Lately, I’ve been getting a lot of questions from readers on starting the Smith Manoeuvre.  This article is from the archives but very relevant today.  Hope it helps!

As this blog has quite a bit of content regarding the Smith Manoeuvre, I often get reader questions regarding how to start the Smith Manoeuvre, and when is a good time to start.  I have answered the “how” in the past, but what about the “when”?

What is the Smith Manoeuvre

Before we get started, lets take a couple steps back and explain what the Smith Manoeuvre is to newer readers.  It is advertised as the “tax deductible mortgage” and markets the tax benefits where in reality, it’s an investment strategy.  It’s where a homeowner obtains a readvanceable mortgage, and uses the increasing line of credit to invest in the markets.  In other words, the home owner is borrowing against the equity in their home to invest.  The borrowed amount is now tax deductible and your investments are now leveraged.

For more details, you can read this post on the ins and outs of how the smith manoeuvre works.

The Question

Ok, now that we have the preamble out of the way, lets get back to the reader question.  The question is about the timing of the Smith Manoeuvre.  Should I start the Smith Manoeuvre?  If not, when is a good time?

Lets talk more about the strategy.  As I mentioned above, although it’s advertised as a tax deductible mortgage, it’s actually a leveraged investment strategy.  What does that mean? Leverage amplifies both gains and losses.  When the going is good, the gains are great, and you are a investing genius.   However, when markets go into bear mode, things can get ugly fast.  Not only is your portfolio now underwater, you have a loan balance that’s greater than the value of your portfolio.

Evaluating Risk Tolerance

The point I’m trying to make is that the Smith Manoeuvre is all about risk tolerance.  Sure, it can work in the long term providing that the investor sticks to their plan.  However, most investors are swayed by their emotions of fear and greed, and tend to veer from the long term plan during extreme market conditions.  For prime example, when the market significantly corrected in 2008, what did you do?  Did you sell with everyone?  Buy during the decline?  or simply do nothing?

If you found that you were constantly worrying about your portfolio balance during the correction, then chances are is that your risk tolerance isn’t suited for leveraged investing.  If, on the other hand, you kept confidence in the market and bought equities while the media was declaring the end of the world, then your personality may be well suited for leveraged investing.

The Numbers

If you have the risk tolerance to follow through with leveraged investing, the next speed bump in the process is the mechanics or the numbers.  To start, the homeowner should have at least 20% equity in their home.  That way, they eliminate the CMHC fee of getting the home equity line of credit.

Personally, I’m not comfortable leveraging 100% of the HELOC space.  Thus far, I have $50k borrowed from a credit limit of almost $200k.  However, this could change should the markets provide another buying opportunity for dividend stocks.


In an ideal world, all mortgages are tax deductible.  Unfortunately, that luxury is only for houses in the U.S.   In order to have anything similar in Canada, a home equity line of credit is needed and used to invest with.  Sounds simple, but there are risks to leveraged investing that needs to be accounted for before starting the Smith Manoeuvre.

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  1. Traciatim on June 7, 2010 at 9:22 am

    Are you sure that’s a smith manoeuvre? I always thought the smith was liquidating assets you currently own to pay off your mortgage to borrow funds to buy more (or the same) investments thus having the same amount of exposure to both your investment risk and your borrowed funds while also reducing your cost.

    For instance, you realize you have a 100K mortgage, and 50K in dividend paying stock. So you decide to sell the 50K in stock, pay 50K off on your mortgage, take out a 50K line of credit, buy 50K of dividend paying stocks. Now you have a 50K non-deductible mortgage, a 50K deductible line of credit, and 50K of income producing investment. Same amount of risks, just lower cost of borrowing. Of course that assumes your cost of borrowing is less than the previous cost over the term of the loan and also your income from your investments is higher than your cost of borrowing.

    It seems to me like a pretty delicate balancing act that depends on so many factors that it would be hard to tell if it would be better just to stay where you are, just pay off a huge chunk of your mortgage and save the interest, or if it would be better borrowing to invest again.

  2. Andy on June 7, 2010 at 10:38 am

    @Traciatim – From my understanding you are adding complexity to the maneuver. Other than the suggested 20% equity in your home you don’t HAVE to have existing assets that you need to sell to start the SM. You could simply start investing as you pay down your mortgage. The dividends you get can go towards paying off the mortgage, along with your normal payments. The line of credit space that is then opened is used to invest again, thus converting your non-deductible mortgage into a deductible line of credit. Once the mortgage portion is gone, you could now either sell the investments to pay off the LOC, or pay it off over time with the dividends while the interest on it continues to be tax deductible.

  3. FrugalTrader on June 7, 2010 at 11:06 am

    @ Traciatim: What you are referring to is the “Singleton Shuffle” where you take your existing Non-reg portfolio to pay down the mortgage which is then used to reinvest via HELOC. The core SM, is simply taking the small mortgage paydown/credit increases to reinvest with a readvanceable mortgage.

  4. DG on June 7, 2010 at 11:15 am

    @Traciatim — That’s the way its usually sold, and it is a gentle way to sell it because overall there is no change in total leverage. However I think very few people fit into the large-unregistered-investment-with-mortgage category, because if they are saving they are probably plowing it into an RRSP or their mortgage.

    I think the way FT describes it more realistic and relevant to most people, even if it not the 100% traditional definition.

  5. DG on June 7, 2010 at 11:22 am

    I got into the SM big time in Sept 2008, literally a day before Fannie May and Freddie Mac went boom. The following months were quite a gut check, but I held firm. The market value is back in the black now, dividends never went down, and interest rates on the LOC were very low, so it has been very profitable so far.

  6. ldk on June 7, 2010 at 11:27 am

    How we started was to take the amount we would have otherwise been investing each year anyway, put it on the HELOC (to reduce the ‘mortgage’ portion of the debt) and then borrowed back the same amount and put it into investments. After about 5 years we had ‘converted’ all of our house-related debt into ‘a loan for investment purposes’ (ie. tax-deductible) but we were no further extended/leveraged than we would have been otherwise.

    Now that all of our house debt has been paid off we regularly use our HELOC for various investment opportunities.

  7. Scott Peckford on June 7, 2010 at 11:38 am

    Great article. Any discussion on leverage should always include a realistic evaluation of risk tolerance. Kudos to you.

    One point of clarification you can no longer get a secured line of credit unless you have 20% down/equity. CMHC is no longer an issue. :)

  8. Financial Cents on June 7, 2010 at 1:22 pm

    Hey Frugal,

    Good on you to state this: “When the going is good, the gains are great, and you are a investing genius. However, when markets go into bear mode, things can get ugly fast. Not only is your portfolio now underwater, you have a loan balance that’s greater than the value of your portfolio.”

    I couldn’t agree more, the SM is all about managing risk, including your own and comfort level with it.

    Sure, leveraged investing can work (well) in the long term, but the average investor is emotional and cannot handle market volatility. As a DIY investor, I’m learning everyday and learning more about why I make certain investment choices (or don’t) and how that equates into our net worth growth. While I consider myself “above average” for financial acumen, I recognize I have a great deal more to learn and because of that, I avoid using any significant amout of leverage for investment purposes. I invest in what I know and fully comfortable in. Maybe when our house is almost paid off, I will feel differently, and borrow some equity. Until then, while I remain curious about SM, I’m “out”. :)

    This said, keep your posts about SM coming, as I’m sure it will drive many discussions – who uses it and how they are doing with this strategy. Cheers!

  9. The Passive Income Earner on June 7, 2010 at 1:26 pm

    Correct me if I am wrong, but doing the Smith Manoeuvre will also add to your monthly cost by needing to pay the HELOC interest monthly. Which means you need to pay for your mortgage + HELOC interest which will grow over time while your mortgage payment will not necessarily decrease. Or is there something I am not seeing in a ‘readvancable mortgage’ that prevents you from having to pay the monthly interest on the HELOC?

    Although the intention is to make your mortgage tax deductible, I would have way too much leverage to apply it by the book. My HELOC is currently 250K$ and I still have a mortgage of 300K$. At which point do you look at paying it back? If you were to look at doing any venture requiring capital, you become limited in your options since you are very leveraged. In my case, I want to do real-estate at some point and I need to be able to borrow. Therefore, I don’t do the Smith Manoeuvre but I could take an investment loan at some point.

  10. DG on June 7, 2010 at 1:43 pm

    @ Passive Income Earner: The interest on the interest is also tax deductible, so you want to let the HELOC debt compound. My bank charges LOC interest to my chequing account, so I just manually move funds from the LOC to chequing every month to cover the interest. When I asked my bank about this they said they might not like it, but I do it anyway and they haven’t said anything.

    There’s nothing inherently illiquid about the SM, you can sell all investments, pay off the LOC, and then proceed with your real-estate opportunity. Of course if you would be selling at a loss then that might not be much fun…

  11. ethan on June 7, 2010 at 5:06 pm

    Does investing into td-eseries canadian index, canadian bonds, us index, intl index (coach potato) count as tax deductible ? I read somewhere that some investment might not be tax deductible.
    if it is tax deductible, what else can I deduct ? can I somehow factor in the MER ?

  12. Henry on June 7, 2010 at 6:03 pm

    I think that one should not use the Smith Manoeuvre with DSC (back load) funds. That is a real no no, since you will not be able to sell when the market condition changes. However, there are financial advisors out there who likes to do this. They get a commission from helping you get a loan and make an upfront fortune with DSC funds commissions.

    A lot of no load funds have a three month early redemption penalty of 2%. That can be a concern as well. I would prefer ETFs unless you are investing in a diversified portfolio of small cap stocks. Valuation and market timing are ways to manage risks at all times.

  13. No Debt Guy on June 7, 2010 at 6:31 pm

    Although I wanted to fully pay off the mortgage before I started leveraged investing I am thinking I may get all of my ducks in a row and start earlier.

    Besides MDJ what are some good resources for the Smith Maneuver?

    It is fully DIY or do you advise getting a planner and accountant involved?

  14. FrugalTrader on June 7, 2010 at 6:58 pm

    @ passive income earner, I suggest only leveraging as much as you are comfortable. As I stated in my article, I have almost $200k credit available, but have only leveraged $50k thus far.

    @ ethan, yes you can use the td-eseries for leveraged investing. I’m not sure about the MERs though, but I doubt you can claim them.

    @ no debt guy – I would suggest reading the book and reading the archives here regarding the SM. Other than that, if you want to DIY, I would suggest some advice from an accountant if you are already investment savvy.

  15. Rachelle on June 7, 2010 at 9:12 pm

    It may seem a little weird to say this but before you do any type of Smith Manoeuver I believe that you should know your way around the stock market.

    IMHO if this is being pitched to you by your Financial Advisor and he/she is the one who picks your mutual funds, you’re way out of your league and you probably shouldn’t do it.

    If you have a decent track record investing in the stock market and you’re making money doing it and would like to continue your plan then consider the Smith Manoeuver.

    • Max on July 19, 2018 at 10:40 am

      Very good comment (ie you should be familiar with the stock market and have a decent track record)… Too many people get pushed (suggested without knowing the risk) into doing stuff that they do not fully understand.

  16. Devin on June 7, 2010 at 11:34 pm

    Hey guys, just recently got a new townhome with a Scotiabank STEP line of credit for it. Does anyone have experience doing the Smith Manoeuvre with Scotiabank. Also curious if they let you use available line of credit to pay the interest off?


  17. csplice on June 8, 2010 at 2:12 pm

    When I quit smoking I wanted to benifit from the money I wasn’t spending on cigarettes. Those that tell you to quite always say you can save $100’s of dollars a month, and those that quit say they never see the savings accumulate.

    My solution was to start the SM with a balance where the interest payments equaled my monthly nicotene habit. I paid the interest and watched my portfolio grow for months. This was in 2003.

    Over time I have started to compound the interest instead of paying it monthly, and I have also increased my SM portfolio as I felt comfortable and my HELOC room increased. Things are going well, all things considered.

    As for the time to start, in my opinion you need a catalyst, a reason to start the SM. What ever your reason, that will give you the determination to get through the initial hump, and then you are off the the races. Market conditions will improve you results, but determination will help you stick with it for the long run.

  18. ethan on June 8, 2010 at 2:50 pm

    So if I use TD e-Series as the investment portion (coach potato), CRA would allow me to deduct the HELOC interest rate right since it has a reasonable expectation of returns via the yearly distribution. For those distribution, are they all dividends or would there be interest or capital gains ? How do I calculate which is what.

  19. FrugalTrader on June 8, 2010 at 3:06 pm

    ethan, the prospectus for the funds will tell you what the distributions are. I believe the equity indices will distribute primarily dividends, and the bond fund will distribute interest. You don’t need to calculate each indivdiually to prove that your investment loan is deductible – simply holding equities with investment loan money does the trick.

  20. nobleea on June 8, 2010 at 3:38 pm

    Are bond funds eligible for this? I didn’t think they were since they are essentially interest. In that you doing so would not make the interest on borrowed funds tax deductible.

  21. Traciatim on June 8, 2010 at 4:35 pm

    Nobleea, I’ve tried to find an exact list of what investments are eligible and which are not. The closest thing I can come up with is anything that generated income, which I’m sure if you stuck with just interest and dividends you’d be pretty safe. Even if you have capital gains in there, as long as the stock in question payed a dividend I’m sure you’d be OK. Just ask the auditor when they show up :)

  22. Ed Rempel on June 8, 2010 at 7:02 pm

    Hi Traciatim & DG,

    FT is right. The Smith Manoeuvre is borrowing back on a credit line the amount paid down from each mortgage payment to invest.

    The “large-unregistered-investment-with-mortgage” strategy is NOT the SM. If you have seen people selling it that way, then they have not even read the book.


  23. Ed Rempel on June 8, 2010 at 7:13 pm

    Hi Passive,

    No, you don’t need cash flow to pay the interest on the credit line. This is because you normally capitalize it with the SM. The tax rule is that if the interest on a loan is tax deductible, then the interest on the interest is also tax deductible. Therefore, you can reborrow from the SM credit line to pay its own interest.

    This makes sense as well, since it is more effective to use any of your cash flow to pay off your non-deductible debt first, such as your mortgage.

    Nobody says you have to invest ALL your available credit. If you have a mortgage of $300K and available credit in your credit line of $250K, you could start with zero and reborrow your mortgage principal, or you could start with any lump sum you want.

    The normal strategy with the Smith Manoeuvre is to maintain the tax deductible credit line for life. Some people pay it off at retirement by selling some investments. Most pay it off whenever they sell their home, perhaps in their 80s. In general, maintaining the credit line and keeping the investments should give you a significantly higher income after retirement than if you sell investments to pay off the credit line.

    Also, there is a popular misconception that seniors are in low tax brackets. When you include the various clawbacks on income that affect seniors, many seniors are in a higher tax bracket after they retire. Depending on your situation, the tax deduction from the interest may be as beneficial to you after retirement as before. This is another reason many people maintain the credit line after retirement.


  24. Ed Rempel on June 8, 2010 at 7:18 pm

    Hi Henry,

    If you are a market timer and would sell your investments when market conditions change, such as a market crash, then the SM is probably not the right strategy for you.

    As Financial-Cents said, it is all about risk control. It is also about knowing yourself. If you are not able to handle a market decline, then you are too conservative of an investor to consider leverage strategies.

    Market timing might reduce a loss if you sell during a decline, but studies like the Dalbar study consistently show that market timers have far lower returns. This is the reason that women are far better investors than men!



  25. Ed Rempel on June 8, 2010 at 7:21 pm

    Hi No Debt,

    The SM is a leveraged investment strategy, which means it is a risky strategy. Leveraged investing significantly increases both your gains and your losses. If you are not a seasoned investor with a solid investment strategy, then you are much better off working with a professional.


  26. Ed Rempel on June 8, 2010 at 7:25 pm

    Hi noblea,

    Bond funds are fine for tax deductibility. It is not necessary that the interest you get be more than the interest you pay on the loan, based on IT-533.

    Leveraging into a bond fund is not a very profitable strategy with the combination of low returns and fully-taxable interest. However, it might make sense in a diversified portfolio.


  27. Ed Rempel on June 8, 2010 at 7:34 pm

    Hi Traciatim,

    There is no specific list, but IT-533 describes what is necessary. An investment must have a “reasonable expectation of income”. This means that as long as your investment can reasonably be expected to pay a dividend at some point in time in the future, it is probably fine.

    IT-533 specifically says that generally any common share or mutual fund is fine, as long as it’s prospectus does not specifically prevent paying a dividend. It describes shares in a growth company that is not paying a dividend for the foreseeable future, but may some time “when operational circumstances permit”, and says shares of that company would be fine.

    We generally invest in tax-efficient mutual funds that pay little or nothing in taxable distributions, but deducting the interest to invest in them is still fine.


  28. Scott Peckford on June 8, 2010 at 8:27 pm


    The Scotia STEP is a great product. Although it may not automatically readvance. You may have to request an increase when you pay down your princple.

    Scotia was allowing the auto-readvance, but last month they stopped doing it. :(

    It will depend on how your mortgage was set up from the beginning.

    Also you can capitalize your interest as long as you stay below your authorized limit.

    Hope that helps


  29. Andrew F on June 9, 2010 at 1:26 pm

    One thing that’s bugged me is the claim that withdrawing capital gains income from your SM portfolio to apply to the mortgage would affect the deductibility of the investment loan. I can see why this is the case with return of capital, but I don’t understand this for capital gains. Can anyone explain the rationale?

  30. jungle on June 10, 2010 at 11:05 pm

    Interesting about the Scotia STEP, I ask for the auto-increases last month, signed paper and nothing happened. They rep even said they took that feature away but then she rebutted it and said it should work.

    We’ll see what happens this month.

    To keep this on topic, I believe the best way to profit from this strategy is to buy the stocks at great prices. This is after you do your homework to ensure the stock is a solid company, ok debts, profits, etc and that has increased dividends over a long period of time. Then wait for the stock to come at a great price. You get a higher dividend and more value.

    There is a stock right now that I want to buy, problem is, I’m not ready. I don’t have a proper HELOC now. Scotia is not the best choice for this.

  31. Ed Rempel on June 11, 2010 at 1:07 am

    HI jungle, Scott & Devin,

    Scotia STEP was always more complex for the SM than a few other banks. They didn’t do the automatic readvance until a couple of years ago. We had not heard that they stopped offering it. The SM is still possible with it if you just go into the branch every month (or every 2 weeks) and sign a paper to have your credit line limit increased.

    This is such a pain that most people only do it once or twice a year, which makes the SM tricky.

    There are a few other banks that offer readvanceable mortgages that work better for the SM.


  32. Ed Rempel on June 11, 2010 at 1:45 am

    Hi Andrew,

    In general, if you remove taxable income from your leveraged SM investment, it does not affect the interest deductibility. ROC is not taxable income, which means you are withdrawing the principal.

    The issue with capital gains is the mechanics. If you have a mutual fund pay out a capital gains distribution, you are fine.

    However, if you borrow to invest $100,000 and later sell it for $150,000 at a $50,000 profit, and then withdraw $15,000 to get some income, you are actually withdrawing $10,000 of your principal and $5,000 of the capital gain. Then the interest on $10,000 of your investment loan would no longer be deductible.

    There are a couple of ways to deal with this:

    1.Accept you fate and keep the calculation of how much of the investment credit line interest is still tax deductible.
    2. You could pay sell the $15,000 and pay $10,000 onto your investment credit line and keep $5,000. Then you could reborrow the $10,000 to invest again. Now your investment credit line remains fully tax deductible and you have withdrawn the $5,000 capital gain.
    3. You would buy investments like tax-efficient mutual funds that allow you to pay out a capital gains distribution.


  33. Andrew F on June 13, 2010 at 4:11 am

    So realized capital gains can be harvested if every time you make a gain, you withdraw the entire sale price, pocket the gain (by paying against non-deductible debt), pay the original purchase price against the investment loan and reborrow it? Seems odd to me that you have to repay/reborrow the loan–is that just caution or does CRA actually frown on just withdrawing the capital gain on a sale. Seems like this would make it practical to liquidate the entire portfolio periodically if just to make use of the capital gain.

  34. Ed Rempel on June 18, 2010 at 1:03 am

    Hi Andrew,

    The issue is that it is difficult to withdraw just the capital gain. When you sell the investment, the proceeds are a mixture of the original borrowed principal and the capital gain. That is why paying down the full amount is required, even though it is awkward.

    If you sell investments and withdraw the capital gain only. then that amount of the loan becomes non-deductible and you would need to track this and calculate your interest deduction with this.

    If you liquidate the entire portfolio periodically, pay off the loan and reborrow, you can restore full deductibility. However, this will have a tax cost, so it may not be worth doing.


  35. Spectre7 on August 9, 2011 at 6:40 pm

    A few questions from a potential investor (just looking to get in) with a HELOC.
    I have a HELOC as a way to manage debt and cash. Anything I buy, like renos or a car, is purchased and the funds borrowed at mortgage interest, not car loan interest. As it stands, basically house and renos are paid off, but not the car, so I have lots of room to borrow. Which brings me to my first question:
    1. Should I be thinking of a SM as a more risky manoeuvre than cutting a cheque to my broker to put into mutual funds for me? It comes from the same cash flow. My paycheque goes in, my groceries and interest come out.
    2. Given same said cheques cut to my broker for my RRSP and RESP contributions, would the interest on these not also be tax-deductible? Contributions are made to both registered and unregistered accounts. Looking for some cheap tax advice here.
    3. I’m thinking of doing some DIY investing, starting with, like, $2K. Is this too small to make a difference, or is it a good way to get my feet wet?

    • FrugalTrader on August 9, 2011 at 10:26 pm


      1. if you use the HELOC to invest, call your bank to setup a sub account. You do not want to intermingle personal expenses and an investment loan.
      2. SM is leveraged investing, so both your gains and losses are magnified. Say you put a significant portion of your HELOC on the TSX, and it has lost around 10% YTD.. say your $100k turns into $90k in a couple weeks, would you be able to sleep at night? What if that $100k of borrowed money turns into $70k but you still owe $100k?
      3. no, borrowed money for resp and rrsp are not deductible.
      4. Look at buying index mutual funds like the td e-series to start off. Consider moving into index ETFs once you have $20k-$50k (imo).

  36. Spectre7 on August 10, 2011 at 3:07 am

    @FT: Thanks for the wisdom. As I said, I plan on starting with only $2K or so. I used to work at a racetrack/casino, so I saw the lesson: don’t bet more than you’re willing to lose.

  37. Ed Rempel on December 7, 2011 at 4:50 pm

    Hi Spectre,

    The Smith Manoeuvre is best done as a long term, preplanned strategy, not just a trial. Borrowing to invest is a riskier strategy. If you are going into it to “see how it goes”, then it is probably best not to do it at all. If you go in as a trial, you will probably do it until the first down market and then sell at a loss.

    My suggestion would be to either commit to it as a long term strategy and plan how you plan to do it, or don’t even start.

    For only $2K, this may not be worth the effort, either. The tax refund will probably be only at $20/year, which is not much reward for setting up a separate credit line to track the interest, having a separate investment account to keep the investments separate, and recording it all on your tax return.

    You could make $20 by shoveling your neighbour’s driveway or mowing their lawn! :)


  38. Hank on March 28, 2012 at 11:33 pm

    Hi there,
    I just happened upon this site and think it is great. I have a question regarding the benefit of the Smith Manoeuvre if you have a favourable mortgage rate. We currently have a variable mortgage rate of 2.05% and a secured LoC with a 3.50% interest rate. If I have calculated correctly, the additional interest paid on the LoC vs. the mortgage would outweigh the tax benefit of wriitng off the interest unless my effective tax rate was over 40%.

    If that is correct, it would lead me to believe that I am better off leaving my debt in the mortgage until our rate increases.

    Any thoughts out there? Do my calculations sound right?

    Thanks in advance for any insight

  39. Ed Rempel on April 21, 2012 at 6:21 pm

    Hi Hank,

    Yes, your calculations are correct. It is important to keep your tax deductible debt separate from your non-deductible debt. The readvanceable mortgages all link a mortgage to a credit line. You need a credit line if you are readvancing regularly, such as investing every 2 weeks in the normal Smith Manoeuvre or capitalizing your interest every month.

    Once you build up a significant tax deductible debt, you can consider creating a separate mortgage within your readvanceable mortgage. Most of the readvanceable mortgages allow multiple mortgages and credit lines. So, you can roll the balance owing on your tax deductible credit line into a separate mortgage, and still keep adding to the credit line as you have been doing.

    This sound at first like an obvious good idea because of the lower interest rate you will get, but implementation is more complex than you would think. The 2nd mortgage will have a higher payment than the credit line, because you are paying down some principal. That is not necessarily a problem, since you can readvance the principal portion of both mortgage payments.

    However, depending on which bank you are with, the readvancing happens differently. With some banks, both mortgage will readvance into your main credit line. With others, they will readvance into separate credit lines.

    Now you may have 2 mortgages and 2 credit lines that you are readvancing from, with both credit lines and one mortgage being tax deductible.

    This might be worth the effort, depending on your tax bracket and how large your tax deductible credit line is.

    All of this only marginally affects the benefits of the Smith Manoeuvre. Most of that benefit is the long term, after tax growth of your investments vs. the long term interest cost after tax of the tax deductible debt.


  40. Jeremy on November 15, 2012 at 3:23 pm

    My mortgage is with a credit union and they don’t seem to give the option of the readvancable mortgage. I’m thinking, however, that I could just open up a HELOC, borrow whatever I can against my house, and do a lump sum investment using that money. How does this differ from the Smith Manoeuvre in its benefits?

  41. Ed Rempel on November 16, 2012 at 9:31 pm

    Hi Jeremy,

    The difference between your idea and the Smith Manoeuvre is that you are suggesting just ordinary borrowing to invest. There are 2 major differences:

    1. You would have to pay the interest, while with the SM you can capitalize the interest.
    2. You would have one lump sum once, while the SM for you would be invest a lump sum plus an additional monthly investment.

    Without knowing your numbers, I’m not sure how significant these 2 differences would be for you, but they would likely make a big difference long term.

    How are you planning to make the interest payments, Jeremy?

  42. Jeremy on November 17, 2012 at 6:57 am

    OK, so the readvanceable mortgage is what allows the interest to be capitalized? I’ve been weighing my options about what to invest in, and I think I may end up investing in a rental property, so the additional monthly investments wouldn’t do me much good in that scenario, the lump sum is all I need. The cash flow from that property would pay the interest.

    I am open to other suggestions for investments, but I am not a fan of mutual funds, which seems to be the prevailing wisdom about where to put it.

  43. Dan on November 17, 2012 at 11:47 am

    Hi Jeremy, I am essentially doing the SM through a credit union without a readvanceable mortgage. I use a HELOC, but I don’t use it to full capacity so I have room to capitalize the interest. When I run out of room, I will have payed my mortgage down somewhat and can take out another LOC. This happens every 2 years or so.

    So it is basically the SM, but my “readvancement period” is 2 years rather than monthly. Call it the “lazy SM”.


  44. FrugalTrader on November 17, 2012 at 1:43 pm

    Dan beat me to it. Just leave some space within the HELOC to make the interest payments for x number of years. For me, I’m relatively cautious so I only have less than 50% of my HELOC invested.

  45. Ed Rempel on November 18, 2012 at 12:54 am

    Hi Jeremy,

    Dan & FT’s advice can work fine to make the readvancing unnecessary, but that does not maximize the available leverage and may result in extra costs to refinance every 2 years.

    In your case, you may or may not want to refinance. You can still bank at a credit union have your readvanceable mortgage at a bank. You probably have to pay a penalty to get out of the credit union, but you can get a readvanceable to day at 2.49% for 2 years with the credit line at prime +.5% and pay no legal or appraisal fees.

    Whether that is worth it or not depends on your interest rate, penalty, and what strategy you would do if you refinance vs. what strategy you would do without.

    If nothing else, you can work out the best interim strategy and then get a readvanceable mortgage when your current mortgage matures.

    I am a big supporter of the credit union movement, have my business account with a credit union and am the in-house advisor for a small credit union. However, credit unions are not even in the game when you are looking at the Smith Manoeuvre.


  46. Ed Rempel on November 18, 2012 at 6:37 pm

    Hi Jeremy,

    Regarding your investment choice, you mentioned a rental property or mutual funds. That is 2 decisions – real estate vs. the stock market and how to invest in the stock market.

    You cannot compare real estate with the stock market, without looking at the degree of leverage. The stock market has far higher growth, but people are sometimes more comfortable leveraging against real estate.

    In 1977 (35 years ago), the average house in Toronto sold for $64,559. At the end of 2011, it was $421,463. That is growth of 5.7%/year, which is 2%/year more than inflation at 3.7%/year.

    If you had invested in the stock market, you would have $2,443,515 in the TSX and $2,414,054 in the S&P500. In fact, in GICs, you would have $627,735.

    In short, the stock market has had 6 times the growth of real estate, and even GICs had nearly double the growth.

    Of course, rental real estate involves rent as well as growth. The effect of that depends on the property. Most don’t have much positive cash flow until you have built up quite a bit of equity. You do pay down a bit of the mortgage each month, though.

    Rent is fully taxable, though, so once the mortgage is paid down, you can end up paying tax. Stock market investments generate mostly capital gains, dividends and deferred capital gains, all of which are taxed more beneficially.

    To fully compare growth, though, you also should compare time. Rental properties can be a part-time job. You will probably spend 10-20 hours/year or more, with a rental property.

    Looking at risk, the largest decline from top to bottom in Toronto real estate since 1950 was 28% and in the stock market (TSX) was 43%. So, real estate is a bit less risky – about 2/3 the down side of the stock market.

    The stock market has had 3 declines over 40% since 1950, while real estate only one. However, real estate took 13 years to regain the decline (peak to trough to recovery), while the stock market always recovered it all in 6 years or less.

    Here is the bottom line. If you have $100,000 that you can invest in the stock market or use as a down payment on a $400,000 property, the property will probably do better because you have 4 times as much invested.

    However, if you put $100,000 down and take a 3:1 loan to invest $400,000 in the stock market or use it as a down payment to invest $400,000 in a rental, the stock market will probably have far higher returns long term.

    To invest in the stock market, you need a solid strategy, though. There are 3 main ways to invest in the stock market. You can pick your own stocks (like FT), you can buy index investments (FT also buys some, plus some others here), or you can buy mutual funds (which is what I do).

    It sounds like you are not very experienced with stock market investing. Picking you own stocks can be complex. When you buy stocks, you usually buy them from pros that are selling and they usually know a lot more than you about the company. Doing your own research properly takes a lot of time. You can’t just use stats on the internet, because everyone has that. Just looking at internet info about a company means that you know less than everyone else.

    Most investors that pick their own stocks just stick to large, well-known names or dividend payers, which means that they are missing most of the companies on the stock exchange, including nearly all the fast growing companies. Only 2% of the companies trading on stock markets around the world are large caps.

    Picking indexes can be a relatively easy way to get index level returns. Most index investors tend to buy the most popular sectors. For example, today investors often focus on ETFs of dividend-paying stocks, even though dividend-paying stocks are about twice as expensive as non-dividend payers today.

    Studies show that investors tend to be very poor at choosing the best sectors or countries to invest in. This is a “top-down” decision, which both amateur and professional investors usually get wrong.

    If you buy index investments, my suggestion would be to buy an MSCI World index and hold it forever. Adding any other index means you are over-weighting that index.

    For example, most investors mistakenly think that buying aa MSCI World index, S&P500 and TSX60 at 1/3 each is more diversified than just owning the MSCI World index. However, the MSCI World index already has 6,000 stocks and already has index weights in Canada and the US. Adding the other 2 indexes just means you are heavily over-weighting those countries – which means you are less diversified.

    Picking mutual funds is mainly about picking top fund managers. When you buy a mutual fund, you are really hiring a professional fund manager.

    I understand why you hate mutual funds. I hate average mutual funds, as well. Most of the large mutual funds are “closet indexers”, which means the fund manager just tries to hold stocks similar to the index, but still claims to be an “active” fund manager. About 70% of mutual funds in Canada are closet index funds, based on a comprehensive study.

    If you choose mutual funds with good fund managers that have holdings very different from the index, then most mutual funds beat the index, and they tend to continue to beat it. This is based on the most in-depth study on this subject, which is the only study I have seen that tries to identify the types of fund managers and how they perform. The study measure “Active Share”.

    In general, studies show that investors are reasonably good at choosing top fund managers, when they try to.

    If you focus on avoiding closet index funds (for example, make sure that 8 of the top 10 holdings are not in the index) and study the fund manager not the fund, you can do well with mutual funds.

    In addition, mutual funds have imbedded the full compensation for a financial planner, so you are not on your own. You can get professional advice about investing, plus also financial planning advice for all areas of your finances.

    Comparing indexes to mutual funds should take into account that the mutual fund includes advice.

    Of course, the value of that advice varies. I would suggest that you expect a financial planner to give you a comprehensive written financial plan and give you real advice on all areas of your finances, not just investment-only advice.

    Financial advisors also tend to recommend the currently popular sectors, since they are easier to sell. I would suggest to avoid advisors that mainly recommend the currently popular sectors.

    I hope that is helpful, Jeremy.


  47. Jeremy on November 19, 2012 at 12:11 am

    Hi Ed, thanks for your detailed reply. I am somewhat experienced with investing in stocks I’ve researched on my own as well as doing some day trading. My experience with both however hasn’t been stellar. In both cases I followed a regimented technical system that had been proven to work with back testing, and which had success for me at the beginning, and then once I got more confident and put more money in, stopped working. I ended up losing money on both. My friends and family have all used advisors who got them in mutual funds, which lost money. At least those are the stories I’ve heard. I feel better about losing money on my own than with an expert selling me mutual funds, cause at least I learned some things in the process. But doing a SM I obviously want a high return with safety.

    I don’t feel comparing the capital gains of real estate to the capital gains of stocks is fair. You have to include the total ROI, including cash flow in your pocket, which might be small but is still something, and the growth of your equity from the initial down payment to final equity. Do you have studies comparing that?

    What do you generally recommend? I called to sign up for your SM webinar but I was busy Saturday and there isn’t anything till January

  48. Ed Rempel on November 19, 2012 at 11:02 pm

    Hi Jeremy,

    I can’t recommend anything specific for you without knowing your situation and what you want to accomplish – except to attend one of my webinars. :)

    If you are going to do the Smith Manoeuvre, you need a sound investment strategy, since borrowing to invest magnifies your gains and losses a lot.

    Your stock-picking experience is quite typical. In my opinion, technical analysis is something that is marketed to amateurs to promote trading. When I talk with professional fund managers, few use it. For quite a few, their marketing people say they use it, but when I talk with the fund manager and his traders, they don’t.

    In fact, from studying many fund managers, my experience is that in general those that use technical analysis have poorer performance than those that don’t.

    I am a bit jaded, but I think of technical analysis the same as astrology – charts with no logical base. I think of it as something people do INSTEAD of research.

    Picking individual stocks requires tons of real research into companies, their operations, their management team, their competitors, their valuation, their financial position, their growth prospects, etc. This is difficult for individual investors to do. Not impossible, but difficult and time-consuming.

    It’s hard to comment on your friends’ and family’s experience without knowing what happened. Everyone lost money in 2008. Anyone that sold or became more conservative after the decline also lost money.

    The market has been anything but normal recently. If someone lost money recently, that does not say much. Stock market investing must be looked at as a long term strategy.

    This may also be typical, though. From what I have seen, financial advisors and brokers are just as bad at market timing as amateur investors. They follow recent trends every day and invest based on the “wisdom of the day”.

    In early 2009, most advisors were talking about switching clients to more conservative investments so they would feel safer. The worst were those with bank advisors, who gained clients by persuading them to sell at the bottom of the market. Advisors are supposed to help you make smart decisions – not chase the markets.

    There are smart ways to invest, though. Consider:

    1. Stock market returns long term are strong. The worst 25-year period since 1930 for the S&P500 was a gain of 8%/year.

    2. Staying invested through down periods, instead of chasing markets, has proven much more reliable. Studies such as the Dalbar study show that most investors tend to consistently buy high and sell low. You need a strategy to avoid that common mistake.

    3. There are fund managers that beat the index long term. If you focus on identifying them, rather than trying to pick which sector or country to invest in, you can identify them.

    I agree that comparing real estate to stock market investing should include the full ROI. Real estate returns are clouded by figuring out how much of the return relates to investing the down payment, tax on the rent, and the value of the time you spend.

    It is easier to compare if you look at a property and calculate the returns if you borrowed 100% of the cost of buying and paid interest only. That way, you also will have little or no tax. If you look at that, is there still positive cash flow to give you a profit?

    Even if a property pays off its own mortgage over time, the returns still are small compared to the stock market. The last 30 years were probably the strongest ever for real estate, yet Toronto real estate had 1/6 the growth of the Toronto stock market.

    If you add that the rental paid off its mortgage, then the growth is 1 times the value of the property, so then the return is 1/3 of the stock market.

    I think of real estate as a GIC on leverage. Real estate returns are low, similar to GICs (lower in the last 35 years but higher recently). Rent is fully taxed like GIC interest.

    Almost any example I have ever seen of real estate doing well is really an example of a low real estate return with high leverage making the overall return good.

    When you project real estate returns, calculate separately the rate of return of the property (return divided by the full cost of buying the property) from the leveraged return (return divided by the amount invested). You will almost always find the real estate return is low, but it is not bad after leverage.

    I did see a study on this a few years ago, but can’t remember the details. It showed that calculating the full return was not much higher than just the real estate growth, because the cash flow is often negative. As I recall, it did not explain the methodology clearly, so I’m not sure how realistic the assumptions were. It was a large study, though.

    I have some experience with this. I used to own a rental property and even owned a couple apartment blocks when I used to live in Winnipeg. They were a lot of work. They had a high PITA factor (paid in the ass). I enjoyed it for a while and it gave me a good feeling, but then it became drudgery. I eventually found I could make a much higher return with no work with mutual funds, as long as I was willing to leverage a similar amount.

    The key then comes down to how much leverage you want to take on and can qualify for. If you leverage into the stock market is anywhere close to the leverage on real estate, then you should expect far higher returns from the stock market. If you would invest many times higher in real estate, then the leverage return of real estate will likely be better.

    With real estate, you can generally borrow 4:1, based on 80% down. With mutual funds, you can borrow 100% with no down payment if you qualify (generally up to 50-100% of your net worth), and 3:1 after that with a 3:1 loan.

    All of this is relatively high leverage, which may be too aggressive for you.

    You would learn a lot from our webinar, Jeremy. There is fundamental financial information there. We might have another one before Christmas if we have enough people sign up. Otherwise, the next one will be in January.


  49. sheldon on February 1, 2013 at 5:18 am

    Hi. I have been reading up on the Smith manoeuvre for a while now. I have been working towards saving up for a 20% down payment on a new home with plans to turn my current home into an income porperty. I have noticed that OSFI has cut the LTV maximum from 80% to 65%, My question is, would it be best to wait until I have a 35% downpayment, or stick with 20% down and finance the other 15% with a traditional mortgage ? Also, is there something I am missing that still allows an 80% LTV. Thanks, Sheldon

  50. Ed Rempel on February 3, 2013 at 12:28 am

    Hi Sheldon,

    The new OSFI rules are not really an issue. You can still get a readvanceable mortgage with 80% LTV as long as the mortgage portion is at least 15%.

    The effect of the rule does not affect you when you have an 80% mortgage. It affects you when your mortgage is almost paid off and is down to less than 15% of your home value. At that point, you would ideally want to have a almost only a credit line, but you have to keep at least 15% in a mortgage.

    We have found an easy way around it by splitting the tax deductible credit line into a credit line and a second mortgage portion.

    In short, the OSFI rules should not be an issue for you any time soon.


  51. Andrew F on February 3, 2013 at 12:36 am

    Ed, is there any reason not to hold most/all of the investment loan as a mortgage to take advantage of lower borrowing rates?

  52. Ed Rempel on February 3, 2013 at 2:23 am

    Hi Andrew,

    Interesting question. We are getting 2.59% on a mortgage today and 3.5% on the credit line, so there is almost a 1% savings.

    In practice, we do convert part or all of the credit line to a mortgage sometimes, but there are some issues with this strategy.

    First, the payment will be higher. It is P+I, so it is higher even though the interest rate is lower. If you are paying down your mortgage and reborrowing to invest, you need to leave more to cover the extra payment. This means you end up with less to invest. Your tax deduction is also smaller.

    It is possible to readvance the principal portion of this 2nd fixed portion as well. This adds significant complexity, since you now have 2 mortgages that you are readvancing each month.

    You then have to know how your bank’s readvanceable mortgage works. For example, some work with mortgage and credit lines in pairs, which means that if you have 2 mortgages, you have 2 separate credit lines to invest from.

    The times we use this strategy are mainly once the mortgage is fully converted and you have only a tax deductible credit line. It is not nearly as complex then. Your payment is higher, but you can readvance the principal to reinvest.

    After you retire, you can afford to take more from your investments if you are still adding to them with each mortgage payment, which can make up for the higher payment you have to make. Your overall retirement cash flow can be a bit better this way because of the interest rate savings.


  53. May on July 7, 2018 at 1:42 pm

    Another question to answer might be WHEN to start SM. I have a heloc with more than half million credit available, and I am debating on whether and when to start SM. Market has been weak this year but still at a high point and almost everybody expecting bear market sooner or later. Interest has already been up and most likely will be up again for quite a few times in near future. All these make a SM strategy more risky and less profitable.

    In the other hand, we plan to retire in maybe 5 years, and then we would like to melt down our RRSP before forced to convert to RRIF. A SM could be a great way to help melting down RRSP faster.

    Still debating …………..

    • Jeremy on July 8, 2018 at 2:46 am

      May, maybe Ed will chime in with some more expert advice but I’ve now been doing the SM with him for quite a few years. That experience has been good for me, but the leverage issue is something that can keep you up at night if you’re not careful. What makes me comfortable is the fact that I’m in my 30s and if the markets crash I can be patient and ride out the lows, and my retirement won’t be impacted. If you’re 5 years from retirement you are probably not in the same boat. From what I’ve experienced, SM is something that somebody close to retirement should only take on if they have an EXTREMELY high risk tolerance. Especially at a time like this when the markets are riding pretty high and Trump is taking away all the regulations that are supposed to prevent another 2008 crash. If you do decide to enter the SM, I would think it’s best to wait until this bear market comes. Because when you enter the market with all that leverage, it’s a pretty big chunk of capital to lose if you’re buying high.

      • FT on July 8, 2018 at 10:47 am

        Great advice Jeremy.

    • FT on July 8, 2018 at 10:50 am

      To add to what Jeremy added, if you do decide to do SM, what about borrowing an amount that you are comfortable with instead of going all in? I’m still not comfortable with borrowing the full amount available. We are currently borrowing about 30% of total equity. I may leverage more if there is a significant correction.

  54. May on July 8, 2018 at 3:04 pm

    @Jeremy @FT Thanks a lot for the feedback. Both of you confirmed my thought at least now is not the good time to start a SM. I think I will definitely not do it now.

    If we retire in five years, we will be quite comfortable financially and doing SM might expose ourselves to risk that we do not need to take. Maybe it’s insane to risk what you have for something you don’t need. In the other hand, one can always use more money. It’s just that we are mortgage free and it means we have lots of assets locked into the house we live in. I am kind of attempted to use that asset to do something instead of just sitting on it.

  55. Michael on July 10, 2018 at 2:01 pm

    Hey All

    I’ve been considering using this strategy to melt down my RRSP when I enter retirement.

    I want to build a non-registered dividend producing portfolio. To do this I would use funds from a HELOC and use withdrawals from my RRSP to pay the HELOC interest.

    If my thinking is right, the tax payable on the RRSP withdrawal would be washed out by the tax deduction on the HELOC interest.

    This way, I can take advantage of the tax benefits of my RRSP, then the tax benefits of the Smith Manoeuvre when I am ready to retire.

    Interested in your thoughts.

    • May on July 12, 2018 at 11:31 pm

      I think this depends on lots of factors including market status. I have asked a similar question above. I think you need to run some numbers to determine if it’s worth the risk. Leveraging to invest is always with high risk. I think you may want to run some numbers to see how much benefit you will get before deciding if you want to do it or not. And you also need to have a backup plan what if your investment go down by a big percentage, let’s say 50%. Will you still be able to hold it? If you don’t rely on RRSP and can do leveraged investment for a long period, it might be OK. If you actually need to rely on it for living, it’s another story.

  56. HW on July 11, 2018 at 5:03 pm

    After reading this a few times I’m not sure I get it completely. Using a realistic example, a lot of us have a mortgage of 2.5% and a HELOC of 3.95%. If I sell my non-registered portfolio, pay down my mortgage, and borrow the same amount again using HELOC, I’ll be paying effective 2.765% in interest (after 30% tax deduction). This is higher than the 2.5% I am paying with my mortgage. The math doesn’t really add up for me.

    • FT on July 12, 2018 at 9:36 am

      HW, your math is correct, it probably would not make sense for you right now. However, as your income increases (larger tax deduction) and with mortgage rate increases, the numbers will be more enticing.

      • May on July 12, 2018 at 11:50 pm

        @FT, a question for you. Regarding to interest, I think one can borrow money from heloc as a term portion, at least with my heloc it’s an option. This mean, if I want to borrow, let’s say $300K from my heloc for investment purpose, I can borrow it at a mortgage rate that’s is lower than my heloc rate. In this case, the interest I paid is still tax deductible, right? But each time I pay back, I also pay back part of premium. In this case, how do I calculate how much interest is paid and how much is deductible?

        • FT on July 13, 2018 at 4:14 pm

          That is correct, even if it’s a term repayment (instalment), the interest is tax deductible if the proceeds are used to invest in income generating assets. You’ll need to get a statement from the bank once a year to see how much interest you paid.

  57. Jayu on July 17, 2018 at 8:14 pm

    I have a dividend portfolio with around 35k invested –
    I want to start adding more dividend stocks with my HELOC (don’t have any large mortgage balance)
    should i start SM with my existing brokerage or is it better to start SM portfolio with a different brokerage account to keep a separate record of HELOC interest & dividend income generated from HELOC funds .

    • FT on July 18, 2018 at 2:04 pm

      Definitely better to keep SM portfolio separate.

  58. Brian on January 2, 2019 at 6:02 am

    What happens if you want to realize some capital gains from your stock investments?

    ie. Use 300k heloc to buy canadian dividend paying stocks. stocks appreciate to 600k. want to sell half the stocks to buy international stocks in a tfsa, realizing a capital gain and knowing there is no tax deductability when using the funds in a tfsa but looking for higher capital appreciation.

    Does the 300k from the sale have to pass through the heloc and take it to $0, before going into the tfsa, to have a full financial trail? that doesnt seem right as theres still half the funds borrowed to invest being used.

    Do you have to track all the buy/sell transactions over the years and figure out what the original loan amount was for purchasing the first stocks in the ledger leading up to the sale? Thats tedious.

    It doesnt look like the money can go straight from the unregistered account to the tfsa without accounting for it in the heloc in some way.

    • FT on January 2, 2019 at 11:24 am

      Hi Brian, personally, I would keep everything separate. Ideally, any gains from your SM investment account should either remain in the account to be re-invested OR used to pay off the investment loan. That way, everything remains clean. Another solution is to withdraw the dividends from the account since inception to fund your TFSA. No issues with tax deductibility then.

      This article may help:

  59. Internet Guy on February 5, 2020 at 8:46 pm

    Hey — hope you still read this topic and the comments! I have a question: I started the SM and my mortgage is up for renewal, the bank (RBC) has given me the option to turn my (higher interest rate) SM LOC into a (lower interest rate) second mortgage – but wouldn’t doing that make the SM “null and void” or am I missing something? Hope you can help! Thanks!

    • FT on February 6, 2020 at 10:46 am

      If your LOC turns into a mortgage, then it’s not technically the SM anymore. However, if it gets you a better rate, and you plan on paying off your LOC anyway, then go for it!

      • Internet Guy on February 7, 2020 at 8:27 am

        That’s what I thought.
        One more questions on that:
        if I start to use the dividend income to pay off the LOC instead of the mortgage (and/ or flip the LOC into a mortgage), is the interest still tax deductible?

        Thanks & have a great weekend!

        • FT on February 8, 2020 at 8:38 am

          Yes the interest would remain tax deductible, but your tax deduction would decrease with time !

          • Internet Guy on February 9, 2020 at 1:27 pm

            Awesome. Thanks FT! You must be a busy guy answering all the questions on here! Great contribution to the Canadian personal finance community! :)

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