Mastering the Smith Manoeuvre and Turning Your Mortgage Into a Tax Deductible Investment Loan

By FT | April 19, 2020 | 

We’ve been writing about the Smith Manoeuvre here at Million Dollar Journey for over a decade now!  

Since I have personally implemented the Smith Manoeuvre and provided various updates on my tax deductible investment loan + Canadian dividend stocks strategy over the years, we’ve collected quite an assortment of Smith Manoeuvre themed articles. Rather than have readers click all over the site, I thought it’d be best to update all of the relevant information and then combine all of the information that we’ve gleaned over the years into our Ultimate Guide to the Smith Manoeuvre!

[Editor’s Note: I started working on this guide several months ago, and we know that there is a hunger for financial predictions concerning the viral tragedy unfolding. While one could argue that there is no better time to start the Smith Manoeuvre than during a market downturn, this article is meant to be a long-term resource that folks can come back to as they implement the strategy.]

Introduction to the Smith Manoeuvre

For those who don’t know what the Smith Manoeuvre is, it’s a Canadian wealth strategy that is designed to structure your mortgage so that it’s tax deductible. Our U.S. neighbours already get the luxury of claiming their mortgage interest on their yearly tax return, and now there is a way for us Canadians to do the same. (Kind of.)

There’s a tax rule in Canada, where if you borrow money to invest in an income-producing investment (like a dividend-paying stock or an investment property), you can deduct the annual interest paid on the investment loan from your income tax. 

In layman’s terms, if you get a loan with x amount of interest per year, you can claim that x interest during income tax season if you use the loan toward stocks or rental properties. If you’re still confused, please read on below where I will eventually explain everything step-by-step.  

If you’re wondering if the juice is worth the squeeze - just understand that while properly implementing the Smith Manoeuvre does require a little bit of reading, it can save you thousands of dollars per year in taxes, as well as supercharge your long-term investment returns.

Mr. Fraser Smith came up with the idea of the Smith Manoeuvre (hence the name) and revealed it as a way for Canadians to turn their plain old mortgage debt, into shiny new investment debt - which was tax deductible and ready to grow.

To summarize the Smith Manoeuvre in a nutshell, the main idea is that you borrow money against the equity in your home, invest it in income-producing entities, and use the tax return to further pay down the mortgage. 

Rinse-and-repeat until your mortgage is completely paid off, leaving you with a large portfolio and an investment loan. Voila! Your mortgage is now an investment loan which is tax-deductible.  Plus, you have a much larger portfolio that is ready to take advantage of the long-term rate of return that stocks have traditionally generated over the last 200+ years.

While I have a tendency to optimize, here is a slightly modified version of the Smith Manoeuvre which you can use if you have already started a non-registered investment account like I did.  If you have not yet opened a non-registered account, then just skip to Step 2.

  1. Sell all existing stock from non-registered investment accounts and use it toward a down payment for step 2.
  2. Obtain a readvanceable mortgage. This is a mortgage that has 2 entities, the Home Equity Line of Credit (HELOC) and the regular mortgage. 

Nothing unique about this setup EXCEPT that as you pay down the mortgage, the credit limit on the HELOC increases. This is a key feature that is needed when implementing the Smith Manoeuvre. Note that you usually require at least 20% equity/down payment before you can obtain a readvanceable mortgage. All of Canada’s major banks offer this type of HELOC + Mortgage setup; however, I wouldn’t bank on walking into a branch and talking to anyone who has any idea what the Smith Manoeuvre is!

  1. Use the HELOC portion of your mortgage to invest in income producing entities like dividend paying stocks or rental property. With every mortgage payment, your HELOC limit will increase. So with every regular mortgage payment, you will invest the new money in your HELOC. Note that you SHOULD NOT use the HELOC money to invest in your RRSP or TFSA as you will lose the tax deduction on the invested money. If you don’t already have an investment account, here is a review of the more popular discount brokerages in Canada.
  2. When tax season hits, deduct the annual amount of interest that you paid on your HELOC against your income. So, if you paid $6,000 in interest payments for the year and you have a marginal tax rate of 40%, you will get back ~$2,400 of it.  
  3. Apply the tax return and investment income (dividends, etc.) against your non-deductible mortgage and invest the new money that’s now in your HELOC.
  4. Repeat steps 3-5 until your non-deductible mortgage is paid off.

As you can see, this process will pay down your regular mortgage in a hurry.

  1. Additionally, it’s important to understand that in its pure form, the Smith Manoeuvre advocates for never paying down the original HELOC. Simply pay the interest each year, deduct it on your taxes, and leave the investments to do their thing. This can, of course, be modified depending on your risk tolerance. This is also why multi-millionaires often have large investment loans, and why the tax code is set up to take advantage of that fact.
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How Much of My Home Equity Can I Use for The Smith Manoeuvre?

Nationally-regulated banks can only allow homeowners to borrow up to 65% of their equity towards their “revolving” or home equity line of credit portion. However, homeowners can still borrow up to 80% of their equity in total. This means that the remaining 15% (80% – 65%) has to be in the form of an installment mortgage with a regular repayment schedule. 

This is a relatively recent rules change and the important thing to remember is that at no point can you ever be borrowing more than 80% of the total value of your house, and at no time can you have a HELOC greater than 65% of the value of your house.

Should I Do the Smith Manoeuvre?

One particular (and critical) fact to keep in mind is that even though the Smith Manoeuvre includes making your Canadian mortgage tax deductible, it also includes a leveraged investment strategy.  

What the heck is a leveraged investment strategy, you might ask?

Leveraged investing refers to the act of borrowing money in order to invest. The term comes from the idea that when you borrow money to invest, you can “move” great sums of money - sort of like how using a bar and a fulcrum allows someone to apply physical leverage in order to move a heavy object.

When using the Smith Manoeuvre and implementing a leveraged investing strategy it is critical that you understand that if markets go down, you still have to pay interest on your investment loan.  Consequently, borrowing money in order to invest can be quite risky in the short term, and if you need the money in the next 5-10 years, I would definitely not set up a Smith Manoeuvre! Leverage works against you, so when markets go down, you will really feel that sting if you are looking at your investment accounts every day.

It’s crucial that you know yourself, know how you respond to risk, understand how investing markets work, and be confident in your long-term strategy no matter what markets do in the short term. I cannot emphasize enough how important it is to know if you will be able to sleep at night after watching 40% of the value of your Smith Manoeuvre account seemingly evaporate. It’s bad enough when this happens inside an RRSP or TFSA, but there is an added layer of psychological warfare that occurs when that investment has been purchased with “borrowed money”. It’s possible (if unlikely) that you could end up with an investment loan that is worth more than your now-cratered investment portfolio.  

Now, if you understand how equity markets work, and are confident that profitable businesses will keep making money in the long-term - then this isn’t a big worry. You can ride it out, keep making your mortgage payments, keep deducting the interest, and live life. If you can’t wrap your head around how this all works, and instead just keep coming back to, “It feels like I’m gambling my house on the stock market,” then the Smith Manoeuvre simply isn't for you.  

The Advantages:

  • You get to build a large investment portfolio without waiting to pay off your mortgage first (the power of compounding). This is an absolutely massive advantage in wealth-building power relative to the average Canadian!
  • You get to pay down your non-deductible mortgage in a hurry.
  • Your new investment loan is tax deductible. This obviously becomes even more valuable if you are in the higher tax brackets.

The Downside:

  • You need to be comfortable with LEVERAGE and investing in general.
  • You need a plan ‘B’ in the case that you need to move and home values have gone down. If you invested properly, your portfolio should at LEAST cover your loan.
  • Some record-keeping has to be done for tax purposes.

What are the Benefits and Investment Returns of the Smith Manoeuvre?

Here are my personal numbers and plan from back when I started the Smith Manoeuvre - which I’ll use to calculate the benefit. You’ll notice that back in 2008, houses were much cheaper, and interest rates were much higher. These numbers were my original plan, and for the most part, they held up pretty well:

  • Old Residential Home Value: $140,000
  • Old Outstanding Mortgage: $80,000
  • Equity: $50,000 after Realtor fees.
  • Cash Savings used: $20,000
  • Non-Registered Portfolio: $40,000 (liquidate)
  • Total Down Payment: $110,000
  • New House: $275,000
  • New Mortgage: $275k-110k= $165,000 (non tax deductible)
  • New HELOC (@ 6%): [ ($275k x 75%) – $165k] = $41,250 (tax deductible)
  • Total Debt: $206,250
  • New Mortgage Payment (accelerated bi-weekly) @ 5.25%: $584.12 (not including property tax, insurance etc).
  • Original Amortization: 16 years

The Criteria:

  • All tax returns will be applied to the non-deductible mortgage balance, which then again, increases the HELOC balance.
  • All dividends will be used to pay down the non-deductible mortgage.
  • HELOC interest payments will be capitalized. That is, the HELOC required payments will be paid by the HELOC itself. This will avoid using any of my own cash flow to support the investment loan. The spreadsheet will account for this.
  • Assume that the LOC will be invested in dividend paying stocks that provide an income stream of $1400/year (assume 3.5% average dividend yield). This equates to a $54 / bi-weekly period applied to the mortgage. This should be increasing annually but for simplicity sake, I will be keeping this constant.
  • Assume that since I'm going to continue to max out my RRSP, I won't have any extra cash to pay down the mortgage.

The Assumptions:

  • Marginal Tax Rate: 40%
  • Average Investment Growth Rate: 8%
  • Diverted Periodic Investments: $54
  • HELOC Interest rate: 6%
  • Mortgage Interest Rate: 5.25%

The Results:

  • Non-deductible mortgage paid off in 11.78 years instead of 16
  • Investment Portfolio Value after mortgage is retired: $244,833
  • Portfolio Value NET of HELOC: $38,583
  • Investment Portfolio Value after 25 years: $908,640
  • Portfolio Value NET of HELOC: $702,390

Summary:

  • This analysis shows the benefits of using the Smith Manoeuvre, not the down side. You need to be comfortable with leverage, especially the downside, before you even consider using this strategy.
  • The Smith Manoeuvre enabled me to pay off my mortgage in 12 years instead of the stated 16 years with no extra cash flow out of my pocket.
  • At the end of the mortgage term, assuming that I average 8% returns over that period of time, my portfolio value minus the loan amount will be approximately $38,000.
  • If I continue to hold the tax-deductible loan after paying off my original mortgage loan, and allow my investments to continue to compound - the overall result will be roughly $700,000 more in my pocket.

A common argument against the Smith Manoeuvre is that there is simply too much risk in “gambling” your home in the stock market.

If you have this question, it’s honestly a good indicator that the Smith Manoeuvre isn’t for you - and that’s ok! You know what’s not for me? Anything involving motors, wrenches, etc! It’s important to “know thy self” when it comes to leveraged investing. Investing in the stock market might come with an inherent level of risk - however it’s NOT gambling at all. Using fairly stagnant home equity that would just sit there otherwise, not compounding much on your behalf, is “gambling your house”.  

Think about it this way, isn’t it a “gamble” in some sense of the word when you buy a house and take out a mortgage 5-10x as big as your down payment?  If you look at that house as an investment, you just leveraged a ton of money in order to buy an asset that is about as non-diversified as you can get. That huge amount of money that you just borrowed is now tied up in a single property - which can’t be moved - and that will rely on the whims of the local real estate market, which you have no control over. PLUS, it’s pretty illiquid and will cost you thousands of dollars to sell. How is that less risky than setting up a portfolio of stable dividend stocks, which are diversified across massive industries, and that earn money from all over the world?! 

Not just that, but they have 20+ year histories of paying their shareholders ever-increasing dividends, year after year. I know which asset sounds less risky to me! 

The diversification of your assets that is a necessary part of the Smith Manoeuvre actually makes your overall financial picture less risky - but if that’s hard to envision, then you’ll find it very difficult to not panic when markets hit a downturn, and using leveraged investing just isn’t for you.

How to Setup the Smith Manoeuvre 

Before I start with the details, we need to make sure that your investment loan is, in fact, an investment loan that is tax deductible. If you get a loan to invest in a tax-sheltered account, like an RRSP, TFSA, and/or an RESP, then the interest is not tax deductible.

Also, tax deductibility of an investment loan depends on if you use the proceeds to generate business/investment income. You cannot use a HELOC secured against your rental property on personal expenses and still claim the interest as a tax deduction.

Calculate Your Interest Deductible:

To determine the tax return of the interest paid on your investment loan, multiply the total interest paid during the year by your marginal tax rate.

For example: if you paid $1,000 in interest for the year and you are in the 40% marginal tax bracket, you will receive $400 back from the government.

CRA Rules for the Smith Manoeuvre

Canada Revenue Agency (CRA) expects that if you use borrowed money to invest that you will receive some sort of income from your investments. The “income” includes interest, dividends, rent, or royalties. Even if a stock that you purchase does NOT currently pay dividends, as long as they have a reasonable “expectation” of future dividend payments, then it “should” remain deductible.

Although CRA only expects income from your investment portfolio, in 2003, the finance department declared that in order for investment loans to remain deductible, the interest/dividends must produce a profit. That is, the dividends must EXCEED the interest that you are paying on the loan. I know, the finance department and the CRA are on different pages. According to Globe and Mail writer Tim Cestnick, the CRA will generally ignore the finance department rules and accept the tax deduction as long as it produces any income, but check with your tax professional for the latest rules.

I know this much, the companies on our dividend stocks list (which we update quarterly) definitely meet the CRA’s and the finance department’s criteria.

Keep Your HELOC Interest Tax Deductible!

Once you use a loan/line of credit to invest, do NOT withdraw from it unless it is from dividends/interest that the investment produces.

For example, if you use a $10,000 line of credit to invest, achieve a $5,000 capital gain, and subsequently withdraw $5,000 to spend on a vacation, how much of your loan balance is still deductible? $10,000? Nope! 

According to Tim Cestnick, since you withdrew 1/3 from your investment loan, only 2/3 of your remaining loan is tax deductible.

This includes Return Of Capital funds/income trusts also! 

Technically, as you receive ROC distributions, it will decrease the tax deductibility of the investment loan. This can be avoided by using the ROC to pay down the investment loan, then re-investing if desired. Technically, this “should” be the same as simply leaving the ROC distributions in the investment account (confirm with your accountant). If you invest in dividend stocks, there won’t be any return of capital to worry about, but if you’re invested in REITs (Real Estate Investment Trusts) or various types of ETFs or mutual funds, there is likely to be some return of capital mixed into your returns.  

If you gain $300 (or any amount) in dividends though, you can withdraw $300 and spend it as you please. If you’re using an investment loan to perform the Smith Manoeuvre, I would suggest using the dividends to pay down the non-deductible mortgage, so as to further accelerate the conversion to deductible/good debt.

As a side note, many people have written comments about using the investment loan to buy mutual funds with HIGH distributions.  Typically, high distributions include return of capital - which is fine, providing that you NEVER withdraw them. If ROC distributions are withdrawn from the investment account, the tax deductible portion of the loan will be reduced. Only dividends/interest can be withdrawn without any consequence to the investment loan. This makes sense when you consider the principle of “income producing securities” being the key focus, because return of capital is not “income” per se.

Summary:

  • Make sure your investment loan produces income of some sort.
  • ROC distributions are undesirable for leveraged investment accounts as they decrease the tax deductibility of the investment loan. There are ways around this, but it can turn out to be an accounting/paper trail nightmare.
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The Smith Manoeuvre Returns Spreadsheet Calculator

You can download our Smith Manoeuvre Returns Calculator and input your variables to see how the Smith Manoeuvre could work in your specific situation.

Again - it’s worth reiterating that the stock market does not move in a nice linear 8% growth line year-in-and-year-out. When using leverage to invest, it’s key to truly wrap your intellectual arms around what a worst-case short term scenario might look like.

Best Investments for the Smith Manoeuvre

Look - if I knew which investments were going to perform best (whether in your Smith Manoeuvre portfolio or otherwise) I wouldn’t be sharing them for free on the internet. The truth is that I have no idea which specific stocks are going to skyrocket and which will plummet. All I know is how to apply Canada’s tax rules to your Smith Manoeuvre investments (which have to be in a non-registered investment account) and historically, how large groups of stocks have fared over the long term.  

However, with that said, when it comes to the Smith Manoeuvre, I have a preference toward purchasing steadily-growing dividend paying stocks. While I still do my own research, I now use Dividend Stocks Rock in order to organize my “watch list” for excellent Canadian dividend opportunities.

Why Dividend Stocks You Ask?

I believe that investing in mostly Canadian dividend-paying stocks is the most efficient way to implement the Smith Manoeuvre. The reason being, is that Canadian dividends of strong companies (like the big banks) have a history of increasing dividends that can be used to pay down the non-deductible mortgage. 

Why not just buy interest bearing bonds or GICs? 

Publicly-traded companies that pay dividends in Canada (think “big companies listed on the Toronto Stock Exchange”) are eligible for the enhanced dividend tax credit, which results in a substantial tax break for dividends compared to interest-bearing income like GICs. Plus, the excellent record for these dividend growth stocks simply offers a vastly superior long-term rate of return. Companies like Telus, Enbridge, or RBC are just in such dominant positions within the Canadian market, that their prospects for paying ever-increasing dividends are absolutely excellent. 

To summarize, the strong dividend company (if history is any guide), will increase their dividend on a regular basis AND you will receive a tax credit for any dividend income that you receive. Putting the dividend income and the annual tax refund towards the non-deductible mortgage will make the conversion from bad (non-deductible) debt to good (tax-deductible) that much quicker.

Since dividend investing is a subject all on its own, we’ve also written a seperate in-depth guide on the best dividend growth stocks.

Learning More With the DSR Newsletter:

Dividend Stocks Rocks (DSR), is a superb resource for everything stock investing. It is managed by my fellow blogger Mike Heroux from the Dividend Guy Blog since 2013.

DSR is not just a weekly newsletter with stock picks. It’s a program that will help you manage portfolio and improve your results.  I use it to help me filter my picks according to both yield and dividend growth prospects.

Our readers are eligible for a 50% lifetime discount clicking on the button below:

Can I Use ETFs or Robo Advisors to Do the Smith Manoeuvre?

One of the most common questions that I get asked is, “Can I use ETFs when doing the Smith Manoeuvre?” Over the last couple of years, that question has evolved to also include the services of Wealthsimple - that will manage a portfolio of ETFs on your behalf.

The short answer is: yes.

The longer answer is… you might not want to go that route.

Legally speaking, the vast majority of ETFs (and certainly all of the most common ones) meet the CRA’s definition of an income-producing investment.  

A person could certainly be successful if they used basic ETFs to create diversified portfolios, using the money from their HELOC. Here’s the two main issues that people run into and why I prefer to use Canadian dividend stocks.

1) Almost any ETF is going to complicate your tax situation.This is due to the fact that the distribution dividends that ETFs reward investors with each year, commonly contain non-ideal forms of income such as foreign bond interest, foreign dividends, and distributed return of capital (which is especially common for ETFs that include REITs).  

2) In addition to the tax complication - which can mean several hours of paperwork each year as you track your adjusted cost base and where your income is coming from - ETFs that include these different types of income just aren’t nearly as tax efficient as Canadian dividends in a non-registered account.

If you do decide to go the ETF route, a basic Canadian equities ETF that does not include REITs is probably your best bet.

Personally, many of you know that I’m a huge fan of Canada’s all-in-one ETFs, as well as old school favourites like XAW or VXC. I love the instant diversification that they bring to the table, and how easy they are to recommend to folks. I don’t use them in my Smith Manoeuvre, however.

Instead, I use them in my RRSP and TFSA, as well as in a separate non-registered account (to make the accounting paperwork easier). They are an easy way to diversify away from the large exposure to Canadian dividend-payers that my Smith Manoeuvre account offers.

Using Robo Advisors Like Wealthsimple for a Smith Manoeuvre

Obviously if ETFs legally work for using the Smith Manoeuvre, then so too would a portfolio of ETFs managed by a robo advisor such as Wealthsimple.

That said, I actually email-interviewed their portfolio management team in order to confirm that there was nothing that I had overlooked. They responded that not only was it fully within the CRA rules to run a tax-deductible loan through a robo advisor account, but that the annual fee that you would pay to Wealthsimple would be tax deductible as well. Additionally, they mentioned that investing through a Wealthsimple non-registered account would allow the client to take advantage of tax-loss harvesting, and that they would track the book costs - greatly aiding in the overall paperwork battle that can be the main drawback to using ETFs.

Naturally the same drawbacks would apply with Wealthsimple’s ETF portfolios, as with the ETFs we covered above, as far as tax treatment for foreign dividends or bond interest. You would also have to factor in the tax-deductible fees that Wealthsimple would charge for their services. 

Overall, I like the idea of getting help on the paperwork side of things AND using the Smith Manoeuvre would allow you to get all of the benefits of Wealthsimple’s VIP levels - which you can read about here in our full Wealthsimple Review. This could lower the fees that you already pay if you use Wealthsimple for your RRSP, TFSA, and/or RESP.

That said, I’m still partial to the simplicity of going with my Canadian dividend strategy.

Investing in Your RRSP and TFSA vs The Smith Manoeuvre

One of the common arguments that I see online, is that maxing out your RRSP plus TFSA - and investing for the long term - will outperform the Smith Manoeuvre.

I will agree with the basic math behind the statement that due to the fact that your RRSP and TFSA 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 Smith Manoeuvre is a replacement for your RRSP and TFSA, but a replacement for your non-registered portfolio

The optimal strategy would be to maximize your RRSP and TFSA, 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. 

Always remember that there is an 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 ETFs.

Be aware that apart from the leverage/risk/sleeping-well-at-night element, success depends on the equation (market returns)-(investment costs)-(interest)-(taxes on inv earnings)+(interest tax deduction). This is the underlying equation (with some added optimizers) that we based our Smith Manoeuvre Calculator on.

The fact that the interest tax deduction is at your marginal income tax rate, while taxes on the actual investment earnings are likely lower (cap gains and dividends), juices returns a bit through tax arbitrage. Over a full economic cycle (market returns)-(interest) is positive, but there is no guarantee of a large difference between what your investments will earn and the interest that you’ll owe. This reality means that having the nerves of steel to not tinker - as well as low investment costs to not fritter away the positive spread - are crucial.

The other key factor when looking at the Smith Manoeuvre vs TFSA + RRSP debate is that most people who look into this strategy won’t be doing so from a “dead stand still” as they look ahead at the next 50+ years. Most folks will be somewhere midway along their financial journey’s path, and will likely own a home. Allowing folks to move their equity from the relatively low traditional returns on real estate (despite what some in the GTA might have you believe) to relatively high traditional returns in equities, can make a massive difference. Take a look at the math behind my personal $700,000 example that I originally used for more evidence. Consequently, it’s not a “vs” argument, but more of a “yes, and” agreement.

Arguments Against the Smith Manoeuvre 

A common argument that I sometimes see is that paying off your mortgage, and then investing in a non-registered portfolio will outperform the Smith Manoeuvre.

The math involved with that argument just doesn’t make sense. When implementing 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 compounded returns should make the difference. Not only is there more time in the market for your investments to compound, you pay NOTHING out of pocket to maintain your HELOC. You simply withdraw the interest owed monthly from your HELOC and re-deposit it. (Aka “capitalizing the interest”)

The only issue is that in order to make the Smith Manoeuvre work, you’ll have to reach an investment return that is greater than the interest that you are charged. For example, if a HELOC charges 6% and you’re in a 40% tax bracket, then your effective interest is 3.6% after your tax deduction. North American stock markets have averaged 10%+ over the last 100+ years, but I used 8% in my personal calculations. In any case, it should be much higher (long-term) than 3.6%.

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. This is actually the perfect example of why the math is on your side when using the Smith Manoeuvre. 

Another common argument against the Smith Manoeuvre is that there is simply too much risk in “gambling” your home in the stock market.

Dealing With Cashflow Problems on the Smith Manoeuvre

A big question that I get is what about making the HELOC payments? Wouldn’t that crimp your cash flow? To get around this cash flow problem you can “capitalize the interest”. Essentially, this is where you use a loan to make the loan interest-only payments. In this case, you can use the existing HELOC to make the HELOC payments. Confusing? It’s not as bad as it sounds.

For those of you new to this strategy, capitalizing on the interest is one of the bonuses of this strategy. It’s where you use the investment loan to pay for the interest owed, and everything remains tax deductible. As funny as that sounds, the rule is if you take out a loan (we’ll call it loan A) to pay for the investment loan (HELOC) tax deductible interest, then loan A interest is also tax deductible. So technically, if I use the HELOC balance to pay for the HELOC interest, then the entire HELOC balance should remain tax deductible. I utilize this strategy as it allows me to have an investment loan without actually using any of my own cash flow to service the loan interest.

The easiest way is to have your HELOC interest automatically deducted from your chequing account monthly. Then do a transfer for the same amount from your HELOC to repay your chequing account. I would also recommend having a dedicated chequing account for this strategy in case CRA comes knocking on the door for your records. At least that’s the way that I have it setup. And yes, I would recommend against maxing out the HELOC as you’ll need the space to pay for the interest incurred.

If you are capitalizing the interest though, isn’t there a point where you run out of HELOC space (credit available)? The answer is yes! This brings us to our next point below.

Running Out of HELOC Space With the Smith Manoeuvre

If your instalment mortgage is paid off, and you are using the HELOC to pay for itself, your HELOC balance will continually increase. The question is, are you comfortable with a maxed out HELOC? Note that a large HELOC may impact your credit score as you may be borrowing a large amount of your overall credit available. 

Personally, I have seen the impact with my Equifax scores but not so much Transunion. You can likely check your credit score for free with your bank. If your bank doesn’t offer the service, here are some other free ways to check your credit score and report. You can also get your credit score (Equifax) for free with Borrowell.

Let’s take a look at an example. Say an initial loan of $100k from a HELOC with an interest rate of 4% and a credit limit of $250k.  Providing that there are no more transfers from the HELOC to the portfolio, how many years will it take for the HELOC to be maxed out? 24 years! Check out the table below.

YearBalance
1$100,000.00
2$104,000.00
3$108,160.00
4$112,486.40
5$116,985.86
6$121,665.29
7$126,531.90
8$131,593.18
9$136,856.91
10$142,331.18
11$148,024.43
12$153,945.41
13$160,103.22
14$166,507.35
15$173,167.64
16$180,094.35
17$187,298.12
18$194,790.05
19$202,581.65
20$210,684.92
21$219,112.31
22$227,876.81
23$236,991.88
24$246,471.55
25$256,330.42

Let’s take a look at a personal example that I wrote about my own HELOC a few years ago. At that point, the balance was about $140k with 4% interest and a credit limit of about $215k. If we were to have capitalized the interest right up until my credit limit, I could have done that for about 12 years.

YearBalance
1$140,000.00
2$145,600.00
3$151,424.00
4$157,480.96
5$163,780.20
6$170,331.41
7$177,144.66
8$184,230.45
9$191,599.67
10$199,263.65
11$207,234.20
12$215,523.57

To mitigate against the HELOC balance from getting too large, you could simply make the payments out of your own cash flow and/or you use the dividends generated from your investments to pay down the loan. 

At that point in time, my Smith Manoeuvre portfolio generates about $7,800/year in dividends. If I were to have withdrawn those dividends right onto the investment loan (and to keep things simple, let’s assume that interest rates stayed the same AND that there was no dividend growth - which obviously was NOT as good as the situation I’ve enjoyed over the last few years).

YearBalanceDeposit
1$140,000.00$0.00
2$145,600.00$7,800.00
3$143,312.00$7,800.00
4$140,932.48$7,800.00
5$138,457.78$7,800.00
6$135,884.09$7,800.00
7$133,207.45$7,800.00
8$130,423.75$7,800.00
9$127,528.70$7,800.00
10$124,517.85$7,800.00
11$121,386.56$7,800.00
12$118,130.03$7,800.00
13$114,743.23$7,800.00
14$111,220.96$7,800.00
15$107,557.80$7,800.00
16$103,748.11$7,800.00
17$99,786.03$7,800.00
18$95,665.47$7,800.00
19$91,380.09$7,800.00
20$86,923.30$7,800.00
21$82,288.23$7,800.00
22$77,467.76$7,800.00
23$72,454.47$7,800.00
24$67,240.65$7,800.00
25$61,818.27$7,800.00
26$56,179.00$7,800.00
27$50,314.16$7,800.00
28$44,214.73$7,800.00
29$37,871.32$7,800.00
30$31,274.17$7,800.00
31$24,413.14$7,800.00
32$17,277.66$7,800.00
33$9,856.77$7,800.00
34$2,139.04$7,800.00
35-$5,887.40$7,800.00

As you can see from the table above, using the dividends from the portfolio would result in paying off the HELOC entirely by about 35 years (at least in this scenario – it’s faster if you count the tax deduction). 

The main takeaway here is that you should plan on capitalizing on the interest on your investment loan, take note that you will eventually run out of HELOC space unless you plan on: refinancing; paying it off using dividends; and/or using your own cash flow.

Capitalizing the Interest on the Smith Manoeuvre With the Rempel Maximum 

Ed Rempel, a certified financial planner (CFP) and accountant, has been a regular comment contributor to the Smith Manoeuvre articles on this blog. He has come up with a twist to the Smith Manoeuvre strategy that maximizes the tax and investment return on your leveraged portfolio.

He calls this strategy “The Rempel Maximum“.  

Please check out the two interviews on the Smith Manoeuvre - which my staff writer Kyle Prevost recorded over the last couple of years at the Canadian Financial Summit with Ed.

How Exactly Does “The Rempel Maximum” Work?

The “Rempel Maximum” is a variation of the Smith Manoeuvre that maximizes both your tax and potential portfolio return while using $0 of your own cash flow. When you use the Smith Manoeuvre, you will get a small increase in your HELOC balance as you pay down your mortgage which is then used to invest. 

With the Rempel Maximum, instead of using the small increase to invest, you use the increase to fund your investment loan/HELOC. This may result in obtaining an additional investment loan depending on the size of your principle payment. More on this below.

This way, you get the tax deduction from the HELOC along with the tax deduction from the investment loan. Canadian tax rules state that you can deduct the interest from a loan that supports an investment loan.

On top of that, you’ll have a large balance to work with initially to take advantage of compounding returns and time. 

How Do I Implement the Rempel Maximum?

You’re probably wondering how large of an investment loan can you obtain? According to Ed Rempel:

For example, if your mortgage payment pays $500/month of principle ($6,000/year), you divide the $6,000 by the interest rate (say 6%), which gives you $100,000. You increase the credit line limit on your readvanceable mortgage to 80% of your home value, which is often done for free at the major banks. Then you borrow and invest up to the credit line limit. If there is less than $100,000 available, then you finance the rest from an investment loan.

Based on the above example, the banks will give you [principle payment/interest] as your maximum investment loan including your HELOC. Depending on how much equity you have in your home, you could end up with a fairly large investment loan.

What Are the Risks Involved With the Rempel Maximum?

This strategy uses the maximum leverage available to you based on your principle payments, or how much your credit line is readvanced with every payment. Needless to say, the investor must be aggressive, comfortable with risk, and experienced with investing.

As you already know, leverage amplifies your returns, good or bad.

Below is an example from Ed Rempel:

You have a home worth $400,000 and a mortgage of $200,000 at 5% interest (Editor’s Note: Can you tell we worked through this example a few years ago!) and are paying $1,169/month (25-year amortization). You can re-borrow at a rate of 6%, the investments average a 10% long-term return, and you are in a 40% tax bracket. 

Each mortgage payment pays down $336 of principle x 12 months/ 6% = $67,200. 

Since you have more than the $67,200 in available credit on your Smith Manoeuvre credit line, you can borrow this $67,200 to invest. 

The interest payment is $336/month - which can be paid entirely from the Smith Manoeuvre credit line each month. 

The additional benefit of the Rempel Maximum over the “plain vanilla Smith Manoeuvre”? 

After 25 years of regular Smith Manoeuvre: $410,000 

After 25 years of the Rempel Maximum Smith Manoeuvre: $718,000

That’s over $300,000 in difference over 25 years! The craziest part is that if you use the Smith Manoeuvre and the rules around borrowing to invest in Canada to your advantage, this $300,000 difference would compound over the next 25 years (assuming you never paid the loans back, and just kept making interest payments).

Who Should Use the Rempel Maximum Smith Manoeuvre?

There are 3 criteria that a person should consider before implementing this strategy:

  1. The investor must be experienced and comfortable with risk.
  2. The Rempel Maximum works best if your initial HELOC balance is small. ie. Someone who is just starting the Smith Manoeuvre with a little over 25% in equity.
  3. The investor must be in this for the long-term (think 25+ years).

Summary:

The Rempel Maximum is a way to maximize the potential returns from implementing the Smith Manoeuvre through the additional tax deduction and increased leverage. This can be an extremely powerful and lucrative strategy if used properly over the long term.

If you are considering using this strategy twist to the Smith Manoeuvre, make sure that you are comfortable with the maximum leverage applied to your portfolio.

I've Paid Off My Mortgage - Should I Stop the Smith Manoeuvre?

Another common set of questions that I get revolved around, “What if I’ve paid off my non-deductible mortgage while implementing the Smith Manoeuvre? Now what?” 

What do I do with the large remaining investment loan?

How do I arrive at this situation?

There will come a point where the non-deductible mortgage gets paid off completely and the investor is left with a large line of credit (of tax-deductible “good debt”) which is invested in the market.

Besides jumping up and down in celebration, there are a few options once the non-deductible mortgage is paid off:

  1. Keep the investment loan forever. This is the main strategy if you follow the Smith Manoeuvre to a tee. The rationale is to keep collecting the tax deductions for the remainder of your life. 
  2. Pay off the investment loan completely over time. The opposite of the above is to start paying off the investment loan once the non-deductible mortgage is wiped out. Basically, the investor here would apply the old mortgage payments toward the HELOC. The tax deduction would still apply, however at a reduced amount every year as the HELOC balance reduces.  I’m more in favour of this option, or the one below, as I’m not sure I would be comfortable having a large looming debt during retirement. Even if it’s good debt.
  3. Pay off a portion of the investment loan. This is a hybrid of the above strategy where the investor would pay down the investment loan to a point where they are comfortable with the monthly payments. The investor can decide how much per month they can afford to pay indefinitely and pay down the balance accordingly. Of course, the investor would have to account for higher inflation years as it would affect his or her monthly line of credit servicing costs.

The three answers above are all correct, it’s up to the investor to decide how much risk they can allow in their portfolio and still sleep well at night..

Record Keeping for Your Dividend Stocks as You Do the Smith Manoeuvre

The process of saving and investing can be a rewarding experience.  However, when it comes to taxes and reporting your investment returns to the CRA, the experience can be frustrating.

If you have used the Smith Manoeuvre to exchange your non-deductible mortgage interest for tax-deductible investment loan interest, you may be wondering how to report that interest expense on your tax return.

Filing Your Smith Manoeuvre Tax Return

When it comes to personal finance, proper record keeping ensures that you can track progress towards your goals. When it comes to income tax, proper record keeping can help avoid the denial of a deduction and incur interest and penalties.

When you file your tax returns, you are not required to submit any documentation to the CRA to prove your claim for interest expenses. However, you must keep adequate records to support your claim in case the CRA asks to see them.

You must be able to show that the funds withdrawn from your line of credit were used to purchase investments. You can show this link by attaching a cancelled cheque from your line of credit to your brokerage statement or attach your bank statement showing the funds transfer from your line of credit to your brokerage account.

You also need to support your interest expense calculations. Attach copies of your line of credit statements along with a cover sheet showing your calculations to your income tax return. This is why I personally recommend keeping your HELOC account as 100% Smith Manoeuvre funds. If you begin using that HELOC account to fund other purchases, the record-keeping can get easily muddled.

Maintaining proper records will ensure that you can quickly access your records and prove your claim at any time.

Personal Use of Funds

When you borrow to invest in income producing properties, the interest you pay is tax deductible. However, interest used for personal purposes is not tax deductible.

It is important to ensure that when you use your line of credit to invest, that you avoid using it for personal purchases. Using your line of credit for personal purchases could result in your deduction being denied unless you can conclusively link the proportion of the line of credit to your investments.

It can be difficult to determine the proper proportion if there are a number of personal purchases on your line of credit. There is also a greater possibility for error. It is advisable that you use a second line of credit for personal purchases…or better yet, use cash!

Reporting Your Tax Return

So, you have assembled your bank statements and calculated your interest expense and now you are ready to claim the deductions on your tax return.

The deduction for interest paid on your investment loan is reported as “Interest Expenses” on Schedule 4 Part IV Line 221. The description should be “Investment Loan.” The total amount reported on Line 221 of Schedule 4 is then recorded on Line 221 of the T1 Income tax and Benefit Return.

And that is it!

If you are unsure of what you can claim or what you can deduct, it is advisable that you speak with a tax professional.

Smith Manoeuvre Checklist

While the benefits of the Smith Manoeuvre are definitely attractive, it is not something that you want to “try out” to see if it’s right for you. Instead, it’s a long-term commitment to use a proven leveraged-investment strategy, through both good markets and bad. 

To help you with the decision, here is a checklist of things to consider before diving in:

  • Do you already have the 20% down/equity in your home, to avoid the CMHC insurance?
  • Can you handle,and are you willing to deal with the challenges of using leveraged investing?
  • Is your RRSP and TFSA maxed out? This technique shines the most when done using your non-registered (taxable) accounts.
  • Are you willing to accurately track your transactions in case you get audited by CRA? The benefits to the Smith Manoeuvre are clear, but are you willing to do that extra bit of tracking to ensure that it is done properly?
  • Do you have a plan ‘B’ in the case that you need to move and home values have gone down? If you invested properly, your portfolio should at LEAST cover your loan.

Smith Manoeuvre Frequently Asked Questions

How Is a Person Supposed to Pay for Both the Mortgage AND the HELOC at the Same Time?

This is probably amongst the biggest concerns people have had, as the borrower will be responsible for BOTH payments while implementing the Smith Manoeuvre. This includes your primary mortgage (principle + interest) along with your HELOC (interest only). Seems a bit steep, hey? Say you get a $100k HELOC @ 4.45%, that’s an extra $371/month on top of your existing mortgage payment.  

After talking to both Fraser Smith and Ed Rempel about this issue, I’m convinced that capitalizing the interest on the HELOC is the best option! 

Scratching your head yet? 

If you re-read our section on capitalizing the interest you’ll see that it basically means withdrawing the monthly interest due from the HELOC account, and redepositing the amount as the interest payment. 

If you capitalize the interest, you will never make the extra interest payments out of your own pocket while your primary mortgage exists.

You will only start paying the HELOC interest out of pocket/cashflow when the primary non-deductible mortgage is paid off. So as you can see, using the Smith Manoeuvre, you will always have a payment. It never goes away. However, the payments are now tax deductible.

Why Would You Need 20% Down on Your House to Start the Smith Manoeuvre?

The reason is that most of the readvanceable mortgages out there REQUIRE 20% down. The mortgages that do NOT require 20% down will charge an extra CMHC fee.

Which Spouse Should Claim the Investment Loan?

When you are a couple, what is the best strategy for getting the best tax return from the interest paid on the HELOC used to buy investments?

The answer is that it really depends on the financial situation of the couple, and all the variables that your particular scenario entails - but, let’s look at the different components of this question:

Does it matter whose name the investments are purchased under or should they be under both names?

Typically, whoever funds the investment account is responsible for the taxation on the account. However, investment loans are different. You can have both spouses on the “title” of the investment loan (ie. HELOC), but it’s the name (the one who submits their SIN) on the investment account who gets taxed (and obtains the right to claim the tax deduction).

With that said, providing that you purchase tax efficient investments, it would be optimal to keep the investments in the name of the higher-income spouse.

It makes sense to claim the investment income under both spouses if both spouses are in the same tax bracket. This would help in future years when income splitting is a concern.

According to Ed Rempel, although you can have both names under one investment account, you can choose who to charge the investment income. As long as you keep the deduction consistent through the years, this shouldn’t pose a problem.

Does it matter who owns the HELOC or if it is jointly owned?

As mentioned above, if the HELOC is jointly owned, you can put the money into an investment account of either spouse, or a joint account.

If the HELOC is under both names, does the tax deduction for the interest paid get split between the two people?

Again, it doesn’t matter if the HELOC is under both names, what matters is the name on the account that is investing the money.  The owner of the account investing the money, is the owner of the tax deduction and tax liability.

Conclusion:

Be sure to claim the investment loan under the spouse with the highest income. If both spouses have similar rates, then invest under both names.

Please remember that I am not a tax professional, so consult an accountant before following any taxation advice you find here.

Does it matter who owns the HELOC or if it is jointly owned?

As mentioned above, if the HELOC is jointly owned, you can put the money into an investment account of either spouse, or a joint account.

Is a Leveraged RRSP Better than a Smith Manoeuvre?

We received a reader question about the strategy of borrowing to invest in an RRSP instead of a non-registered portfolio (like the Smith Manoeuvre):

“I have a readvanceable mortgage, but why shouldn’t I just use my RRSP instead of investing in a non-registered account? Wouldn’t it make sense to use that space first? Simply take my equity out as I pay my mortgage (like I’m about to do the Smith Manoeuvre) but instead invest inside my RRSP. Then get my tax refund back, put that on the mortgage, withdraw the equity on the other side again, and continue that process?”

Now I realize that in the scenario I just layed out, I would not receive the interest deduction that you would receive for a non-registered investment, but instead would receive the normal return that an RRSP would receive. As far as I can figure, the effect would be receiving a large tax refund in the present (by using RRSP) and smaller in the future, versus a normal Smith Manoeuvre  where you receive a very small refund at first, and larger in the future (on a continual basis I realize until the loan is paid).

To begin, let's go over the tax rules, as well as the benefits & disadvantages of each strategy.

Leveraged RRSP:

  • Tax refund on the contribution – thus a larger tax return to put on mortgage.
  • Investment loan is NOT tax deductible.
  • All withdrawals from the RRSP are taxed at the marginal tax rate when you eventually retire.

Leveraged Non-Registered Portfolio:

  • Tax refund based on the interest to service the investment loan. Depending on the current interest rates, this can fluctuate. This tax deduction is small initially but will grow over time as the investment loan grows.
  • Withdrawals are very tax efficient from a non-registered portfolio. Only 50% of capital gains are added to income, and dividends can be extremely tax efficient depending on the amount of other income during the year.

Having explained the tax rules, our Smith Manoeuvre Calculator can be used to compare both strategies. This is the scenario and conclusions that we arrived at:

Instead of borrowing home equity as it accumulates to invest in a non-registered portfolio, borrow to invest in an RRSP, and apply the full refund to the mortgage. This uses a readvanceable mortgage so there is a lot of flexibility to do this as each payment is applied.

So, the tweaked Smith Manoeuvre Calculator found that:

Inputs:

  • $300,000 House Value
  • $240,000 Mortgage @ 5%
  • $1,395.85 monthly payments amortized over 25 years
  • 8% investment growth rate
  • 5.75% HELOC rate
  • Marginal Tax Rate of 46.41%

It should be noted that higher Marginal Tax Rates at the time of contributing to the RRSP make the case for investing in an RRSP more favourable when compared to the ‘traditional’ Smith Manoeuvre.

Here are the outputs:

With Smith Manoeuvre: 

  • Mtg is retired in 21 years
  • $240k HELOC that is TAX DEDUCTIBLE
  • Investment portfolio of $304,142 that is NON-REGISTERED
  • Adjusted cost base (not including commissions) of $138,516

With RRSP:

  • Mtg is retired in 18.25 years. Therefore, run the scenario until 21 years still making ‘mortgage payments’ but the money now goes to paying the HELOC interest and anything left goes into RRSP.
  • $240k HELOC that is NOT TAX DEDUCTIBLE
  • Investment portfolio of $395,143 that is in an RRSP

Assuming the same MTR as used above, the net of it is whether a $240k LOC that costs $13,800 after tax to service annually and a fully taxable portfolio of $395k (that would be worth $212k if cashed out all at once) is better than having a $240k LOC that costs $7,650 after tax to service annually and a $304k portfolio (that would be worth about $265k if cashed out all at once).

If, however, your MTR is lower when you cash out (e.g. < 30%), then the advantage swings to the RRSP investment – especially if you can get rid of the HELOC quickly.

The basic conclusion is that the higher your marginal tax rate AND the larger the difference between the cost of the mortgage/HELOC and your investment growth rate, the better it looks for the RRSP.

All in all, I don’t see sufficient evidence to suggest that the Smith Manoeuvre/RRSP hybrid can reasonably be expected to outperform a traditional Smith Manoeuvre as long as tax efficient investing is used for the traditional Smith Manoeuvre. That is based on these facts:

  1. At the end of the 21-year period, the traditional Smith Manoeuvre has a HELOC with tax deductible interest payments where the SM-RRSP hybrid has no tax benefit. This will become more important the longer an investor hangs on to the tax-deductible investment loan.
  2. The RRSP will have significant tax consequences as one withdraws funds from it. The SM’s non-registered portfolio, although smaller, will have substantially less tax liability on withdrawals.
  3. A >4% difference between the long term mortgage rate and investment performance over 25 years is uncommon in Canada.
  4. Many folks just won’t have the room in their RRSP in order to keep their entire Smith Manoeuvre investment portfolio running through it - so that adds another layer of complexity as you’d now have a non-registered SM portfolio, and an RRSP SM portfolio.
The Smith Manoeuvre During a Market Crash

[Editor’s Note: I thought that this article I wrote during the last financial crises was especially pertinent at the moment.]

Below is an archived article from this blog which was written during the 2008 financial crisis. It’s a good reality check of what happens in the markets, and how heavy the losses can be, especially with a leveraged portfolio. Think of it as a way to test yourself to see if you have the right temperament for the Smith Manoeuvre.

Originally Published: October 9, 2008

There has been much concern over the viability of the Smith Manoeuvre or a leveraged investment strategy during this recent bear market. The main concerns are due to a couple of reasons:

1) Sinking equities

2) The possible increase of variable rates due to the credit crunch. 

The truth of the matter is that leveraged investing is risky in the short term. My investment account is facing the relatively risky equity market along with building interest on the capital that supports it. The opportunity for the account to grow at an accelerated rate is great, but so is the opportunity for values to drop.

With current market conditions, it’s a gut check to see who can really take the leveraged investing heat. With the possibility of HELOC (home equity line of credit) rates, which are traditionally at prime, to increase above prime, it will make this strategy even more expensive.

However, with a slow economy, the prime lending rates will most likely decrease even further, which will hopefully even out any increases. With that said, the Smith Manoeuvre strategy is still a valid option, just with one less readvanceable mortgage available along with the potential with higher HELOC rates. 

What am I doing with my leveraged portfolio during this correction?  Even with the extreme fear in the streets, I have my eye on the big picture and my long investment timeline. Therefore, I’m sticking to the plan, watching the best dividend paying stocks and waiting to deploy some cash when they appear cheap. I’ve said this before, and I’ll say it again, these market corrections are temporary and should be viewed as an opportunity to buy cheap equities for the long term. It may take a while (even years) for the markets to bounce back, but if you buy cheap, you’ll take full advantage of the upcoming recovery.

Conclusion

After using the Smith Manoevure for more than a decade, I’m still going strong. I’ve enjoyed hundreds of thousands of dollars in growth over the last few years (even including the recent downturn), and used those ever-increasing dividends plus tax refunds, to chop down my mortgage much quicker than the average Canadian.

We hope you enjoyed our comprehensive guide on the Smith Manoeuvre. Don’t forget to sign up to our email list to be informed of new and free in-depth guides like this. 

We’ll keep updating this article in order to keep all of our Smith Manoeuvre information in one place, so toss any questions you have our way!

FT

499 Comments

  1. Ed Rempel on May 17, 2015 at 9:18 pm

    Hi fs,

    To contact me, click on my name to go to our web site. The best first step is usually to register for one of our educational webinars.

    Ed

    • fs on May 28, 2015 at 8:36 am

      Ed,

      Done, thanks again!

      fs

  2. SC on May 27, 2015 at 3:59 pm

    Quick question. I have heard a few people lately talking about this.

    If you refinance your mortgage and invest the money you get from this are the mortgage interest payments on the amount invested tax deductible?

    Example

    I have a $1mill home and currently $500k left on my mortgage. I Re-Fi back up to $800k and invest the $300k I get in an unregistered account. Is 37.5% (300/800) of my mortgage interest payments now tax deductible?

    Thanks!

    SC

  3. Ed Rempel on June 13, 2015 at 12:46 pm

    Hi SC,

    Yes, 3/8 of your mortgage should be tax deductible. It is better to split your mortgage into 2 and have a $500K and a $300K mortgage. Then you can track the $300K separately.

    There are 2 big advantages to splitting your mortgage:

    1. You can track it, which is important if you are ever audited by CRA.
    2. You can then pay down your non-deductible $500K mortgage quickly, while paying down the tax deductible $300K mortgage slowly to keep the tax deduction.

    Ed

  4. RevShark on August 15, 2015 at 2:01 pm

    Hey FT,

    Do you have a spreadsheet that works for the latest version of Microsoft word? I just bought my first home and was able to get all things setup for the SM with 20% down and accelerated payments etc… Also, do you have any tips beyond what you have posted here? Thanks for this great site and best wishes for your future 60k a year passive income.

    RevShark

    • FrugalTrader on August 16, 2015 at 1:04 pm

      @RevShark, Thanks for the kind feedback. What error message are you getting?

      In terms of the SM, my advice would be to be aware of your risk tolerance. The normal gyrations of the market are enough to make a seasoned investor uneasy, but add leverage on top, and it’s a recipe for high stress investing for some. Just be ready for those ups and downs and keep your focus on the long term.

      • RevShark on August 16, 2015 at 11:42 pm

        Hey Frugal,

        Thanks for the quick response. I am getting #Value! in the yellow fields of your V2 spreadsheet. I have a huge time horizon as I am just newly graduated from Uni and have 40 plus years to be a working stiff. Thanks again for this great blog with a treasure trove of articles and comments.



  5. Trent on December 17, 2015 at 5:34 pm

    Question, I have more than enough invested assesses in my investment cash account to buy a house but want to know if I should sell enough stock to buy the house in full so I don’t have a mortgage and than get a secured loan against the house to replace the investment money. I know it would still be tax deductible (interest on the loan that is) But the big question is should I pay for the house in full so there is no mortgage?? Is this still the “smith Manoeuvre”?

    • FrugalTrader on December 18, 2015 at 9:11 am

      Hi Trent, this is a strategy that will basically give you a tax deductible mortgage. However, you need to be willing to take the risk of leveraged investing. As well, the psychological impact of taking on debt.

    • LP on June 19, 2020 at 9:38 pm

      I have a question related to using SM and trading within a non-registered account that is funded by the Heloc that’s part of a readvancable mortgage.

      I plan to use WealthSimple Trade to avoid commissions and invest primarily in Canadian Dividend stocks. Once or twice a year I would like to make some trades to rebalance or invest heavier in a particular sector.

      I plan to only withdraw dividends and wouldn’t withdraw any gains from growth.

      Is the only thing I have to worry about is the capital gains? Note that I don’t plan on buying anything where Return of Capital is applicable, I.e. no ETFs or Reits

  6. Laurencius on February 18, 2016 at 7:16 pm

    Question, I have a paid off home and by accident I become a landlord of this home, I bought a condo to use as my principal home and I took RBC homeline mortgage to pay off my condo and rent the first home, is the interest still tax deductible? Thanks

    • FrugalTrader on February 18, 2016 at 8:04 pm

      Technically, since you borrowed to buy a principal residence, the interest is not tax deductible. However, if you moved back in your old home and rented out your condo, it would be eligible.

  7. Murph on May 30, 2016 at 11:42 pm

    Hello FT and Ed,
    I keep reading all the posts on the SM, and would like to implement it. I also noticed in the posts about Cash damming. I look it up further and noticed it works well to use with Reantal properties… something I eventually would like to get into.
    After reading a bit Re: Fraser Smith, the cash damming would apply to any personal business. Hypothetically, If you install a SOLAR PANEL MicroFit System (in Ontario), this in essence becomes an income stream as you are a power generating station (not sure if it is a “business”, although should be treated as such). If this could qualify, could you borrow a loan to install the MicroFit system and them use the SM & Cash dam method to invest in the business to pay down that loan?
    It would probably pay it down faster than the advertised “get your investment back between 5 – 9 years”.
    That being said, I don’t have numbers to support what a 10kW system cost to install on a roof.
    Any thoughts? Thanks,

    Colin

  8. Murph on May 30, 2016 at 11:47 pm

    Ed,
    From time to time, you mention that people should do the SM, IF it is right for you.
    What types of conditions would “disqualify” someone from doing the SM?

    Murph

  9. Ed Rempel on June 5, 2016 at 8:48 pm

    Hi Murph,

    Yes, you can do the Cash Dam with the Microfit program. You record it as a business on your personal tax return.

    You would borrow the original purchase amount. There are hardly any expenses for the Cash Dam other than interest. You can capitalize the interest and use any income or savings in electricity to pay down your onto your mortgage.

    You asked paying the loan down more quickly with the SM or Cash Dam. Usually with the Cash Dam, the goal is to capitalize the interest accumulate a growing tax deductible credit line, while using any extra cash to pay down your mortgage.

    You could create a separate mortgage out of the Microfit loan and the the Smith Manoeuvre on that loan, which should reduce the amortization by 2-3 years.

    Ed

  10. Bernard Davis on July 13, 2016 at 11:56 am

    * Are there any age restrictions on the Smith Manoeuvre?

    • FrugalTrader on July 13, 2016 at 12:04 pm

      Interesting question! I don’t know the exact answer, but you need to be old enough to hold a mortgage, and old enough to open a discount brokerage account.

  11. Tom on October 4, 2016 at 7:49 am

    Good day, FrugalTrader. I’m hoping you can provide some insight into my question.

    I’m in the midst of implementing the Singleton Shuffle (i.e. I have sold off all my non-reg investments with the intent to pay down a portion of my mortgage and borrow back the principle).

    One question has been nagging me that I hope you can answer. I have made it a rule in the past that I will not invest in any stock unless I have a minimum of $1,000.00 cash in my investment account, in an effort to avoid paying too many commission fees (i.e. $9.95 per transaction, which works out to 1% of my total $1,000.00 purchase). I pay down my mortgage on a bi-weekly basis, and currently (including an additional $100.00 double-down), I am paying about $435.00 in principle each payment. If I adhere to my rule, that would mean I would need to wait until three (3) mortgage payments are made before I can invest in anything (i.e. $435 * 3 = $1,305.00.) Would there be an issue if the transferred principle amount (from HELOC to non-reg account after each mortgage payment) sits there for up to 6 weeks before I use it for investing? Or should I be buying equities with each transfer?

    Looking forward to your expert feedback.
    Tom

    • FrugalTrader on October 4, 2016 at 8:17 am

      I don’t suspect that 6 weeks is a problem before you invest. Providing that you have the intention to invest the cash go for it. Soon it will be difficult to track whether the cash comes from dividends, capital gains or deposits anyways.

    • Nikolai on October 4, 2016 at 10:42 am

      Well…depending on how lenient do you expect CRA to be. Strictly speaking, if the money is not invested into something income-generating you cannot write off the interest. So the safest bet would be not to take the money from HELOC until you are ready to place them into something eligible. However, I can see at least 3 solutions to this:

      – you can use the margin on your account. By the way, you will never be able to buy something for exactly 3 x $435. So, disconnect these things mentally – the mortgage, the HELOC and your margin account. When you see an opportunity in the market – you buy the stock using the margin. Target the approximate amount you intend to withdraw from the HELOC in the future. And then simply take the money from HELOC to pay off the negative cash balance on your margin account. BTW, you may be surprised that the margin rates are sometimes lower than HELOC rates :) And, I believe (although I am not a tax advisor!) that the interest paid on the margin account would be just as deductible as HELOC one, since the law does not specify how you are supposed to borrow. As long as it is used only to buy the eligible investments, of course.
      – If you are paying 9.95 per trade, it means most likely that your broker is one of the banks. They all have money market mutual funds or other kind of fixed-income ones. They are commission-free. So you can use them as buffer before you are ready to move with a stock. Just make sure you respect the minimal period if applicable.
      – switch to another broker that charges less outrageous commissions ;)

  12. KEYZD on December 18, 2016 at 12:42 am

    Hi Guys, Thanks for all of your insights.
    Should one not make sure their TFSA and RRSP limits are maxed before considering the SM strategy?
    That way you can still use the leverage strategy but with a much greater tax advantage (30-40% of income) than the SM offers (3%).

    Am I correct in saying that and should that perhaps be a qualifying question before starting the SM?
    Thanks again!

    • FT on December 18, 2016 at 12:29 pm

      Some would recommend to leverage right away, but personally, I like the idea of maxing out non-taxable accounts before using taxable accounts.

  13. Ed Rempel on December 22, 2016 at 2:03 am

    Hi KeyZD,

    Great question! TFSA vs. RRSP vs. Smith Manoeuvre. Which is best for long term growth?

    Lots of articles on TFSA vs. RRSP. It’s good to also add SM.

    You can borrow your equity and invest in any of the 3.

    I have looked at this a lot, with any clients in this situation. The answer comes down to tax brackets.

    If you are in a higher tax bracket today than you will be after you retire, then RRSP has the advantage of a 10% or 20% tax gain on the full amount.

    If you will retire in a similar or higher tax bracket (perhaps because clawbacks on government pensions may affect you after you retire), then RRSP has a disadvantage.

    Retirees usually have a lot of flexibility in planning how much of their retirement income will be taxable, so RRSP often has the edge.

    Comparing TFSA vs. Smith Manoeuvre comes down to tax-efficiency of your investments. The Smith Manoeuvre creates tax refunds on the interest, but then results in some tax on the investments.

    If you invest tax-efficiently, so that there is little or no taxable income over the years (until you eventually sell), then Smith Manoeuvre is better. Tax-efficient strategies could include investing in corporate class mutual funds or buy-and-hold strategies.

    However, if you generate more taxable income, then TFSA would be better, because there is a “tax drag” on the Smith Manoeuvre non-registered investments. Dividend investing creates higher taxable income, as does more frequent trading producing capital gains .

    To do this properly, you need a good retirement plan, so that you know your tax bracket after you retire.

    The general answer for most people is to contribute enough RRSP to get to the bottom of your current bracket, and then put the rest into Smith Manoeuvre or TFSA (depending on how tax-efficiently you invest).

    Ed

  14. joanne on February 13, 2017 at 2:44 pm

    HI

    We are 53 years old and have a combined net income after taxes of apx 150K
    250K in RRSPs
    150k in Work RRSPs
    Basement suite brings in $900 a month but that pays our property tax of $800 a month! We are in North Van- so expensive!
    We have a 440K mortgage – we renewed it back to 25 years- Silly! More interest again!
    Our home is worth $1.8M. Recently assesed at $2M but I wanted to be conservative
    We have a home credit line of $500K – 49k used to purchase a libiltiy sailboat ( silly again!) We are selling after this summer.
    We want to retire at 62.
    Question:
    Should we use the Line of credit to invest? OR how can we pay off our mortgage quicker- like in 5 years while at the same time investing in something so we have 2.5M in bank to live off the the 4% income “thingy”
    We so appreciate you guidance and know it is just ideas- we do not hold anybody accountable- just need feedback and options.
    We want to travel and yet still hold on to our home as well.

    Thank you everyone!!
    Jo

  15. Ed Rempel on March 1, 2017 at 3:31 pm

    Hi Jo,

    That is a big question. There are a lot of issues. You really need to have a financial plan to figure out exactly what you should do.

    Your $400K in investments likely is not nearly enough for you to retire on in 9 years. Let’s assume it doubles by then and you withdraw 4%, that’s only $32,000/year in future dollars, which buys about the same as $25,000 today. Add your rent income and pensions. That is probably not enough for you, especially if you want to travel after you retire.

    In theory, you could borrow over $1 million to invest doing the Smith Manoeuvre on your home. Is that a good idea for you?

    The Smith Manoeuvre is a borrowing to invest, which is both a risky strategy and the best wealth-building strategy. You need to balance your risk tolerance with the money you need for your retirment goal and decide together what makes sense for you. It is both the best and worst strategy, depending on how you use it.

    For example, let’s say you borrow $1 million to invest against your home. Then we have a big market crash and the invesments drop to $700,000. What would you do?

    If the answer is to sell or convert to more conservative investments to “stop the bleeding”, then the Smith Manoeuvre is a bad idea for you (at least to that size).

    If you would stay invested and possibly even take advantage of the buying opportunity, then maybe it is a great strategy for you.

    Historically, the stock markets have recovered from every decline and have been the best long-term growth investment. The worst 25-year period of the S&P500 in the last 80 years was a gain of 8%/year. Stock markets are volatile short and medium term, but provide reliable growth long term.

    A financial plan will help you you determine the retirement lifestyle you want, how big a portfolio you need for that, and figure out how to get there.

    You probably need to invest a lot, but also have competing lifestyle expenses and decisions about paying down the mortgage vs investing for retirement. RRSPs can provide a good tax advantage if you are in a higher tax bracket today than after you retire. You could keep the mortgage at a low rate and low payment, so that you have more money to invest. You could do the Smith Manoeuvre, which means paying down your mortgage faster also gives you more to invest.

    Optimizing all this requires a plan.

    Ed

    P.S. I did extensive research on 150 years of stock, bond and inflation history to determine if the “4% Rule” is reliable, how to make it reliable and what options there are. I will have the results in an article on my blog shortly.

  16. Passivecanadianincome on March 12, 2017 at 9:50 pm

    Great article. Does this only work for stocks and rentals? I’m looking into investing in a ccpc offering a great yield. by refinancing our house
    Thanks

  17. LoveLea on October 6, 2018 at 2:54 pm

    Hi there!
    I see these comments were made years ago.
    I am a Newbie!
    Here is my situation I have a Powerline Mortgage with CIBC
    $113,000 Mortgage at 2.29% and an available HELOC of $47,000 at 4.2%
    I was wanting to pay off my Mortgage quickly. Can I use my HELOC to pay off my Mortgage faster it started as a 30 year AMT. I live in it now… do I have to rent it out to be able to use the Tax write off or should I get a roommate? Are there any investments out there that you can make more than 4.2%? I am a 47-year-old single with no outside investments please help. Oh plus my stable income is $2,000 / month before taxes but sometimes make other money if I get commisions from doing Real Estate Thanks so much!

    • FT on October 8, 2018 at 8:59 pm

      Hi LoveLea, the only way to get a tax deduction on your HELOC is if you invest the proceeds in assets that have the potential for gain. If you rent out a portion of your home, then you can deduct a portion of your 2.29% mortgage. If you invest in the stock market over the long term (20+ years), you should be able to come ahead if you invest your HELOC. Check out some index investing options: https://milliondollarjourney.com/top-6-indexing-options-for-your-portfolio.htm

      • Love Lea on October 16, 2018 at 7:05 pm

        Thanks so much!!!
        I am trying to get educated on the Markets etc
        looks like scary times in the Stock Markets!
        What to do? Where is it safe? lol
        I will check out the link =) YAY! Hugs!



      • FT on October 17, 2018 at 9:42 am

        Happy to help. Try to figure out your tolerance for big swings in the market (volatility), then judge your asset allocation from there. This article may help: https://milliondollarjourney.com/how-and-why-asset-allocation-works.htm



  18. JohnR on October 10, 2018 at 10:26 am

    FT on you immediate last post, I believe CRA allow only the interest deduction when the investment produces or has the potential to produce income – as in rental income or dividends.

    a qualifying investment that is simply capital gain likely does not qualify

    from the CRA, line 221 ‘carrying charges’

    https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-221-carrying-charges-interest-expenses.html.

    bullet point 4 in the linked page
    “most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. For more information, contact the CRA”

    • FT on October 23, 2018 at 2:21 pm

      Good point John, it does need to have the “potential” to produce income which includes equities that don’t currently pay a dividend but have the “potential” to issue dividends.

  19. Wesley on January 25, 2019 at 5:34 pm

    I have a question about dividends and DRIPS inside of a SM portfolio. If a stock or ETF pays a dividend and the company or fund automatically re-invests for you (Buys backs shares in itself). Do you have to declare this as income on your tax return every year or can you just let it carry over?

    Thanks,

    Wes

    • Wesley on April 10, 2019 at 11:15 pm

      Can anyone answer this question for me??

    • Ed on April 11, 2019 at 2:22 am

      Wes,

      Yes. You have to include on your tax return all dividends you receive. Whether or not they are reinvested is not relevant.

      Ed

  20. Rajesh Patel on April 8, 2019 at 9:28 pm

    Hello,

    I am trying to understand the Smith Manoeuvre concept, and as a part of that trying to validate if the Tax saving will outweigh the higher interest rate. Today I pay Prime -1 (2.95%) for my mortgage. I called up my bank – and understand that the rate for the HELOC would be P+1 (4.95%). So the interest rate on HELOC is 2% higher – I am wondering if there is a better way of doing it – or am I missing something? I apologize in advance if you have already covered this somewhere.

    • FT on April 9, 2019 at 9:13 am

      Hi Rajesh, estimating that you pay 40%, you’ll pay an after-tax interest rate of 2.97% (at current rates). You’ll need to decide for yourself whether or not long-term market results will beat that rate. Might want to focus on maximizing your tax-sheltered accounts before jumping into the leveraged non-registered route.

      • Rajesh Patel on April 9, 2019 at 6:17 pm

        Thank you – really appreciate your advice.



  21. Chris on April 13, 2019 at 10:28 am

    Hi FT, I started exactly this strategy (based on your excellent explanations) to help pay down my personal mortgage a couple of years ago. I have a two rental properties and I use the HELOC to pay my regular bills: taxes, electricity, minor repairs etc. With the revenue from my buildings I use some of it to pay down my home mortgage over and above my normal payments. I’m limited to 15% of the original mortgage amount per year, but using the HELOC and some agressive saving, I’ve managed to reduce my mortgage by 120k in 2 years. I also maxed out my weekly payments to speed things up. I should be mortgage free in the next 2 years (7 years before retirement) and have a HELOC debt equivalent to less than 50% of the debt I paid down. Then I will renegotiate the HELOC with whoever has my remaining rental property mortgages to minimise further my HELOC interest. The HELOC works for me because I pay lots of tax here in Quebec, so I can claim back quite a bit of the interest paid, making the difference in rates (mortgage/HELOC) still beneficial – at the moment. I keep my eyes on rate movements though, and the HELOC will probably become less interesting when I retire.

    • FT on April 14, 2019 at 10:32 am

      Congrats on the financial success Chris! An inspiring story of the success someone can have with leveraged investing when they have the discpline and long term vision.

  22. Chirag patel on July 5, 2019 at 7:42 pm

    Can you use a traditional mortgage to invest in stocks instead of the HELOC route? I have a home paid in full. Mortgage rates are below 3 pct right now – better than HELOC rates. I also like the idea of paying back principal each month. But, I want to know if the interest portion would be tax deductible by CRA. Thx.

    • FT on July 7, 2019 at 10:37 am

      Hi Chirag, if you remortgage your house and use the proceeds to invest in equities, then the interest would be tax deductible. However, careful to show a clear paper trail to show the proceeds going towards investments.

  23. Chirag on August 9, 2019 at 11:08 pm

    Can you deposit your HELOC funds into a margin account and leverage up even more? So for example, borrow $500k from HELOC, deposit into margin account and borrow $1m against that? All of the interest would be deductible. I know, probably not a smart idea! But is it illegal? Might be useful in a market meltdown situation and taking advantage of that.

    • FT on August 11, 2019 at 8:51 pm

      Hi Chirag, Yes you can do that, but you would need super high risk tolerance to sit through market volatility. There is also the added risk of margin-calls in the case that you are invested and the market corrects. If you are to pursue this strategy, I would suggest only using a small portion of your margin available.

  24. Calvin W. on January 13, 2020 at 12:58 pm

    I still need to get pass the concept: for example I have on hand cash of 100k from my salary and rental income. If I pay it into my principal residence mortgage and reborrow the entire 100k to invest, yes the interests are deductible, however it didn’t reduce the principle amount as it just gets in and out, unless you delay the investment to benefit from the time difference between in and out. The other benefit I can think of is the interests deduction can lower my income for tax return.
    Anyone please advise if my understanding is correct?

    • FT on January 20, 2020 at 12:00 pm

      Calvin, the goal is to build a long term portfolio by using the equity in your house. You would need a readvancable mortgage that would increase your credit limit as you pay down your house. If you already have enough equity to obtain a readvancable mortgage, then there is no need for you to use your $100k cash. You could build two portfolios, one with your $100k cash, and the other with your home equity. But note, when you use your home equity, it’s leveraged investing which comes with leveraged returns but also leveraged risk!

  25. The Rich Dog on January 17, 2020 at 12:45 pm

    Would you withdraw your TFSA to put in the equity of the house?

  26. AlW on April 20, 2020 at 11:08 am

    I read this back when I was starting to get into investing and financial independence. I’ve used leveraged investing successfully the past 6 years and this is the only time in these 6 years where I am slightly worried – markets are a mess etc. The interest rates have dropped substantively which is great but it’s odd seeing so many people unemployed and looking for work.

    • Kyle Prevost on April 24, 2020 at 10:51 am

      Have faith AlW! Long term, big companies continue to make a lot of money!

  27. Kyle on April 20, 2020 at 3:50 pm

    Do you recommend an entirely separate bank account (cheq.) to flow the money through ? If so , do you legally have to ? I’ve seen other blogs say that and see your money flow chart does as well. My concern is banking fees with minimum account balances etc. Hoping to keep mine all under TD’s umbrella for simplicity and just using my current cheq account with some good record keeping.

  28. Romeo C. on April 20, 2020 at 4:06 pm

    Could anybody help me find in the Canadian Tax Code where it says that a loan to pay for the investment loan interest is also tax deductible (Capitalizing the Interest). I’ve read IT-533 and I can’t seem to find it. It’s the only thing that still keeping me from starting SM. I just want to have all my bases covered in case of tax audit. Thanks in advance.

  29. hao on April 21, 2020 at 7:00 pm

    Do I really need a readvancable mortgage from one lender?
    How about regular mortgage from lend A, and HELOC from lender B, does Smith Manuever work for this structure?

    • Kyle Prevost on April 24, 2020 at 10:49 am

      Hi Hao – I do not believe this would affect your tax-deductibility – it would simply make things more awkward from a records point of view, and it might make getting favourable HELOC terms a bit more difficult.

      • hao on April 28, 2020 at 6:45 pm

        Thank you Kyle. So I guess I have call my bank again, in order to negotiate better rate both for readvancable mortgage.



  30. Dennis on April 22, 2020 at 5:24 am

    Hi FT & Ed,

    Quick question after reading this post. I see you used 8% return as the estimate growth rate for your investment portfolio. May I ask why? Since you advocate investing the HELOC into dividend stocks isn’t it expected that you would have a lower % gain in stock price? How can you have both a dividend yield of 3.5% and 8% investment growth rate.

    Thanks!

    • Kyle Prevost on April 24, 2020 at 10:48 am

      Hi Dennis – I’ll just chime in on this one. That 8% overall growth rate would include the 3.5% dividend. Sorry for not being clear.

  31. Oliver on April 25, 2020 at 9:37 pm

    Hi,
    I am looking for a simple answer as whether or not I can or need to do a Smith Manoevre or will a basic Leveraged stock portfolio suffice?

    My financial situation is complex with my wife and I having a Principal residence ($2.5mln value with $1.1mln debt) and 6 other rental condos and homes with moderate debt. After our last 2 pre-con condos finally were built and financed we stopped our real estate growth strategy for now.

    My question is whether I can still pull off a Smith Manoevre given we are maxed out on our house debt and I don’t see any banks giving us a good HELOC now attached to our properties. The one thing is we do have a $150,000 fairly well priced credit line (my spouse is a healthcare professional and gets a decent rate) and so I know we can do a leveraged stock portfolio and have started buying during this recent dip. We can still reap the benefits of buying up some of these sold off dividend companies using cheap money that we can write off every year.

    Is there a difference for me at this point? Any extra advice anyone can give?

    Thank you
    Oliver

  32. Michael on April 26, 2020 at 10:00 am

    Hi

    Is there a time limit for when you can capitalize interest on the HELOC? I started the Smith Manoeuvre last year (2019) but never capitalized the interest. Am I able to capitalize all of the 2019 interest this year (2020)?

  33. vathavong on April 26, 2020 at 4:16 pm

    can i invest in corporate class dividend mutual fund?

    • Kyle Prevost on April 27, 2020 at 12:01 pm

      I don’t see why not – buy why would you want to?

  34. Daniel Bennett on May 1, 2020 at 10:05 am

    FT and Kyle Prevost are not one and the same correct? I thought FT was a fellow Newfie?

    • Kyle Prevost on May 2, 2020 at 11:39 am

      That’s correct Dan. FT wanted to step back from some of the day-to-day stuff here on MDJ, so he brought Kornel and I on to help with a few things. I am a MB boy, and FT is indeed a proud Newfoundlander!

  35. Ray on May 11, 2020 at 8:38 am

    Hello,

    I’m currently implementing the Smith Maneuver and had a question on capital gains taxation.
    In the future, should I wish to pay down part (or all) of my HELOC by selling some (or all) of my investments that were bought using the HELOC, will I end up being taxed for capital gains?

    Thank you.

    • Kyle Prevost on May 12, 2020 at 11:27 am

      Yes. Whenever you sell a stock that has appreciated in a non-registered account those capital gains are “locked in” Ray.

  36. Steven on May 13, 2020 at 2:51 pm

    While I have seen a lot of information warning about return of capitol reducing the amount of the interest you can claim, I have not been able to find anything that clearly shows that the income earned on the investment (e.g. Dividends) do NOT need to be reinvested (i.e. can be taken out and spent). Would anyone have any references for this?

  37. hao on May 15, 2020 at 6:27 pm

    I haven’t max out either RRSP and TFSA, should I implement the Smith?
    I am very frustrating right now, choosing between readvancable mortgage (from big bank) and mortgage (lender A) with HELOC (lender B)

  38. jian on May 22, 2020 at 12:38 am

    Hello

    I want to ask what happen with commision for purchasing stocks. Let say I transfer 1000 from HELOC to purchase stock and cost $10 commission. Does it make only $990 tax deductible?

    • Kyle Prevost on May 25, 2020 at 9:39 am

      Fees on an investment loan are always deductible.

  39. Rati on May 27, 2020 at 9:28 am

    Thanks very much for doing this. can you please read below and let me know if i’ve missed something?

    1-borrow money @X% in a mortgage and then repay it down. This is post tax. so:
    post tax rate of return on home equity = X% you are no longer paying the bank + %home appreciation.

    2-borrow money @X% in a mortgage and then repay it down. borrow money @Y% from a HELOC, in a M% marginal tax bracket. so:
    post tax rate of return on home equity = X% you are no longer paying the bank+% home appreciation+ % gains on investment (including dividends) – % taxes paid on investment gains – %Y*M .

    3-setting these equal to each other, the smith manoeuvre works when :
    Y*M% = or < % gains on investment (including dividends) – % taxes paid on gains

    is this correct? Thanks.

    • Rati on May 27, 2020 at 9:31 am

      sorry, missed transaction costs. that should read:

      2-borrow money @X% in a mortgage and then repay it down. borrow money @Y% from a HELOC, in a M% marginal tax bracket. so:
      post tax rate of return on home equity = X% you are no longer paying the bank+% home appreciation+ % gains on investment (including dividends) – % taxes paid on investment gains – %transaction costs – %Y*M .

      3-setting these equal to each other, the smith manoeuvre works when :
      Y*M% = or < % gains on investment (including dividends) – % taxes paid on gains – %transaction costs

  40. rati on May 27, 2020 at 10:14 am

    I’m also trying to understand the rationale for the singleton shuffle / using non registered investments to do the SM:
    1-say you don’t do the singleton shuffle or SM:
    post tax rate of return on non registered investments = % gains on investment (including dividends) – % taxes paid on investment gains – %transaction costs
    we don’t consider the home appreciation gains here as those are gains on the home equity which is not being touched here.

    2-then you do the singleton shuffle : repay money borrowed @X% in a mortgage. borrow money @Y% from a HELOC, in a M% marginal tax bracket.:
    post tax rate of return on non registered investments= X% you are no longer paying the bank+ % gains on investment (including dividends) – % taxes paid on investment gains – %transaction costs – %Y*M .

    3-setting these equal to each other, the singleton shuffle works when :
    Y*M% < X%

    is this correct?

  41. cambo Estikaza on June 16, 2020 at 11:17 am

    If I use the smith manuever with a rental property, would all expenses of the rental be eligible for HELOC interest deduction? such as:
    – Principal part of mortgage payment
    – Interest part of mortgage payment
    – Down payment of the rental property
    – Deposit on a preconstruct ..

    And technically, you can take the principle paid on the rental as a second level HELOC and contininue the same way ! right ? this would be very powerful, (and risky)

  42. John on July 1, 2020 at 2:54 pm

    Income Producing Properties

    How important is it to ensure that the securities (stock market wise) invested have a chance of producing income (i.e. dividend or interest)? How would CRA know?

    Would they only know if needed to check/audit?

    My understanding you actually have to own the shares to a company.

    What about commodities ETF proxies like SLV or GLD ETFs?

    How about LEAP Call Options?

    Thanks

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