on dividend growth stocks if anyone knows of good links…please share…the market has produced a fantastic buying opportunity (finally)…it may not yet be the bottom but with rates headed down I’m looking for good dividend stocks like financials that are on sale and can produce a solid dividend return that exceeds the after tax cost of debt (ie. make money right away before any cap gains or dividend increases).

    Any comments and links appreciated…


  154. Chewbacca on February 10, 2008 at 1:02 pm

    Has anyone considered combining SM with Derek Foster’s strategy of investing in Canadian dividend paying companies that raise their dividends each year, i.e. the five major banks? Any tax incurred on this income will be pretty much offset by the dividend tax credit. You will achieve several goals this way:

    1) Convert bad debt into good debt.

    2) Be on your way of replacing your income with passive dividend income and be able to retire much sooner.

    3) Pay off your mortgage.

    4) Since with the SM, due to interest only payments, the original mortgage amount stays constant, 20 years down the road, even your good debt will be worth less than what it is worth today due to inflation.

    I believe this is what JH is interested in discussing as well.

  155. Life insurance in Canada on February 15, 2008 at 9:27 am

    I have heard about Smith Manoeuvre and in my opinion this was a very good way way for you to turn the debts into annual tax refunds, knock years off your mortgage,and build a larger retirement portfolio at the same time. But now as I´m reading your comments I see, that it has also it´s negatives. But I cannot see an answer for the question from Cross the river: “What does the SM do to your credit score if you only pay interest but never capital?” Have someone answer for this?

  156. Sandor on February 15, 2008 at 10:25 am

    Hi LIIC!

    The SM has no effect on the credit score.
    In fact, it removes your housing from credit considerations, as long as you are paying the interest.
    If you excuse my slightly frivolous reaction, since the SM is not a panacea for everything, it also has negligible effect on the weather, the price of corn and on grown-in toenails.
    The sole purpose of the SM is to make your mortgage tax-deductible. Everything else is coincidental.

  157. Sam on February 18, 2008 at 10:30 am


    Equity in the house, and, I’d lke to get started asap. Currently have a Scotiabank first closed mortgage that comes due in July 2009. Really would like to start th SM. Can someone e-mail me with some possibilities?

    Should I slice mortgage, pay penalty and get an SM mortgage?
    Should I negotiate with Scotia and get a Home Equity Line?
    Canadian Tire is now offering an “All in One Mortgage”. Thoughts? Please assist:

    • FrugalTrader on February 18, 2008 at 10:43 am

      Sam, don’t rush into the SM. First calculate what your penalties would be to cancel, then decide whether it’s worth the 1 year wait.

      The Canadian Tire mortgage is not recommended with the SM as you can’t have multiple accounts.

  158. Sam on February 18, 2008 at 11:03 am

    Thanks FrugalTrader. I’d like to retire early, and, don’t want to wait a year. What would you do, and, which product would you recommend for the optimal success of the SM (Ontario here)? What do you suppose the penalty is (Scotia, closed mortgage, due next year)?

    Also, my wife has a rental investment property with a 10 year closed/low interest rate mortgage (MCAP). They do have a product called “Home AccountTM Plus”. I think it’s like a second mortgage, interest only payments. Any thoughts about harnessing the surplus equity through that and seek alternate investments? I suspect the interest is all tax-deductible.

    You can e-mail me direct too:

  159. Ed Rempel on February 18, 2008 at 11:29 am

    Hi Sam,

    If you post the details of your situation, then we can give you a proper suggestion. We’ve structurd the SM for hundreds of clients.

    We also developed a “Mortgage Breaking Calculator” for the SM that we could run for you if we had your details.

    Calculating whether to break the mortgage now, wait until its due or work with other options (like a second until the mortgage comees due) is surprisingly complicated. There is the interest rate difference, penalty to break, any possible fees involved, savings from other debts that could be rolled in and the opportunity cost of waiting till the mortgage comes due. The opportunity cost obviously depends on how you would implement it.

    If you either post or email me your details, I can recommend what you should do. I would need to know all the details of your mortgages (balance, payments, rate & due date), estimated value of the properties, details on any other debt that is at higher rates that you might want to refinance, and what type of SM implementation you are considering.


  160. DAvid on February 18, 2008 at 11:31 am

    You should contact an investment advisor for details on many of your questions. Your banker would be the source of most accurate information on mortgage options.

    The interest on your wifes investment is already tax deductible. You might consider using any profits from the rental to reduce your non-deductible mortgage balance, and re-invest the difference, by using a Cash-flow Dam. Once again, seek quality (paid) advice.


  161. Sam on February 18, 2008 at 12:10 pm


    I’ve e-mailed you some personal data concerning the closed ScotiaBank mortgage.

    A TD rep just called and suggested a second mortgage HELOC, though, not sure.

    Looking forwward to clarifying the issues. Thanks.

  162. Sam on February 18, 2008 at 12:44 pm

    Just a quick question, where do people here invest their HELOC proceeds for optimimum returns:

    High Dividend paying Canadian bank stocks


    Thoughts are appreciated. Thanks.

  163. Sandor on February 18, 2008 at 1:27 pm

    Hello Sam!

    I would be also willing to try my hand on your case.
    See what Ed say and compare it to my humble offering.
    I also need to know more about your details in order to come up with anything creditable. Please, send me an email and I shall respond.
    See you

  164. Sam on February 19, 2008 at 7:26 pm


    Just a quick update.

    High tax bracket here.

    My Scotia/closed mortage matures next year, and, I’ve been beating the war drum with the bank. At this point, they will offer me a HELOC asap and waive all fees (appraisal and legal). I could then collapse outstanding mortgage amount into HELOC next year.

    I know Scotia is not a preferred SM, though, any thoughts on what to do next? Thanks.

  165. mike on March 6, 2008 at 3:48 am

    I think it makes sense to go into the TFSA before using the Smith Man

  166. FrugalTrader on March 6, 2008 at 9:03 am

    That’s an interesting assumption Mike. I will look into doing an analysis to see the results of a comparison between TFSA vs The Smith Manoeuvre.

  167. Sandor on March 6, 2008 at 9:43 am

    Before you do that, consider this: do the SM and transfer the yearly 5000 from your SM investment to the TFSA.
    Otherwise there is not much comparison, since the TFSA is a yearly limited amount, while the SM investment is probably much more than that.

  168. Cannon_fodder on March 6, 2008 at 10:18 am

    I still think it makes sense to open up a TFSA (if required to ensure carry forward limits, i.e. if I will be in a position to funnel investments into it after 2011, I would want to protect my $5k limit from 2009, 2010 and 2011 so that I could start 2012 with a maximum of $20k) only after paying down your mortgage. Where can you get a 100% guaranteed return greater than your mortgage interest rate?

  169. Luigi on March 9, 2008 at 2:10 pm


    Just read your articles on Smith Manoeuvre and was wondering if you have looked at the new TSFA? In terms of how it can be used to enhance SM or used in conjunction with SM?

  170. Sandor on March 21, 2008 at 9:21 pm

    Hello All!

    In the last 10-12 months I have posted here about the SM and some people have also approached me personally about their particular issues. I manfully answered all inquiries, as it is wont of the financial advisor.
    By now however, I came to realize that it may be helpful, if I launch my own blog dedicated to the SM exclusively.
    I resisted so far, but no more. I launched the SM blog.

    This is the address:

    Come and talk to me, if you have anything to discuss about the SM.


  171. Hal on April 14, 2008 at 4:22 pm

    A HELOC is still a mortgage (even though most financial planners tell their clients that it is not). As such, in Canada, as long as the minimum monthly payment is being made the HELOC cannot be called in by the bank. A HELOC is not a demand loan. On the other hand, if you are using an unsecured line of credit (LOC) then it can be called in by the bank.

  172. […] Downsides of the Smith Manoeuvre […]

  173. Brian Poncelet, CFP on May 22, 2008 at 11:49 pm

    Hi MJ,

    One of the risks you or others don’t seem to talk about is risk management. What do I mean. Life insurance, disability, and critical illness insurance. If you talk to any fee only or brokers who deal with high net worth clients the biggest worry is not the market it’s their health. Without health who cares about wealth!

    Most advisors don’t review (and DIY) do not review their benefits. For example a client of mine works at a major company and they have “flex dollars” (a fixed amount of dollars every year) to buy long term disability or life insurance etc. The problem is the money is buying less and less every year.

    Market downturns happen but over time they recover. Your health, who knows? Usually it gets worse the older you get. You can often get better insurance for less money on your own then through company plans. This is not a sexy topic, so no one talks about it…unless you talk to fee only advisor (generally) or are a high net worth person who has a team of experts looking after you.


    Brian Poncelet, CFP

  174. Cannon_fodder on May 22, 2008 at 11:55 pm


    Care to support FT in creating a post on this topic? It would be a valuable entry.

  175. ymw321 on May 27, 2008 at 11:42 pm

    I have not read the book. I was brought to this page following a comparison of mortgage/HELOC bundles offered by different banks. But I found the statement “converting your non-tax deductable mortgage interest payments to tax deductable HELOC interest payments” is misleading. By following the “strategy”, you are not getting anything except starting a leveraged investment sooner. No non-tax deductable interests have been converted to tax deductable interests: you simply added on your non-tax deductable debt with another tax-deductable debt. In other words, instead of getting out of debt, you tie yourself to the an ever-increasing debt (when you capitalize interests), and on top of that, you carry a market risk that can hardly be diversified if your portfolio is small.

    Take a simple example. Let’s say you have a mortgage of $200,000 with no equity initially. As you pay down the principle, you will have, say, 10K equity and 190K mortgage. So you borrow the 10K and use it in one of two ways: if you have room for a lump sum or double-up in your mortgage, you can pay down your mortgage which will increase equity by 10K so you can repeat the process again next month. The interest you pay on this 10K, unfortunately is NOT tax deductable. Suppose your mortgage is a fixed rate mortgage, you now have converted part of it into floating rate mortgage. Depending rate movements, this may or may not make sense. Or you can invest the money to make a “carry trade” – leveraged investment. However, anyone who can pledge something with a bank for a secured LOC (e.g., you can pledge your bond holding) can do so. This is nothing new: leveraged investment has existed since financial markets existed. The only thing new is that more and more naive people are lured into such investment strategies without fully realizing what they are getting into, or without the capability to be financially sensible as to when it makes send to “carry” a trade and when it doesn’t. The danger is, how do you construct a low risk portfolio with mere 10K?

    The only “tax-deductable” mortgage I can think of is on a rental property. If F.S. is not intentionally misleading the masses to sell his “calculator”, he himself is deadly mistaken.

  176. Cannon_fodder on May 27, 2008 at 11:50 pm


    I may not understand what you are saying because it doesn’t make sense to me. Are you suggesting that as you pay down your principal that at some time in the future you borrow from your home equity and then pay down your mortgage with that money? So now instead of having a $190k mortgage and no debt on the HELOC, I have $180k mortgage and $10k on the HELOC?

    Well, that won’t make it tax deductible (where is the expectation of income as an investment) and typically HELOC rates are higher than mortgage rates (if you go variable) so that will end up costing you money.

  177. DAvid on May 28, 2008 at 2:18 am

    ymw321 said: “By following the “strategy”, you are not getting anything except starting a leveraged investment sooner. “

    That my friend is exactly the thesis of Mr. Smith. By using the incremental equity increase in your home to purchase a (leveraged) portfolio, you convert your non-deductible mortgage to a deductible HELOC supporting a portfolio which should be considerably in excess of the value of the HELOC. Smith does not claim to reduce your debt; he claims to give you the tools to convert it to a tax deductible debt.

    Reading the book will thoroughly introduce you to Smith’s belief system. He becomes almost evangelical about it.


  178. ymw321 on May 28, 2008 at 11:26 am

    Cannon_fodder and David,
    My objection is the word “convert”. first to reply CF: You are right that it makes no sense to “convert” a variable mortgage to HELOC, but it may make sense to convert a fixed rate mortgage to HELOC to take adavantage of falling rates.
    To David, again, you are not “converting” the non-tax deductable interest payment to tax deductable interest payment; you are still paying the non-tax deductable interests embedded in your mortgage. Nothing changes there.
    To clarify, my position is, first, it would not make sense to hold simultaneously both an investment portfolio AND a mortgage: in this case, by all means, liquidate as much as you can and borrow from your RRSP as much as you can and pay down the mortgage (there are tax consequences for capital gains but it may just be your best time to sell). This is to “convert your stock or bond holding to home equity”. Second, do not mix the two concepts of holding a mortgage and borrowing to invest. The former exposes you to the risks of the housing market, and the latter the stock AND the interest rate markets; the former is in one tax regime and the latter the other. If you are an average Canadian as opposed to a business entrepreneur, strive to pay down your conventional mortgage first, then when comtemplating to build an investment portfolio, treat your home equity as part of your portfolio, and consider leveraged investment as one option (banks take more than your home as collateral), but don’t take it as the holy grail since it isn’t.

  179. Sandor on May 28, 2008 at 12:22 pm

    Sorry, but I must emphatically disagree with almost everything ymw321 is suggesting.
    Most of all borrowing from RRSP is a bad idea because that would be severely penalized by taxation.
    The paying off of conventional mortgage first and then start investing is the traditional and non-productive way that the SM is aiming to supplant with something better.
    These inane generalities, even if they were true, are completely unhelpful.

  180. DAvid on May 28, 2008 at 12:39 pm

    ymw321 said:“To clarify, my position is, first, it would not make sense to hold simultaneously both an investment portfolio AND a mortgage:”

    If you read through the comments on this topic and the other SM topics, you will find statements from credentialed individuals indicating a convincing financial advantage of starting your portfolio building earlier, rather than later. While in your opinion, and given your comfort level with investing, it may not make sense to engage the Smith Manoeuvre, for others it does. In a particular example earlier in this topic Ed Rempel CFP shows the $700,000 advantage to applying the SM. To many individuals that opportunity makes great sense.

    I never said you converted your payment — I said you converted your mortgage, there is a considerable difference. Remember, a mortgage is just a loan using real estate as the collateral.

    There are lots of participants here who have considered and rejected using the SM, and others who have applied it. Time will tell if the advantage is real.


  181. Randy on June 14, 2008 at 9:23 pm

    Dear ymw321,

    You skipped one important part of the Smith plan. The Smith plan makes sense if you have some tax-paid investments, and a house mortgage, right now. If you have investments but no house, it doesn’t, and vice versa. If you have no investments other than your house, you have all your eggs in one (albeit relatively safe) basket.

    If you have a $200,000 mortgage and $10,000 saved from your wages in a mutual fund, you get absolutely zip for a tax deduction on interest, even though you certainly will pay tax on 100% of the mutual fund income.

    The Smith plan is a work-around for this perversity of Canadian tax law. You sell the investment, pay down the first mortgage, and borrow about that amount back to invest on a second mortgage. The total amount you have borrowed and invested remains about the same, only now you can deduct interest on the money you invested, and you have a source of emergency funds.

    (actually you now have two sources of emergency funds, which becomes important if real estate values plummet and the bank freezes your HELOC at its current amount to paydown-only. You can sell investments to buy food if necessary)

    The relevant fact about whether interest is deductible is the PURPOSE of the loan. It does not matter at all what form the loan itself takes. Generally, you can deduct interest paid on a loan of any kind – credit card advance, bank loan, mortgage, etc. IF you use the _proceeds_ of the loan to make income. There need be no direct connection between the _collateral_ used for the loan and the income.

    For example, I could take out a mortgage on a rental property, spend the money on a vacation, and the interest wouldn’t be deductible. I could take a cash advance on a credit card and renovate a rental property, and the interest would be deductible.


  182. Scott on June 17, 2008 at 1:06 pm

    I have read this thread through from the start and am impressed with your level of knowledge and professional discussion.

    I do have one question about the SM. With a conventional mortgage there is an interest payment as well as a principal payment required, however with the SM you effectively roll the principal into an investment loan that you no longer have to pay the principal on if you choose.

    Has anyone examined the benefits of having the future value of the principal payed off when it is worth “less” after inflation.

    For example 100,000 in 2008 and 100,000 in 2028 are not the same buying power but the initial 100,000 has had leveraged growth and tax benefits.

    Thank you


  183. Cannon_fodder on June 21, 2008 at 7:37 am


    I think the question really boils down to whether you feel you can do better, after tax, for a particular period of time being leveraged. If you pay off the $100,000 loan by liquidating some assets, those assets won’t be growing and you won’t be paying a tax deductible interest only loan. So, you simply factor whether your assets will be growing faster than the cost of the loan (after accounting for taxes) within your time horizon. If the time horizon is 10 years, then with typical interest rates and an investment bias to solid equities, you should be ahead by not discharging the loan. Shorter periods make the risk of coming out ahead higher, so it may be prudent to start moving to more conservative investments which would be more challenging to come out ahead by keeping the loan depending on the after tax interest rate of the loan.

  184. Ed Rempel on June 28, 2008 at 2:02 am

    Hi Scott,

    Good question. It may sound like paying it off later would save you money, but paying it off much later would save you even more money.

    Cannon is right. Remember this is good debt – not bad debt. As long as you are confident that your after tax return long term will be higher than your after tax interst cost, it is better to keep the investment credit line – and the investments.

    Even after you retire, keeping the debt and the investments can provide you a nice tax-preferred income, while giving you a much-needed tax deduction.

    Most of the time, never paying it off is the most attractive option.


  185. nicolas on July 21, 2008 at 11:41 pm

    hello all, i tried to read as much as i could, but there is a couple years of reply’s to this very interesting topic.

    my question is fairly simple i fear. there was a statement made in the original article, something along the lines of “the payments never go away, they just transfer from mortgage payment to interest payments on the line of credit.”

    how does the cycle end? must i sell all of my investments, pay off the line of credit, and then resume investing without using borrowed money?

    thanks to all,

  186. The Financial Blogger on July 21, 2008 at 11:49 pm

    Hey Nicolas,

    Technically, as it is the case with any other leverage technique, the only way to stop the payments is to pay off the line of credit (i.e. investment loan). However, as long as you make your payment, your interest will remain tax deductible :-d

  187. Marc on September 26, 2008 at 12:24 am

    I have been interested in the Smith Manoeuvre for a while but one of my concerns has always been the impact of a market meltdown. The Smith Manouevre sounds good when markets are rising but when they are falling you could get stuck with loans worth more than your investments. I am just wondering if anyone out there has had this experience with the huge drop in the markets and whether they are now regretting getting into the Smith Manouevre?

  188. cannon_fodder on September 26, 2008 at 1:49 pm


    My timing was actually pretty good (not perfect as it would have been in early July). I was fortunate to get my readvanceable mortgage and tap into my substantial equity to plow into the markets when some of my target stocks reached low prices. Even with this volatility, I’m thinking of the long term (at least 10 years but more likely the rest of my life) and I’m pleased with almost all of my investments.

    Regardless of whether you are implementing the SM or not, you have to possess the right attitude. There are some very good buying opportunities right now and as long as you don’t expect that you can time the bottom, you will look back at this time and realise you took advantage of an excellent opportunity.

    If you buy XIU (an ETF which mimics the SP/TSX composite), reinvested the distributions and it took 4 years just to get back to this year’s high you would be looking at better than an 8% annual gain (if my back of the napkin calculations are correct). There are bargains out there… it takes conviction to buy during these times.

  189. The Reverend on October 6, 2008 at 2:29 pm


    I completely agree with your position on this, but I can relate to what Marc is saying as well. I was speaking to someone over the weekend that had initiated a leverage loan of about $50k in July (not Smith Maneuver per se but same principles) and bought a TSX index fund thinking they’d captured a great price with the TSX down to almost 13,000.

    Flash-forward to today and the index is sitting at almost 10,000. He’s down about $12,000 (about 25%) plus his interest payments (about $300/mth) so far. He seemed pretty unsettled and rattled about the whole situation and that was before today’s sell-off. He for sure wasn’t making this investment for the long haul which was his big mistake but I still think it will make long-haul investors reconsider what their risk tolerance for leveraged investing.

    Part of me wanted to tell him to “double-down” and put another 50k in so that he’d only need it to recover half-way to break even.

  190. Chris on October 12, 2008 at 8:00 am


    With the economic downturn at hand, if investors don’t start reinvesting their American dollars (which has depressed the worlds currency of late as they have sold off investments in a panic) into Canada, or commodities stay low as they are now I don’t see any way for the new government (regardless who they are) not deficit spending to help recover some of Canada’s losses.

    Now admittedly I think that both the risks I outlined above are unlikely however, should either or both transpire resulting in deficit spending then interest rates have no choice but to go up in my mind. Those who are seeing a softening housing market (nearly all of us) and are doing the SM are taking away a lending vehicle that in most cases allows the security of locking into a fixed rate mortgage in a time of increasing rates and turning it into a HELOC that floats with prime.

    I believe that the SM could be the catalyst for the perfect storm for personal finances in a case of rising rates. Home values are commanded by cash flow and if rates go up values go down and HELOC rates go up. I would love some feedback or thoughts on this posting.

    Having said all this I believe there is tremendous value in investments (Canadian primarily because of our, or should I say the American, volatile dollar) out there and do plan on taking advantage of our situation. However, the means and ways to do this is different for everyone.

  191. Ed Rempel on October 13, 2008 at 2:21 am

    Hi Chris,

    We sort of agree, depending on what time frame you are talking about. Interest rates are notoriously difficult to predict, but here is our attempt anyway.

    In the next year or so, it looks like we will have lower rates. There were 2 prime rate drops this week, so those with variable mortgages had 2 mortgage rate reductions. It appears that we will have a recession or slowing economy, which would imply most likely even lower rates in the next year or so to try to stimulate the economy.

    After that, predictions are more difficult, but you might be right about deficits. An article in the National Post last week showed that if oil stays below $80/barrel, the lower oil price alone would result in a governemt deficit of $11 billion/year and a trade deficit near $25 billion/year. This would make deficit spending difficult, but does mean that deficits may be coming.

    An offset likely will be government profits on the bailouts. The Canadian government is buying some mortgage-backed securities from the banks at big discounts, on which Stephen Harper expects a profit eventually. Similarly, the US govenrment will likely make more on their 80% stake in AIG along than any bailout costs. Both governments will likely make large profits on the bailout, once the economy and markets recover.

    So, IF we have deficits, they may well increase rates for a while mid-term (say 1-3 years from now), but that again would likely only be temporary. Interest rates should normalize in the long run.

    We agree that there is tremendous value in investments now. The Smith Manoeuvre is a strategy that should only be done as a long term strategy, so fluctuating interest rates over the next several years should not really affect the long term strategy.


  192. Simpleton on December 19, 2008 at 12:41 am

    Forgive me if I am too simplistic, but does the SM still work if markets ARE NOT profitable? How long does the market (or rather, the investment portfolio) have to be negative for this to be a disaster instead of a blessing?

    Does not the SM assume you need to have good investments in your portfolio (nothing is guaranteed). So, isn’t there a chance of a bigger bust? (I’m just thinking simply here, using leverage can equal big gain, but can’t it also equal big loss?)

    Thanks for entertaining my simple post!

  193. Ed Rempel on January 3, 2009 at 7:41 pm

    Hi Simpleton,

    In general you are correct – you should have good investments . The SM is leverage, which means your gains and your losses are magnified.

    The point, though, is that for the SM to benefit you, the long term after tax return on the investments must exceed the long term after tax interest cost of the money borrowed.

    However, don’t get focused on short term market results. 2008 was one very bad year, but the markets normally produce good long term returns even when you include years with large losses.

    The SM should only be done as a long term strategy. For our clients, we usually look at it as a strategy for life.

    So, for example, if your credit line interest rate is 4% and you are in a 40% tax bracket, then your after tax cost is 2.4%. Now you need to invest so that over the next 30-70 years, your investments should average more than 2.4%/year after tax. If one of those years has a 30% loss, making it up in the long term is easily possible.


  194. DK on January 8, 2009 at 3:10 pm

    Does anyone feel like doing some math on the scenario below? I don’t think it makes sense for this couple to use the SM- prove me wrong.

    1) $380,000 mortgage remaining in Toronto. house was purchased for $781,000 in January 2008 , the current value is $700,000 (if it was sold today)

    2) the married couple is in the highest income bracket (both of them)

    3) They do not have investments outside of their RRSPs ,They are 29 and 31 years old.

    4) Their mortgage rate is currently 2.4% variable rate (prime -1.1%). they have a 5 year fixed mortgage and their bank is not one of the ones listed in earlier posts.

    They have been paying down their mortage at a very fast rate. They expect to be mortgage free in 6 years & 10 months from today. The assumptions that are made (needed to price in reasonable interest rate hikes, and used the mortgage remaning based on their calculations- knowing what years they will be making large lump sum payments and which years they will double up their monthly payments).

    Year end 2009: mortgage remaining, $302,914 (mortgage rate for year was 2.4%)
    Year end 2010: mortgage remaining, $282,245 (mortgage rate for year was 3.4%)
    Year end 2011: mortgage remaining, $228,937(mortgage rate for year was 4.4%)
    Year end 2012: mortgage remaining, $211,441 (mortgage rate for year was 5.4%)
    Year end 2013: mortgage remaining, $157,709 (mortgage rate for year was 6.4%)
    Year end 2014: mortgage remaining, $100,561 (mortgage rate for year was 6.4%)
    Year end 2015: mortgage remaining, $39,795 (mortgage rate for year was 6.4%)
    Oct 2016: mortgage $0 (interest 6.4%)

    5) the minimum amount they must pay on their mortgage is $2468 per month

    6) Their bank gave them a $150,000 line of credit secured against their home. It has a $0 balance as they have never used it.

  195. Ed Rempel on January 11, 2009 at 6:56 pm

    Hi DK,

    Why are you asking about someone else? Are you a financial advisor looking for help with your client?

    They have a very low rate and a non-SM mortgage. It is in all liklihood not worth them breaking the mortgage. The SM could be a big benefit for them, since they are paying so much principal in every payment.

    I assume from your interest rates that the mortgage comes due in 2010? Probaby, they would be best implementing it then.

    Why are you projecting rates of 6.4%? Discounted variable rates have not been that high since the early 90’s.

    There is nothing to stop them from using the available equity. The are all kinds of creative solutions. For example, they have high incomes and probably have lots of RRSP room. They could make large RRSP contributions from their equity and then Smith Manoeuvre that.

    If we knew the entire situation, there are probably a few great creative uses of the SM in the interim, and then they can do the SM in full when the mortgage comes due.


  196. Neilmc on January 11, 2009 at 10:50 pm

    Wow – lots of interesting viewpoints – I just finished reading each and every one.I’m a newbie looking for help. $400,000 rental property with $60K mort. due in 2015. I’m looking for the best way to grab the available equity and invest it in Div. stocks in the market. Redue mort ? (it’s with Firstline) or get a HELOC attached to existing mort ? or something else perhaps ? I’m open to all suggestions and will investigate them all so please feel free to submit your thoughts. They will be greatly appreciated. Happy 2009 to all !

  197. DAvid on January 11, 2009 at 11:56 pm

    A mortgage is amortized — you will have to pay it off over the amortization period, whereas a HELOC could be an interest payment only, with no principle payment. Of course, if you could get a 40 year plus mortgage with less than prime, it may work to your advantage cost wise……


  198. Neilmc on January 12, 2009 at 12:14 am


    I have been leaning towards a HELOC, attached to existing Firstline until 2015. I see from Ed’s standpoint he is not in favour because of no variable rate but I don’t really want to incur the 3 month penalty. My big question is about the interest payback. $200K at 4.0% per year appears to be just $8K/annum in interest but my “gut” tells me that it is more complicated that that. I basically want to grab the entire $200K right away and invest in Div. stocks which should cover the $8K easily, (re-investing the Div. for more stock, every quarter) while the equity hopefully builds. As I said in my 1st post – I am definately a newbie.

    Tks – Neil

  199. cannon_fodder on January 12, 2009 at 12:23 am

    Neilmc – a $200k HELOC @4% that allows you only to pay for the interest alone would only require $8k in payments, which should be easily offset by the dividend payments and you would likely also receive a tax refund because the dividend income is treated quite favourably.

    You could take the dividend income, pay down your mortgage if you felt perhaps you’d like to reduce your overall debt faster as opposed to reinvesting the dividends. Just depends on your risk tolerance.

  200. Neilmc on January 12, 2009 at 12:49 am


    – I guess bottom line is I need to check with my mortgage planner to insure that it is a simple $8K per year. Firstline stat. (Thanks to Melanie I think, for the spreadsheet – as I said before I’ve just read every post and I can’t be sure who said what) mentions that their Matrix Mort. LOC Interest Compounding Frequency is semi-annualy (which I presume is better that monthly or daily) but I don’t really know what that means ie – is the $200K only going to cost $8K per year.

    Tks – Neil

  201. cannon_fodder on January 12, 2009 at 10:27 am


    It is typical for loans, including HELOCs, to be compounded monthly. The less frequently is compounded the less you would pay but it would be very marginal – certainly not important enough to factor in whether or not to proceed. You might be also able to use the cash dam to more quickly convert your mortgage into a deductible loan.

    If you have Excel, you can use the SM spreadsheet I created to play around with various scenarios.

  202. JG on January 31, 2009 at 3:26 am

    I have started to research about SM, and looking to make one of the biggest decisions I had ever.

    I have a mortgage 180K due on Nov/09 locked 4.79% w/Royal. Penalty is 3 months interest for breaking away. My payment is $1,100 month (two semi-monthly). Home value 230K and small non registered portfolio of $12k, originally $18K , as you may imagine the loss is due to current market situations. Line credit 25K and used 8K at 3%.

    Would I be better off , breaking away now? under the current market conditions, I believe we have not hit bottom yet and wouldn’t like to get caught by CRA for a bad investment strategy that will not outperform the new interest rate on the HELOC portion.

    What range should I expect for SM type of mortgages?

    I have been approached by Northwood mortgage, what are the key questions I should be asking if I decide to go with them.

    Thanks in advance for your comments!.


  203. Brian Poncelet, CFP on January 31, 2009 at 9:05 am


    I only time you should consider to break your mortgage and pay a penalty is the following:

    1. Your interest rates are high
    2. You have a lot of other debt like credit card debt (high interest rate) and putting it into mortgage.
    3. You can recover the fees charged by the bank in a short period of time.

    Since the mortgage is due this year I would just wait.

    As far as the SM goes if you don’t like the down side (market) take a pass on it. You should also be in a high tax bracket. Since the other investments seem to be “light”, make sure you deal with the risk management side of things…disability insurance etc. What about job loss?

    Having a few bucks in the TFSA as a backup isn’t bad. After the basics are taken care of then look at the SM.



  204. Sandor: on January 31, 2009 at 12:33 pm

    Dear JC,

    I wouldn’t wait.
    Although Brian is correct in setting conditions for breaking the mortgage, If you calculate how much cash would be liberated for the purpose of investing by converting your mortgage to a LOC, you will find that the cost of penalty would be recovered in about 5-6 months. (In the absence of concrete numbers it is hard to be accurate.)
    On the other hand the success of your investment strategy is a temporary factor. The requirement of tax-deductibility is not success, but a “reasonable expectation of making an income.” If your investments don’t pan out iin one year, they will in the next. What you must take into account is your age and income: can you afford to have some losses and do you have enough time to wait for the recovery.
    I personally consider the SM a better alternative to the RRSP and as to the TFSA, that is for people who have maxed out their RRSP.
    Brian is also correct calling your attention to risk mitigation. That is even more important if you do the SM.


  205. JG on February 1, 2009 at 12:13 pm

    Thank you both,

    I found both arguments sound, I am 39 and my risk tolerance is medium (3 in a scale 1 to 5). I think I can afford a bit of downside.

    I have not gone that far yet as for the details for the mitigation strategy, I have considered the TFSA as one measure but any suggestions are welcome.

    As for the investment strategy, in the first years I am expecting a return that will not jeopardize my tax deduction claim, there might be one or two years where there return may not match the interest from the HELOC, would the CRA ding me then?

    Thank you


  206. Ed Rempel on February 1, 2009 at 2:02 pm

    Hi JG,

    There seems to be a misconception from many people on this site that receiving income is required for interest to be deductible. Let me quote directly from IT-533. To be deductible, you need to have “borrowed money used for the PURPOSE of earning income”. The key is the word “purpose”, which is also bolded in IT-533.

    “Normally, however, the CCRA considers interest costs in respect of funds
    borrowed to purchase common shares to be deductible on the basis that there is a reasonable expectation, at the time the shares are acquired, that the common shareholder will receive dividends. Nonetheless, each situation must be dealt with on the basis of the particular facts involved. These comments are also generally applicable to investments in mutual fund trusts and mutual fund corporations.”

    Then it gives 2 examples. Interest is not deductible for R Corp. that has a specific restriction of not paying dividends, but interest is deductible for S Corp. that always reinvests all of its cash flow and never pays a dividend. This is because it COULD pay a dividend sometime in the future.

    It also spcifically says: “courts should not be concerned with the sufficiency of the income expected or received.” Whether your investment ever pays enough dividends to cover interest is not relevant. As long as you invest for the PURPOSE of earning income and it COULD one day pay income.

    In short, almost any mutual fund or stock is fine. We generally focus on very tax-efficient investments that may pay little or nothing in taxable income for many years. Any tax you pay along the way generally reduces the long run return of the SM.

    The best advice is to invest based on the risk/return of the investment. Buying investments that pay dividends is generally a sound and somewhat defensive strategy, but it does usually leave you with very little diversification – and the payment of a dividend is NOT relevant to the intest deduction.


  207. Ed Rempel on February 1, 2009 at 2:18 pm

    Hi JG,

    About your situation, Royal usually will allow you to convert your regular mortgage to the Homeline with no cost (or at least our contact does). So, you can start the SM without paying a penalty.

    It would not be worth the cost of the penalty for a mortgage coming due this year, but in your case, you can avoid the penalty. In November, you can shop around for the best SM mortgage.

    There are 7 mortgages that work in varying degrees for the SM. Only 3 are available through mortgage brokers. Generally the best ones are with the major banks and are not available from mortgage brokers. Royal is quite good, but has some restrictions.

    There are a couple of articles on MDJ about what to look for in the best SM mortgage, but in short, you would want to have the credit line limit automatically increase with each mortgage payment and to be able to invest directly from the credit line. Banks are almost always wrong for some reason about whether or not you can invest directly from their credit line, so don’t take their word for this.

    If you want a referral in November, we have a free SM mortgage referral service if you answer 10 questions on an article on MDJ.

    You may not necessarily be right for the SM, though. The risk of leverage is higher than investing your own money. You state your risk level as “moderate”, you seem concerned about making a profit every year, and you seem to want to time the market by waiting until it hits bottom. All 3 of these imply the SM may not be right for you.

    The SM is effective as a long term strategy for those that can tolerate the higher risk. Many tests have consistently shown that trying to time the market reduces your returns a lot. This is especially true near market bottoms. In generally, we would strongly recommend against trying to time the market while doing the SM.


  208. wx_junkie on February 3, 2009 at 9:16 pm

    Ed, you stated:

    “The SM is effective as a long term strategy for those that can tolerate the higher risk. Many tests have consistently shown that trying to time the market reduces your returns a lot. This is especially true near market bottoms. In generally, we would strongly recommend against trying to time the market while doing the SM.”

    That being said, would you not concurr that with the market conditions the way they are right now, it may be an optimum time to start an SM implementation? Alas, I suppose this is nullified by the fact that LOC borrowing in the early goings of an SM would be small, due to the high-interest/low-principal condition of the mortgage payment.

  209. Undecided on February 26, 2009 at 11:28 am

    Hello, I’m trying to decide if SM is for me, weighing out the difference between my current tactic of making large payments against my mortgage and ignoring any investments, against being much less aggresive against the mortgage and starting to form an investment portfolio. However, the in person advice I receive is inevitably biased, ie the advisor is likely working in their best interest, not necessarily mine. With that here are my facts:

    Self Employed for 10 years, with highly variable income. Very aware of my finances. Single, 37, . Earn between 50K – 100K per year. My home is my only investment. I’ve never used an RRSP or the savings plan. I already have the STEP product from Scotiabank, with 110K unused Line of Credit at Prime. I live in Calgary, and my house is worth around 400K, and likely depreciating. I have 250K remaining on my 5.35% 5 year fixed closed conventional mortgage,. The original principle was 327K. 2years remain on the term. I frequently make double mortgage payments and have made the maximum 15% (50K) prepayment against my mortgage last year and am thinking of doing the same this year. Any investments I had went into my downpayment, 3 years ago.

    My credit is quite strong. I have no pension plan. I mistrust financial professionals, and their motives, but admit good ones have a place.

    Although I’m not much of an investor, actually not an investor at all right now – except into my house, I am quite aware of financial matters and products. Although, my mortgage is amortized for 40 years, I disregard the payment plan, through prepayments and double payments. Remaining Amortization is scheduled for 15 years.

    Given the Prime on my 110K LOC at 3%, the extreme market volatility (I don’t know of a solid investment that would even break 3%, my highly variable income, and the crappy housing market, I’m torn if SM is for me, or if doing what I’m doing is the best route.

    I suspect that with the accelerated mortgage plan I’m on (I used the calculator, constructed for this SM comparison) the tax deductible interest payments will have a very small effect for me. Leaving SM as a leverage tool for borrowing during a less than ideal time to make a Large first lumpsum payment.

    Thanks for any unbiased opinions! (Yes I know that’s what a financial planner is for, but their opinions are the ones I trust the least, I trust my limited knowledge over the biased actions of a planner).


  210. Sandor: on February 26, 2009 at 2:48 pm

    Dear Undecided,

    You are definitely decided.
    If you do not trust anybody else, why turn for unknown people for advice?
    But, be that as it may, your misgivings are not well founded.
    I am proudly biased and can submit to you that this difficult time is ideal for investing (in the right instrument!) and the market is not volatile now but rather clearly sinking.
    If your house is loosing value then you should take advantage as long as it is worth its present value.
    You do not need an advisor to think about the long term prospects you are facing:
    If you pay off your house first, all you will have at the end is a paid-off house whose value has diminished in comparison to what you paid for it. At the same time you shall miss out on the market.
    If you do the SM, you will have taken advantage of the turn around in the market, having bought investments at a huge discount, and will have accumulated value that will far outstrip the value of your house.
    In other words your present strategy and the SM are moving into opposite directions. The latter having a definite advantage.
    See what each would do for you in 10-12 years!


  211. Undecided on February 26, 2009 at 4:12 pm

    Thank you for your reply.
    It’s true I am turning to unknown people in this forum for advice/opinion. I find a variety of opinions of less risky than a single opinion. Granted most people on this forum would be for SM, otherwise they wouldn’t be visiting, they wouldn’t care.

    Also, nobody on this forum has a personal interest if I invest or walkaway. That is, your opinions are not paying your bills. This morning, I have had 2 opposite opinions from advisers as to the suitability of the SM for me, strangely each advisor worked for the same company, and each had different ideas of what investments work best. Yesterday, I had a mortgage broker tell me the Only way the SM would work is if I got a firstline mortgage and dumped my Scotia STEP mortgage, incurring the $2300 penalty. If it were not for the online information I would believe her ludicrous statements.

    Although I know you are biased, based on your earlier posts, thank you for admitting it.

    You are partially right.
    I have decided.
    I have decided that paying down a mortgage as fast as possible, sacrificing investing, not even holding a single investment, is not the best plan for our population.

    But is it right for a self employed single individual, who may need to change his course of action in the next few years – examples, move to a different residence(causing a refinance on primary residence), prolonged unemployment/career change, the strong possibility that the prime rate will rise in the next 5 years (I suppose this applies to everyone), narrowing the necessary margin.

    But as I see it, and even the book coincides, the tax deduction’s effect is not nearly as great as the investment appreciation. The question I need to figure out is do I want to become an investor, and if so do I wish to become a leveraged investor? (yes I know the book says it’s not leverage, debt transfer instead, but I call it as I see it). I suppose when I really look at it, I’m scared. The Interest deductability portion of the SM makes sense, but has a negligible effect. You mentioned, I’d be taking advantage of a turn around in the market, and this comment is what scares me. I’m not especially risk adverse, but when the dollars are sizable like they are, things change.

    If there is one single thing that makes a great amount of sense in investing at this volatile time in the world is that the time for the market to recover has a long time span, whereas investing after I’ve paid my house off will provide a much shorter time span.

    At its root SM is more of an investment plan than a tax avoidance plan. And I need to choose if I’m to be an investor.

  212. Sandor: on February 26, 2009 at 11:18 pm


    There are too many uncertain ruminations and too few actual calculations in your reply.
    Indeed you must decide what you want to be when you grow up. The question is, how long are you planning to delay that decision. If you like, you can send me your phone number in private, I call you and we can sort out the philosophy problems. The rest you can do yourself easily.


  213. Undecided (Now Decided) on March 5, 2009 at 6:59 pm

    Sandor, Thank you for your offer to point me in the right direction. I have been in contact with a few financial advisors, including the firm that Ed Rempel is involved with. I am moving forward with the SM. Though at this point, I’ve only done the mortgage side of things not the investment.

    I do note that there are side effects to this manoeuvre.

    1) Should a couple start SM with a larger house, then find their house has become an empty nest and decide to downsize, they may need to liquidate a portion of their portfolio earlier than they had expected, thus the timing of their house sale will also be when some of their portfolio may need to be sold. For me, single, younger, with a larger house appraised at 440K – Heloc based on 80%, a mortgage of 250K, and 100K LOC, (350K Global limit) if I moved I would probably have to take a new mortgage on a smaller house, (using Stated Income as I’m self Employed) and therefore the institution would lend only 65% of appraised value. I would have to liquidate much earlier.

    2) Credit Rating, This one is a bit of a mystery for me as I’m uncertain how much this is affected by a maxed out LOC. Some people may not utilize the entire LOC, only using 75% or so, but since the LOC can’t be used for much else except investing (due to the CRA necessity of interest tracibility) , you give up a lot to preserve the credit score.

    Still working on a solid investment portfolio. Looking at 25% of portfolio in dividends. Remainder in Equities. In the immediate near term I’ll leave the equity side alone. I need more help in this investment side. The advisors that I’ve met so far seem to more skilled at tax, than at well researched mutual fund setups.


  214. Sandor: on March 5, 2009 at 7:22 pm

    1) The SM goes with you when you sell, or move.
    If you buy a second house you can start it with a second SM. Your property situation doesn’t influence your SM situation. Only your income and your credit rating does, if you have to make changes.
    This is in effect, of course only after you established your Plan.

    2) Although applying for credit does lowers your credit rating in general, once you have your LOC, you qualified for it, the only thing that matters is your payment habits. Pay your monthlies on time and your rating will be fine.
    That in turn will help you when you buy a second house.
    If you just change your house for an other one, as long as LTV and credit rating is ok, you will have no difficulty to carry with you your SM Plan. Nor would it be necessary to liquidate any investments.

  215. Ed Rempel on March 6, 2009 at 2:03 am

    Hi, Now Decided,

    Downsizing your home in the future should not be a problem, since you presumably would be buying a new home for less money. You can take the difference and pay your mortgage/HELOC down to the point you need or can finance on the new home.

    The issue with moving is mainly if you move to a more expensive home, since you need to be able to make the down payment.

    From all your comments, the SM might not be right for you. You seem quite concerned about the markets, which makes me wonder if you would be able to stay invested the next time your markets go down.

    You seem to be trying to get info from a bunch of places and then decide yourself what to do, but you do not sound very knowledgeable about investments. Dividends would also come from equities, so being 75% equities and 25% dividends would be the 100% equities.

    If a prolonged period of no income with a career change is possible for you and since you are single, this is also an issue. You need to be able to maintain the SM as a long term strategy to be confident it will work for you, which means it is best if you are confident that you will always be able to make your mortgage payment.

    This can be dealt with, however, if you have an adequate emergency fund and protecting your income.

    This may make sense as a calculated risk, however, since all you need to do to maintain the SM is to maintain your mortgage payment. Even in a worst case scenario if you cannot make your mortgage payment, you could always draw on the investments to help make your mortgage payment. This would affect the tax-deductibility of your investment credit line, but is still an option in an emergency situation.


  216. Undecided (Now Decided) on March 6, 2009 at 5:55 am

    Sandor & Ed,
    Sandor my comments about moving are based on my recent inquiries how my lending institution (Scotiabank) would handle a move. Fraser’s book notes that a routine collateral exchange type document could be used. In practice, if I moved, the entire Readvancable Mortgage & LOC would be wiped out. A new application from scratch would be done. For some, probably a small %, this could present an issue.

    Ed, Thanks for your feedback. I do wonder if you’ve arrived at your suspicion of non suitability for SM without sufficient evidence. In the past few days I have researched a great deal on leveraged borrowing. Here’s more.

    First, regarding point about my knowledge, I believe I’m much more knowledgeable around investments than you suspect (Bachelor of Commerce degree – book knowledge granted), and yes I’d agree that I was not using terms dividend & equity properly. ‘Income’ 25% & ‘Growth’ 75% would have better terms. I do admit I’m not nearly knowledgeable or experienced enough to put together a proper portfolio, nor do I wish to.

    The financial planner’s job is to select suitable investments/funds, develop a plan etc. My job is to determine the proper financial planner, and to follow his plan.

    As you pointed out, I do carry risk by the very nature of being single, and with a variable income. For this reason, I’m very careful with my finances, I make substantial prepayments on my mortgage when I can (62K last year) and take comfort in knowing that I can ‘skip’ multiple mortgage payments if I’ve made doublepayments or prepayments in the same calendar year. Also, I have secondary income, that pays 75% of my mortgage. I do anticipate that a financial plan suited to me would address variable income issues, and likely I’d end up sacrificing some long term growth to mitigate the this risk. I’ve been self employed in oil & gas consulting for 8 years, and I think I put in safeguards to address variation in income.

    I’m somewhat caught. I wish to establish distance between myself and the activities of my yet to be determined financial planner. Yet, I feel a little knowledge goes a long long ways. I’ve averted huge mistakes by asking around and informing myself. I do not have the experience to know when I’m being ‘sold’ a financial fund/policy/product that I’m not suited for, so I do ask more than one source, searching for discrepancies. So no, I’m not deciding what to do with the information I gather from multiple sources, I’m determining (as best I can) whose opinion is suitable and sound, and whose is suspect.

    I disagree with your inclination that I may be one of the people who don’t stick it out over the long haul. Here’s why: Unfortunately, I did witness someone leverage their house who was very risk adverse, she was in her 60s, her time horizon was intended to be long, but she bolted, and liquidated her assets with a small loss. If I go into the SM, I do so with evidence that those who react/invest/divest based on natural market fluctuations are have a high likelyhood of being hurt. I’m a believer in DCA, and long term, buy and hold strategy. I feel that I’m extra likely to tough it out when the markets are bearish, due to what I witnessed.

    Ed I feel the SM is not where the risk lies. The risk lies in the investments themselves. I’m cautious about talking myself into something that I should steer clear of. I’m also aware that I need to start to establish a pension plan, as I won’t have an adequate one on my own. If I go ahead with SM, I do so to establish a pension. I do take stock in your comments about my suitability. If you truly think that SM would be a bad decision, I admit it would weigh heavily on my decision. This is why I’ve given you extra details.

  217. Undecided (Now Decided) on March 6, 2009 at 6:11 am

    Here a little development I received from Scotiabank today, and their STEP product. Now, you can do up a single form, that *automatically* readvances the principle reduced on the Mortgage to the LOC. I’m told I don’t have to make a phone call or anything.

    This used to involve going into the branch for an adjustment each month.

    I gather from the opinions on this blog, the Scotiabank STEP is not a well suited product for SM. *It would appear that it has improved.* But that is not necessarily to say it’s a good fit with SM.

    I’m using STEP because I’m halfway through a closed term with them already, because I was approved for 80% of my 440K appraised house 2 years ago, (vs 65% of the current value of 400K) and because my LOC is at prime (instead of prime +1, which appears to be the going rate).

  218. Sampson on March 6, 2009 at 2:23 pm

    Undecided (Now Decided):

    If I were you, I’d be a little careful treading so quickly into the SM. From your posts, it sounds like you don’t have too much experience with investments – so my question is why would you borrow money to buy investments? Instead of making such huge prepayments, invest your earned money.

    My view of the SM is that there are two significant risks. One, you mention is of the holdings themselves, if the investment vehicles selected have decent growth and will yield some form of steady and appreciating income (whether interest or dividends or capital gains).

    The second risk comes from the leveraging aspect. If the above falls through (i.e. dividends get cut, you suffer capital losses, inflation overtakes and eats away at fixed income returns) – then you are left with a significant loan.

    If you don’t do the SM and invest – if you lose, you can cut your losses there. With the SM – not only is there a possibility of eating those losses, but also getting stuck with a nasty loan.

    If sounds like you have significant earning potential – so if you can bank $62k to top up your current mortgage, why don’t you just split that in this coming year, start a solid investment portfolio (simply by maximizing your RRSP contribution you have thousands of $ returned/saved every year in taxes) – and if your advisor can prove their ability, then and only then consider the SM.

    Good luck!

  219. Undecided (Now Decided) on March 6, 2009 at 3:50 pm

    I’m a little perplexed by part of your post, Sampson.

    “If you don’t do the SM and invest – if you lose, you can cut your losses there. With the SM – not only is there a possibility of eating those losses, but also getting stuck with a nasty loan.”

    If I can make reference to Ed’s advice to me earlier, these are the words of an investor with a shorter term horizon for investing. I will not know if I won or lost for several years. If I invest right now I fully anticipate I will be on the downside for 2 years or so, but the investment certainly doesn’t end in 2-3 years. In fact cashing out in 2 years or so is what I think Ed is cautious of me doing. He’s probably seen tons and tons of people do that. Cutting the paper losses is a short term view. I’m assuming the losses will not continue for 15-20 years (assumption from historical returns on stock exchanges). How would I get stuck with a nasty loan? Yes, if I cashed in early the leveraged investments would greatly amplify a loss. Over the long haul I believe I will be ‘stuck’ with a significant gain.

    I’m viewing the SM in the same way as a typical couple views their house. If the value of their house dips, they don’t sell, they need a place to live for the rest of their lives. Sure if my portfolio drops in value I won’t sell, I still need a pension for the remainder of my life. The average couple may change houses as their needs change, and yes over time the fund manager/financial adviser, would alter things in my portfolio.

    So let me ask you this, in order for you to defend your position: If you had 10K and 10K left of RRSP room to contribute, and No SM in place at the time, would you put it into RSP in Investment A, or would you use the SM and only leverage $10K of your home’s equity and invest the 10K in investment A ? Obviously there are benefits and drawbacks to each.

    Earlier, I mentioned how I ask in several places and look for discrepancies, you seem to lean towards RRSPs first, while Fraser Smith leans the other way.

  220. Sampson on March 6, 2009 at 5:16 pm

    Hi Undecided (Now Decided),

    I’ll have to admit, I read your first post, then the most recent, skimmed some of Ed’s comments – For some reason I had the impression that there was a distinct possibility of uncertainty regarding your employment, and the possibility of moving also.

    Given those assumptions, I thought there was a chance you might have to liquidate in the near-term – of which you obviously understand the risks.

    I suppose my point is that instead of deciding to go all in, or not, you can take a balanced approach. Since it sounds like you had not been investing much in equities in the past, you probably have a somewhat limited feeling for the sting of watching your portfolio drop by >40%. My understanding is that you feel you would be able to stomach the volatility – but its impossible to know until you are tested.

    So to your example of the 10k, you might have sitting around. Instead of using all of it for SM (i.e. paying into your mortgage and readvancing the HELOC), why not (i) pay $5k into the mortgage and borrow $5k for SM – put the remaining $5k into the RRSP and reinvest the return (either directly, or using the SM).

    This ‘partial’ strategy would mitigate some risk – offer exposure to leveraged investing and the potential rewards, give you some time to assess the ability of your advisor, expose you to the stock market, pay down your mortgage, deduct taxes from RRSP contributions and the HELOC.

    This does mirror my current approach – First, I do fully contribute to RRSPs. Then I apply the remaining funds (over the year) and the tax rebate to my non-registered portfolio then mortgage at 70% to 30% rate. I have seriously considered the SM (a partial version anyway) – but would like for the World economic situation to settle down and stabilize.

  221. Dave on September 4, 2009 at 6:33 pm

    I would like to add to the following points to the discussion:
    1) An index equity life insurance policy as talked about in one book I read would seem to solve the investment issue with the smith maneuver. First they have a guarenteed minimum of 1% and a max of 14% (seems a little high in the current environment). these policies are tied to a major index but you are guarenteed 1% as a floor, but limited to 145 (or whatever) if the index skyrockets. The downside protection is well worth it if it guarentees no risk to your mortgage home equity. BUT…I haven’t yet figured out if these insurance policies are available in canada since my source is american. It is tax free on the way in and out. No estate taxes and the policy continues to rise with no tax penalty for cash withdrawls.

    2) Isn’t it better to use your equity a second investment property anyway? (rather than invest the equity in the market). Given all the investment steams investment property gives you can have renters paying several properties for you. OPM my bretheren!

  222. on September 4, 2009 at 8:40 pm

    Hi Dave!

    Although the very “policy” you describe is not available in Canada, there is a variant of it, with a floor of 7% and no ceiling. I use this myself. All else is the same.

    There is no reason why an other property could not be used for investment, except that the real estate values are slow to rise in value, in some markets it is stagnating for many years. The other thing is that it prevents diversity although that would be desirable in any investment strategy. So, I would suggest to have a property, but have also some equity and some dividend investment as well.

  223. Ed Rempel on September 20, 2009 at 8:08 pm

    Hi Dave,

    With a life insurance policy, you have to pay the insurance premiums. The amount you can invest is based on the size of the policy. Unless you need life insurance and will need it for the rest of your life (not just till you retire), then this method is far too expensive.

    Also, you would pay more in MER for the principal guarantee after 10 years. Since the markets are so rarely down after 10 years, this extra MER is probably not worth it.

    If you exclude the Great Depression, the last 10 years are the only 10 calendar year period in which the S&P500 was down since 1871. That’s 1 time in 130. To protect against this rare chance of being down, you have to pay a higher MER of .5%/year.

    If instead you have high quality investments and have faith enough to stick with them when they are down, you have about a 99% chance of beating the investments you would buy inside the insurnace policy.

    This probably becomes 100% once you include the insurance premium, which can be very high for the UL policy you would need to buy.

    You can of course use your equity to invest in more real estate. However, growth of real estate has been far less than the stock market. The average house in Toronto in 1977 was $65,000 and was $379,000 in 2008. That’s growth of 5.9%.

    The TSX in the same period has grown 10.5%. If you had invested that same $65,000 in the TSX in 1977, you would now have $1,430,000 and could buy 3 1/2 houses.

    The rent generally only creates positive cash flow if you have equity tied up in your home.

    Virtually every story I’ve ever heard about someone making money in real estate was actually a story about leverage working. Almost always, it is a good return resulting from the leverage effect on a slow-growth investment.

    Most people are not aware that you can leverage similar amounts in faster growing investments. This can give you a far higher return than rental real estate over time, without the PITA factor of renting – that is if you are comfortable with the risk level and can stick with your investments long term.

    I was heavily into rental real estate decades ago until I realized that I could make a lot more money without all the work.


  224. Aolis on November 24, 2009 at 2:47 pm

    Your first point really nails the arguement. The person that has just purchased a house and has a large mortgage is unlikely to be maxing out both their RRSP and TFSA contributions. Few people would have a long term non-registered portfolio at that point in their lives. I mean, few enough people have a long-term registered portfolio.

    The real problem with the Smith and its variants is that they really confuse the issues of long term investing and paying down the mortgage. On one hand, you are simply borrowing money to invest and using your house to secure the loan. On the other hand, you are moving money around to try and get a tax deduction on a portion of the interest you are paying on your mortgage.

    In the first case, you should be putting 18% of your salary into your RRSP and $5K into a TFSA first. In the second, the interest rate is so low right now and has been for some time that the tax savings are not very substantial but the risk is still high.

    In the examples, most of the difference comes from assuming that the leveraged investment does well. You are going to be in alot of trouble when you decide to sell your house after a 20% drop in the market. That is a probable outcome yet easy to ignore when it is twenty years down the road.

    In my mind, the real purpose behind the Smith idea is to get people to consider leveraged investing, who might not otherwise. The idea is hidden underneath a blanket of paying down a mortgage. However, RRSP and TFSA are clearly superior investment choices and the tax deduction on the very low interests rates we have now is negligible.

    The real catch to all this comes when the financial advisor proposing this plan starts suggesting investments that are profitable to themselves. Suddenly, you are investing money you that you didn’t have before and the advisor is making 1% of that each year.

  225. Ed Rempel on November 26, 2009 at 3:44 am

    Hi Aolis,

    RRSP and TFSA are clearly better than SM or leverage? That depends on your assumptions, your risk tolerance and your time frame.

    Leverage magnifies the gains and the losses. If you invest effectively for a long time frame and can tolerate the risk, leverage has a very good chance of making much higher returns than RRSP or TFSA.

    For example, if you have $4,000/year of cash, you could contribute it to your RRSP and get a $4,000 tax deduction. If instead you borrow $100,000 to invest @4%, you have payments of $4,000/year and have a $4,000/year tax deduction, but you have $100,000 in investments, not just $4,000.

    If the $100,000 makes a good return, then clearly I am way ahead (after interest costs and tax), and if it loses money, clearly I am way behind.

    The 25-year rolling returns of the S&P500 since 1871 have ranged between 5.0%/year and 17.4%/year. So, if you do this as a 25-year strategy, your odds are quite good.

    Also, when we compare the SM to a TFSA, the SM normally creates refunds each year, since the tax deduction on the interest is usually more than any tax on the investments, especially if you invest in tax-efficient funds and don’t sell.

    RRSPs provide a tax-deferral and TFSAs are tax-free, but leverage and the SM normally create tax refunds each year.


  226. Aolis on November 26, 2009 at 1:37 pm

    Hi Ed,

    “if it loses money, clearly I am way behind.”

    I’m going to retire regardless so I really shouldn’t be choosing a strategy where I can end up way behind.

    Risk tolerance isn’t just how aggressive I feel, it also depends on my ability to absorb loss. If I am already contributing the maximun to my RRSP and TFSA, then if I do leverage my house, the debt is only a fraction of all my investments. If it goes bad, I can pay it off from my RRSP and still have retirement funds left over.


  227. Ed Rempel on November 27, 2009 at 3:07 am

    HI Aolis,

    I agree with your comments about risk.

    However, if you are going to avoid any strategy where you could end up way behind, should you also abandon equity investing?

    What do you mean by “if it goes bad”? Do you mean going to zero?

    The risks of both equity investing and the SM decline over time. For example, the S&P500 has never had a loss over a 15-calendar-year period (including during the Great Depression) and has never made less than 5%/year over a 25-calendar-year period.

    If you have a solid investment strategy, the ability to maintain your payments long term, the risk tolerance to stay invested during major declines and the discipline to avoid behavioural mistakes, then the worst-cases scenario is usually manageable and is not “going to zero”.

    The risks do decline a lot over long time frames (eg. at least 15-20 years).


  228. Aolis on November 27, 2009 at 4:22 pm

    Hi Ed,

    As I get closer and closer to my retirement, I will indeed abandon equity investing and switch to fixed income.

    Bad means that I actually make less money that I paid in interest and am left with not much to show for my retirement. The S&P500 not having a loss is a big difference from doing better than my interest costs. Interest rates are all good and low right now but they got pretty high in the eighties.

    With an RRSP or TFSA, I don’t have to worry about interest rates and even with a zero return, I still have the initial savings that I put in.


  229. Lorne on November 29, 2009 at 7:25 pm

    it is always interesting to read someone state that “as i get closer to retirement, I will indeed abandon equity investing and switch to fixed income.” then in their next breath, state that they do not have to worry about interest rates, and even a zero return (on invested dollars) would be acceptable.

    assuming that person is ‘Average’ – retirement age around 62, life expectancy of 90 ish – and will be looking forward to a roughly 30 year retirement time frame, i would think he would rather have a prettty good idea about what interest rates are going to do, or a plan to invest and draw sufficient income no matter what they do, because a fixed income strategy in a rising cost retirement is not a conservitive plan at all. it is far more ‘risky’ than investing in equities whose dollar value on a piece of paper will fluctuate up and down with regularity.

    finally, it is just an observation that a person who has not been advised of this fact, and has not been helped with a plan to allow for it, is the same person who when shown a potentially excellent strategy on how to increase net worth and future income potential, would make the assumption that an advisor is only – or mostly – showing this in order to make a 1% commission on the assets invested, if someone is shown and helped through a strategy and a Plan that increases their net worth by, for example, $500 000, does it matter that they compensate the person responsible for this increase. unfortuneatly, this is common for DYI investors who always focus on MER’s and doing things the cheapest way they can find.

    just some thoughts.

  230. Ed Rempel on December 14, 2009 at 1:29 am

    Hi Lorne,

    Great points. We think one of the most costly mistakes made by most people is to invest much to conservatively when they get near retirement. They still probably have 30+ years in front of them, so having too little in equities can cut retirement income by a huge amount (and cost more tax).

    If we do end up with higher inflation, bonds can be quite risky. They have historically been far worse at keeping up with inflation than stocks over the long term.

    The benefit of a financial advisor is often far more obvious after you are retired, since having an appropriate asset allocation and planning for the least tax (such as planning around tax brackets and avoiding all the clawbacks) have easily quantifiable benefits.


  231. Duncan Macpherson on December 23, 2009 at 4:25 am

    I always find it amusing when people comment on “Risk” tolerance and time frame as the most important aspects of a financial plan. The often overlooked and major flaw with this is that it assumes past averages equal future returns. It also assumes that the more time you have ahead of you, the greater the amount of “risk” one should take on. Let’s assume that all things being equal, someone begins investing at age 20 and places 75% of their savings in stocks, and the rest into GIC’s or bonds and they continue this trend for the next 45 years. Every 5 years they reduce their exposure to equities until they hold a maximum of 20% in equities and the rest in fixed income assets in the final 10 years prior to retirement. If markets remain stable, this should be a somewhat sound strategy. However, what happens if 30 years into their plan the markets are flat and inflation rears it’s head, eroding the purchasing power of what’s left of their nest egg? The fixed assets they hold don’t pay nearly enough to cover living expenses (in real purchasing power). If they held bonds, they also likely have lost value taking away a good chunk of their nest egg. Sound far fetched? Maybe. But history has shown us that markets can and do behave irrationally. Fine and good if a crash happens early in an investing career, but what if it occurs towards the end? I’ll leave you with a story of two farmers. One purchased and raised an ox over the course of 2 years. He kept it well fed and invested an enormous amount of his time and income looking after the beast so that eventually he could sell it’s meat for a profit to the local butcher! Another farmer bought a cow and also placed a great deal of his income into maintaining its health. Yet every day the man milked the cow and sold it along with cheese and butter at the local market for a modest profit. At the end of two years, the first farmer slaughtered his ox and went to the butcher for his payday. Unfortunately when he arrived, the butcher explained that ox prices are way down due to a lack of demand. Reluctantly, the man sold the meat at half of what he’d originally paid and went home wondering how he could recover his losses! The second farmer bought two more cows with his steady profit stream and hired a young boy to milk the cows for him while he retired in comfort to a steady stream of income. The moral is never wait to get paid tomorrow if you can instead get paid today.

  232. cannon_fodder on December 23, 2009 at 11:21 am


    With your allegory, are you trying to steer us in a particular direction?

    Did the first farmer have to comply with Sarbanes-Ox regulations?

    I’m not sure I saw a recommendation from you as to the proper course of investing. One can always come up with a hypothetical scenario in which a strategy does not work.

    Even though I’m (hopefully) 10 years from financial independence, I am planning to need another 40 years of income after that point. Although I am very highly invested in equities, most of my investments are dividend payers. I hope that this provides some stability and, ideally, a sufficient income stream that will not require the disposition of any capital.

  233. Stressed Investor on October 12, 2010 at 1:09 am

    In 2007 we invested in the Smith / Snyder Manoeuvre. In my opinion the risks were understated and the benefits strongly exaggerated.
    After 3 years our $750,000 B2B LOC that was paying out through the Stone Capital fund approximately $10,000 a month has now been completely changed. We lost numerous shares and our $750,000 is worth more around $400,000 and paying out around $3000/mth that is currently just paying out the amount of interest on this still remaining $750,000 loan. Not only that but our house value is probably down about $100K and our reinvestments into the funds we are required to buy to satisfy the B2B loan requirements are doing very poorly.
    We are under extreme stress over the entire ordeal and don’t know whether it is better to stay the course or get out and take our 300 to 400K loss. Our biggest current stress is the fear of interest rates rising and having nothing to reinvest and struggling to pay the interest only on the B2B loan.
    I realize there are many details missing here as that would take pages, but any advice would be greatly appreciated.

  234. Brian Poncelet,CFP on October 12, 2010 at 3:19 pm

    Stressed Investor,

    The biggest concern is not so much the interest rates going up is your investments going down. My thoughts are to get a second opinion from a couple of different advisors who can give you some direction.


  235. FrugalTrader on October 14, 2010 at 1:22 pm

    This was written by Ed Rempel:

    Hi Stressed Investor,

    Sorry to hear you fell for the Smith/Snyder instead of doing the real Smith Manoeuvre, Stressed.

    Just so you are clear, the difference is that the Smith Manoeuvre involves borrowing against your home equity over time to invest in investments that grow and compound usually into a large number over many years.

    The Smith/Snyder, on the other hand, involves taking out a large loan to buy an income fund that tries to make you think you are paying off your mortgage very quickly. However, it replaces it with a NON-deductible investment loan.

    And sorry to tell you that the bad news is not over for you – probably only about half of your investment loan is tax deductible now. This is because you have been taking out the distributions from the income fund.

    We call the Smith/Snyder the “Reverse Smith Manoeuvre”, since it it a process of converting a tax deductible investment loan into a NON-deductible loan.

    There are 3 main problems with the Smith/Snyder:

    1. It does NOT reduce your non-deductible debt. Every dollar of distribution you take out of the fund and pay onto your mortgage is a dollar of your investment loan that is no longer tax deductible. So, you still have the same amount of NON-deductible debt. Once you pay off your mortgage, your entire investment loan is NON-deductible, so you may as well convert it into a new mortgage. There is actually zero benefit from taking out a distribution (in fact negative). Unfortunately, the Smith/Snyder was heavily marketed because it falsely looks like it pays your mortgage off fast and many people were not told of the tax problem. It will likely fail a CRA audit.

    2. Instead of buying investments that are the best based on risk/return, investments with the Smith/Snyder focus on getting a high distribution. Most funds are not available with this option, and the ones that have it usually are income/balanced funds with reduced long term growth potential (and are less tax efficient). So, you lose much of your long term growth potential.

    3. The benefit of the Smith Manoeuvre can be quite large if you leave good quality investments to grow and compound over many years. The Smith/Snyder is focused on getting income and trying to look like it is paying down debt – and misses the main benefit of the Smith Manoeuvre.

    I understand your stress. We have saved a few people from it, but it is difficult and takes some negotiating with your investment loan. However, if you have it structured like some others we have seen, doing nothing will likely mean things keep getting worse.

    Are your B2B loan payments principal plus interest now? What percent is your version of the fund paying out now?

    We have seen a few situations that we call a “Race to Zero”. Which will hit zero first – your investments or the loan? Let’s hope it is the loan, but the ones we have seen will be close. This is no way to make money!

    If you sell, though, you will lock in your loss.

    There is good news, though:

    – There is a rescue plan that works!
    – Investment loan rates are back to quite low again.
    – If you keep your mortgage, you should be able to keep the same credit line limit, even if your home as dropped in value.
    – If you keep you non-deductible debt separate, it can all remain deductible even though the investments are down a lot (other than the amount you have taken out in distributions).

    Here is what you need to do to fix it, Stressed. You need to convert to the real Smith Manoeuvre:

    1. Apply to B2B to change your investment loan to interest only payments. To do this, you will need to stop taking the distribution out of the fund and start making the B2B loan interest payments. You can pay them from your SM credit line (which is how the SM is supposed to work). You might have to add money or pledge new assets to qualify.

    2. Change your investment to one with zero distribution and something that will grow over time.

    3. If possible, you should reinvest the total of all the distributions you received from the fund since you started. If you don’t do this, then you will need to calculate each year how much of your investment loan is still deductible. For example, if you have received $200,000 in distributions since you started, then the interest on $200,000 of your investment loan is no longer deductible. It is up to you to make this calculation – CRA can just disallow everything and force you to calculate it. It is not the end of the world, though, since it only means you get a smaller tax deduction.

    The other option would be to change your mortgage so that $200,000 of your investment credit line becomes a mortgage again. That way, the remainder of your credit line would be deductible and you can do the SM on that $200,000 again.

    4. Depending on your mortgage payment, you might be able to start a monthly investment, in addition to paying the investment loan and credit line interest all from your investment credit line. This is the real Smith Manoeuvre.

    These 4 steps may sound difficult, but they should solve all 4 problems:

    – your cash flow issues
    – your fear about higher interest rates
    – your tax problem (would probably fail a CRA audit)
    – your investment loss (over time).

    The key is that, if you stop taking money out of the investments, then they can start to grow and should eventually regain the loss.

  236. Eva on November 26, 2010 at 3:08 pm

    I understand this strategy, but have this question. Let’s say I bought my house a while ago at a low price and the market value is much higher.
    If I go the route you are describing, will I have to pay tax on capital gain if I sell my house? Will the fact that I use the mortgage to make money make me loose personal residency exemption on my house?

    • FrugalTrader on November 26, 2010 at 11:09 pm

      Afaik, using a heloc to invest does not effect the tax deductibility of the heloc interest.

  237. Ed Rempel on December 15, 2010 at 2:25 am

    Hi Eva,

    No. Using your home as collateral to borrow from a credit line to invest does not affect your principal residence status. There is no problem using your available credit to make money.


  238. Tiffany Clark on July 19, 2011 at 2:15 pm

    Smith Manoeuvre when applied through a disciplined program like the TDMP – will allow clients that do NOT have discipline to accelerate repayment of their mortgage, facilitate a forced savings plan and can act as a pension type plan for those that are self-employed. The type of investment solution that is used to employ this strategy is going to differ depending on the client risk/comfort.
    I believe that for MANY Canadians this is solutions to grow wealth and reduce debt instead of building equity to finance BOATS, LUXURY LIFESTYLES, and generally just keeping up with the “JONES'”.

    I am a mortgage broker and am proud to offer this strategy to my clients…… a plan to get ahead… not a Peter PAN mortgage.

  239. Ed Rempel on October 3, 2011 at 1:16 am

    Hi Tiffany,

    The Smith Manoeuvre is not that difficult to manage and usually involves only one manual transaction per month.

    TDMP does not do the Smith Manoeuvre. They do the Smith/Snyder, which involves 4 unnecessary transactions each month that don’t actually do anything at all. With all that complexity and losing tax deductibility of the investment loan, professional help may be necessary.

    However, it is easier just to avoid the “4 Meaningless Transactions” and do the real Smith Manoeuvre. The difference is that with the Smith Manoeuvre, there are no monthly distributions each month to reduce the benefits and you are not restricted to only investments that pay high monthly distributions.


  240. Johnny Canuck (Oakville) on October 26, 2011 at 3:13 am

    Fantastic discussion on the Smith Manoeuvre. I considered this a number of years back, but I personally cannot stomach the idea of leverage, and did not proceed with it. Instead, I setup a self-mortgage through my RRSP in March 2008. Lucky timing for me, as I sold most of my RRSP holdings to get the mortgage advance and avoided the late 2008/2009 financial collapse.

    Just wondering if the posters who proceeded with the SM back in 2007 would be willing to share their experience with this over the past 4 years. In Oct 2007, TSX Composite was 14,000. Four years later TSX Composite is at 12,500 (-10%) and in between hit a low of 7500 (-50%).

    If you are willing to share your experiences in this time period, we could all benefit from it.

  241. Ed Rempel on December 7, 2011 at 4:38 pm

    Hi Tiffany,

    I should add to my post 246, that it has been pointed out to me that TDMP has a different process now and my comments may no longer be fully accurate.

    A few years ago, they were doing the Smith/Snyder strategy. I am told they have a different method now and I don’t fully know what they are doing now, so I don’t know whether my comments still are true.

    I believe they are using portfolio managers directly, instead of mutual funds, which would mean they would not have the tax advantages that mutual funds offer. (Pooling in your cost base in a mutual fund and using corporate class mutual funds is usually far more tax efficient. With tax-efficient mutual funds you can often invest for many years with zero tax on the growth until you eventually sell, which you can’t normally do using portfolio managers directly.)

    I also believe that using portfolio managers directly allows them to not have a financial planner giving advice. I believe that they are having mortgage brokers give financial advice, instead of using a financial planner. It may also allow the mortgage broker to actually get a referral fee on the investments (even if they are not licensed for investments). Again, I am guessing here based on bits and pieces I have heard.

    I believe their process would still require a monthly payment from the investments (even though we don’t see any advantages of getting monthly payments), but this payment may be partly or fully taxed as a dividend (or something else). If it is a dividend, that would allow them to maintain the full deductibility of the credit line (unlike the Smith/Snyder).

    If they are still taking a monthly payment and it is not taxed, then these payments are probably still “return of capital” (ROC) for tax purposes, which would probably mean that they would essentially still be doing the Smith/Snyder and my previous comments would still be true.

    I believe that my comments probably still apply, but if they don’t, then I stand corrected.

    I welcome you or anyone that knows about their new process to explain exactly how it works now on this blog. Then we can see whether or not my comments are still true.


  242. Linda on February 28, 2012 at 6:49 pm

    We almost lost our home as a result of the Smith Manoeuvre. You have to be investment-wise and have excellent advice. We didn’t have either.

  243. Brian Poncelet, CFP on February 28, 2012 at 11:02 pm


    Could I ask what company set this up and what kind of returns were you expecting or told? Also the time frame (like 10 20 years to reach your target, vs paying down your regular mortgage)


  244. MAC on March 18, 2012 at 6:45 pm

    can you explain the advantage of a self mortgage using your RRSP money.

  245. Ed Rempel on July 12, 2012 at 10:37 pm

    Hi MAC,

    No. We think the self-mortgage using your RRSP is one of the worst ideas out there with no advantages.

    I can get a mortgage today at 2.69%. If I invest properly, I should get a decent equity return long term in my RRSP of, say 10%. This gives my RRSP a return of 7.3% above my mortgage rate.

    With an RRSP mortgage, you give up this entire 7.3% and pay fees to do it. Why would anyone want to do this?

    It may make sense for GIC-only people, but in my opinion, nobody under 80 should be GIC-only. If you are over 80 and still have a mortgage – maybe. :)

    The RRSP mortgage makes you think you don’t have a mortgage, but you still do. A trust company administers your mortgage for your RRSP. If you can’t make the payments, your RRSP will foreclose on you and sell off your home, exactly the same as if you have a mortgage with the bank.

    I know the strategy well, MAC, but no, I cannot explain the advantages.


  246. Ed Rempel on July 12, 2012 at 10:53 pm

    Hi Linda,

    What happened with you? Do you want to elaborate?

    It sounds from your description like you were doing the Smith/Snyder, not the Smith Manoeuvre. The Smith/Snyder involves taking monthly income from your investments – the Smith Manoeuvre does not.

    If you were taking monthly income, say 8% from mutual funds through 2008-9, you are probably still down a lot – and probably well below your investment loan.

    Is that what happened with you, Linda?

    If so, then I have good news and bad news for you.

    The bad news is that you may be worse off than you think. If you have been taking monthly income from your investments and claiming all the interest, then you are at risk of a tax audit. Not nearly all of your investment loan interest is still tax deductible. Every dollar of monthly income from your investments (assuming it is ROC) reduces the tax deductibility of your investment loan.

    The good news is that there is a fix, Linda. We have helped some people out of it.

    The fix is to convert to the actual Smith Manoeuvre. This works because it allows you to stop taking money out of your investments, allowing them to grow over time. With a good quality equity investment and no withdrawals from it, your investment should recover and even give you good growth over time.

    To do this, you should start paying your investment loan and investment credit line from the credit line linked to your readvanceable mortgage. Then you can change your investments to stop the monthly withdrawals.

    If you have an investment loan that is under water, you may be making principal + interest payments. If you stop taking monthly withdrawals from your investments and if you qualify, you may be able to convert your investment loan back to interest-only payments.

    The advantage here is that, once you don’t need monthly withdrawals from your investments, you can invest based on the best risk/return only, without restricting your investments to those paying large monthly payouts.

    I am guessing at your situation, but is that helpful, Linda?


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