As promised, I will be discussing my personal scenario regarding using the Smith Manoeuvre. The spreadsheet provided by Cannon_Fodder was a great help and reinforced in my mind the power of smart tax planning.

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

Without further adieu, here are the numbers:

  • Current Residential Home Value: $140,000
  • Current 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 (estimated): $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 stock 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 will be 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


  • 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 will enable 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 the term, my portfolio value minus the loan amount will be approximately $38,000.
  • It is very likely that we will be putting some of own cash flow/savings to pay down the mortgage. If we were to add an extra $100 to our bi-weekly payments, we would reduce the mortgage term down to 10 years from 12.
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FT: Have you tried a 25 year mortgage of $206,250, and flow your current investment portfolio through it? Smith does NOT suggest the homeowner collapse investments for the down payment, but rather suggests that you use the value of the house to carry the greatest possible mortgage for investment purposes. He has further suggested that for those whose mortgage is less than $200,000 that they consider finding the means increase it for the borrowing space.


Do you have any rentals properties by chance? This or any other unincorporated business really makes the Smith Manoeuvre interesting. It accelerates the conversion of your bad debt (mortgage) into good debt (interest-deductible investment loan). In fact, my wife and I are currently pursuing either a small business or rental property more aggressively knowing the above benefits. I have used the spreadsheet from the RedFlagDeals thread but have an even better one I got from the financial planner who introduced me to Manulife One and more importantly the Smith Manoeuvre. I will look at cleaning it up and posting a blog entry on it this week actually. Thanks for continuing the discussion. Blessings!

FT does the Smith manoeuver explains what happens when the valuation of the home actually drops? I am seeing this trend this year across some parts of Montreal.

What happens to the equity value of your loan when the actual equity value of your house drops?

FT: Yep the whole “cashflow dam” idea mentioned in the book. I know it is a lot easier to setup before you purchase a rental property but you should be able to figure out a way to pay all costs related to the “rental property business” you have with your HELOC and deduct that portion of the interest. From my calculations and spreadsheet scenarios that is where the SM *really* becomes interesting.

FT asks: David: I’m not sure what you mean. Wouldn’t selling off my non-reg port to pay down the house give me a larger HELOC to invest with?

Yes, It’s just that Smith would launder the portfolio through the mortgage. As long as the banking product you have chosen is based on the $206,250, not the $165,000, the goals should match. The Smith Calculator does not readily allow you to have the LOC on the side as Cannon_Fodder’s does.

Remember, Smith’s numbers are mostly based on the 25 years of amortization being used to build the portfolio.

BTW, care to expand on your statement at the beginning of this entry: “it appears that some of you are better at analysis that I am. :)”



I wish you every success. Although I am too conservative to leverage my investments these days (I was more aggressive in my youth :-) I have been examining the following strategy to see if it has any benefit (using round numbers here):

1) I have a rental property, no mortgage, worth $180 K

2) I have an RRSP portfolio worth $130K

I would like to take a mortgage on the rental property and invest in an income/dividend/roi fund providing 7% return (combination of interest/dividends/return of capital). The revenue would be about $9100. Not all taxable (only about 75% as the roc portion is not taxable)

I would borrow the money from my RRSP with a self-directed mortgage (B2B Trust or TDW) at 5.5% (market rates). The payments would be about $9000 a year (6600 Interest and 2400 Principal). The $6600 would be deductible as a carrying cost for the investments, but (and here is the good part)…

…I would be receiving the interest in my RRSP tax free, so my RRSP would be increasing by $9000 per year.

Over time, the mortgage is paid out (no hurry as I am earning the interest) and I am left with another $130,000 of securities.

The only downside I can see so far is that the Return of Capital will eventually reduce the ACB for the securities to zero.

Thoughts, critics, am I missing anything?


Hi Q,

Here is what you are missing:

1. You are investing your RRSP at only 5.5% – easy to beat with almost any equity investment held long term.
2. Since you are taking a distribution that is likely mainly ROC, your mortgage used for investments becomes non-deductible. If you take a $10,000 distribution (7%), then only $120,000 of your mortgage is deductible. After 13 years, it is completely NON-deductible. (We call having a ROC distribution from a fund the Reverse-Smith Manoeuvre, since it is a process of converting a tax-deductible loan into a non-deductible loan.)
3. You are choosing an income fund because of the distribution, but it will have a lower return and cost you more tax than an equity fund – or any fund chosen for it’s risk/return, as opposed to whether or not it pays a distribution.
4. The RRSP mortgage idea only sounds good. See my entry at the Red Flags blog – – on the topic. If you invest your RRSP in a 30-year bond and get a good rate on your mortgage, you will always beat the RRSP mortgage strategy.

Your fear of leverage may go away when you study the markets, Q. You are leveraging with both your house and your rental – and you are not diversified. Depending on how you measure risk, real estate is at least 2/3 as risky as the stock market.

If you measure it by the largest possible decline top to bottom, in Toronto it is TSX -43% and Toronto real estate -28%: real estate has 2/3 the downside risk of stocks.

If it is by longest possible time with no growth, the answer is TSX 6 years, Toronto real estate 13 years: real estate can have bear markets more than twice the length of stocks.

Meanwhile, while real estate has seen above average returns for the last few years, the returns are very low long term. Since 1977, Toronto real estate has averaged 6.0%, which is 2% over inflation. This compares to 12.3% for the TSX and 7.7% for GIC’s.

Suprisingly, the last 30 years, which include the largest real estate boom of the 1980’s and the recent real estate strength, real estate has had 1/2 the return of GIC’s and less than 1/6 the return of stocks!

So, 2/3 the risk and 1/6 the return.

My point is that leveraging equities (if invested well) is hardly any more risky than buying your home with a mortgage and many times more lucrative.


Thanks Ed,

Just looking for some clarification for some of your points:
1) 5.5% is the guaranteed return for the life of the mortgage, nothing stops me from reinvesting the proceeds as they come in to the RRSP in equity investments as well (example the first year will have a 9,000 cash flow into the RRSP that could then be invested in any equity or other vehicle, thus compounding over and above the original investment)
2) If I borrowed $20,000 to invest in an income trust that had an ROC component to its distribution, are you saying that the interest on the $20,000 is not tax deductible. I question that interpretation.
3) Keep in mind that in my early retirement plan, I am concerned about cash flow more than growth. If I can average 6-8% on my investment portfolio, I provide myself with the cash flow I want to live my lifestyle (ala Derek Foster), so locking in guaranteed rates benefits my lifestyle choice and protects my principal.
4)If I am going to leverage, why not pay the interest to myself. It allows me to not be in hoc to anyone (i.e. debt free) which is critical to my lifestyle choice (sleeping easy at night :-)

Finally, keep in mind that my properties will continue to appreciate in accordance to real estate trends. I can refinance as my RRSP grows and the values of the properties increase.

I will not actually have altered my NetWorth initially.

Also, since I am setting up the mortgage within my RRSP, I can vary my rate of return to do what I want it to do. I can set it up for 1 year term and continually set the amortization to 25 years each year.

As well, see point 1 of mine above, you can reinvest the proceeds from the mortgage (super-compounding) to further increase the rate of return. I do not foresee using the money in my RRSP within the next 25 years or so.

There is a reason why banks like offering mortgages :-)



hi ed,

“Since 1977, Toronto real estate has averaged 6.0%, which is 2% over inflation. This compares to 12.3% for the TSX and 7.7% for GIC’s.”

i believe the TSX growth includes dividends..
by the same measure should not the net rent(rent- prop tax – maintenance fee) be includedd in real estate growth…

does the 6 % growth includes rental income too or is it just pure growth…

thanks a lot…

Well after thinking it over, I came across this idea, since the SM allows you to take your HELOC out and invest it, is it not smarter to pay down your mortgage say in 15yrs, and than take the full HELOC value from your house and invest this equity? Am I missing something here, since the latter seems as the smarter choice.


Good question. These figures are from the Toronto Real Estate Board and are growth only.

We didn’t want to unfairly prejudice the figures. Since the cash flow is now a negative number, this could reduce the return of real estate quite a bit.

Markets vary betwen favouring landlords & favouring tenants. Right now in Toronto, it strongly favours tenants. If you compare renting or buying the same condo, for example, a condo can cost $1,700/month to carry after putting 10% down, when you could rent the same condo for $1,300. And that is if you assume repair costs are zero.

I’m not a real estate expert, but normally, these costs roughly balance or are slightly negative. Rental real estate generally only has positive cash flow when you get significant equity built up. Of course, there are many specific exceptions to this, but I’m quite sure that is the long term average.

If you count the rent and expenses, you would have to compare that to what you could have otherwise made by investing the downpayment and the negative cash flow. In the vast majority of cases, if you rent your home and invest the down payment and saved cash flow in equities, you will be ahead of owning. This will always be true if you leverage the equities to the same level as real estate.

Here is the interesting part. Even though stock markets have had more than 6 times the growth of real estate in the last 30 years, most of our clients know more people that have made money in real estate than stocks. Isn’t that wierd?

I thought about this a lot and figured out why. Real estate investing has 3 benefits – but not what you might think. Here is why people make money in real estate:

1. Leverage – We leverage to buy our homes, but not for faster-growing investments. All examples of real estate being profitable include high leverage. There is a perverse logic here. You put $100,000 down on your $400,000 home which rises by 4%, you have made 16% on your $100,000 down. Then most people want to pay down the mortgage. As they do, the return gets lower and lower – and once the mortgage gets paid off, your return will be lucky to keep up with GIC’s. Real estate is only a good investment if you maintain a large mortgage.

If you compare any scenario with equities leveraged to the same level as real estate, the equities always win by wide margins.

2. Forced savings – While investing the down payment and cash flow saved by renting will usually give you a larger nest egg than owning, few people have the discipline to invest it all.

3. Terrible equity investing – When it comes to equities, studies consistently show that the average investor makes only 1/3 the return of of the investments they own. This is because our human brain is designed to continually make us buy and sell at the worst times.

This is the beauty of the Smith Maneouvre. It keeps you highly leveraged, puts most of the money in high-growth investments eventually, and involves investing automatically every 2 weeks (which means you are less likely to try to market time).


Hi Q,

In response to your comments:

1. I see 5.5% as a low RRSP return and a high mortgage rate. We’re getting 5.15% variable now, which will allow us to take advantage as rates decline over the next year. Equity returns should earn 8-10% or more over time. And the RRSP mortgage strategy has high setup and maintenance fees.
2. You are putting $9,000 into your RRSP without getting a tax deduction, but will then have to pay tax on it in the future when you withdraw it. You get tax-deferred growth, but that applies to any RRSP investment and largely to equity investments outside the RRSP.
3. A ROC distribution is just getting some of your own money back. Many people confuse this with the investment return, but ROC funds or income trusts pay out even when they lose moeny. CRA’s view is that it is the “current use” of money that matters. In you case, if you borrow $130,000 and invest in a ROC fund and have $10,000 paid to you in distributions, then $10,000 of the $130,000 is no longer invested and the interest on only $120,000 is deductible. After 13 years, none of it is deductible.
4. You are concerned with cash flow, but you are paying $9,000. If you look at examples with leverage doing RRSP or Smith Manoeuvre with the same cash flow, you will find there will be many better options. The best strategy depends on your complete financial picture.
5. You are not debt free. If you don’t make your mortgage payments, your RRSP mortgage administrator will foreclose on your house. There is really no difference between the RRSP mortgage strategy and getting 5.5% mortgage at the bank and then investing your RRSP in your neighbour’s mortgage or a mortgage-backed security earning 5.5% (except $2,000 in fees). Thinking that you are mortgage free is only a matter of “mental accounting”. You and your RRSP are not the same, so think of your personal mortgage and your RRSP investment separately. So, if you can get EITHER a personal mortgage below 5.5% or an RRSP investment over 5.5%, you beat the RRSP mortgage strategy.

Work out options with the Smith Manoeuvre & RRSP strategies and you will be way ahead, Q.


hi ed,
thanks for your replies….i value your expertise.

how would there be a negative flow on real estate. (rental income- prop tax – condo fees).
i have left the motgage payments/interest out…in comparison with stock returns. for even if we buy stocks on leverage we have to pay the interest isn’t…
1) for stocks while we use growth & dividends(not interst on our borrowed money to invest)

for real estate shouldnt we use growth & income(rent – prop tax – condo fees)

this way we take out the interest component on both investments..that would have a level playing field for comparisons….

hi ed one personal question..

i plan to buy a assumptions are as under..
price- $200,000
interst payment for a year .assuming 6%- $12,000
rental saving – $7,200(that’s the rent i save by buying a condo – prop tax – condo fees)
rental saving work out to 3.6% on my investment & it’s a 100 % guaranteed investment.since the fictionary tenant would only be me…

in a nut shell i pay interest savings are i lose 2.4% for a year… which would be more than offset by the capital growth of the condo…if even i asssumed a moderate capital growth of 5% that would leave with a gain of 2.6%..would’nt it..

Hi Ed,

Valid points, but since I don’t have any mortgages currently, the Smith Manouvre doesn’t apply to me. I am simply borrowing to invest. What I am doing is using realestate as collateral on the investment loan.

Thanks for the other points, it gives me lots to think about.



Hi Q,

I am always leery of any strategy that uses either an RRSP mortgage or a ROC mutual fund. These strategies can also be presented to sound good, however, they are almost always inferior to other strategies.

For example, in your scenario you detailed, instead of doing the RRSP mortgage and then using the mortgage proceeds to buy a ROC fund, you will get a better gain by just buying the fund in your RRSP and forgettig about the RRSP mortgage strategy. I did a quick spreadsheet projection to verify this. And this is before all the fees involved.

Is this your idea or did someone try to sell you on it, Q? I can’t actually see any benefits of it, and you are doing it instead of all kinds of strategies that would have benefits.

Are you planning to pay all the distributions on the mortgage, or are you planning to spend the difference? Are you looking to just forget all the long term growth and just try to get more spending money now?

Also, you seem to be hesitant to invest in equities or leverage your home or rental property to invest in equities. Since you don’t have a mortgage, you can still do leverage (essentially jump to the finish line of the SM).

Your “income fund” is mainly in equities – why not buy a real equity fund and try to be tax-efficient with your investment? Income funds are really just balanced funds. They are often sold as though they are some sort of income product, but most are about 1/3 dividend paying equities, 1/3 income trusts (which are only equities with a different legal structure) and 1/3 bonds.

They tend to be very tax-inefficient, so you will lose most of the interest deduction benefit because of tax on the investment.

However, if you bought an equity fund that is tax-efficient, you could still just sell a bit each month (systematic withdrawal plan, or SWP) to get whatever cash flow you want.

A SWP on a tax-efficient equity fund will easily beat buying an income fund paying a ROC dividend – and it avoids the tax problems.


Hi Sam,

My comparison was with fully-leveraged real estate compared to un-leveraged equities. If you compare them with both full-leveraged, then of course the equity benefit is much higher.

The historical return of equities is over 12%, while real estate is only 6% (although both will likely be lower going forward in this lower infation environment.)

If we use the historical returns, $200,000 in equities would grow $25,000 in the first year while real estate would grow $12,000. If you collect $1,200/month rent (about $15,000) and pay 2/3 of this for property taxes, condo fees, repairs & maintenance and whatever, you gain about $5,000, but are still about $8,000/year behind.

Compound this for many years with the “magic of compounding” and you have a monstrous benefit to equities.

This is still extremely favourable to the rental property, since it excludes all the other costs – legal fees to buy, CMHC fees, commissions and legal fees to sell – and of course all the PITA of collecting rent, finding tentants, having vacant months, having to fix it up between tenants, etc., etc.

Even in your situation, you say the interest will cost you $12,000 and you save $7,200 in rent less condo fees & property taxes, that means it is costing you $4,800 more to own than to keep renting.

Keep renting and put this $4,800 into an equity fund and you are ahead of buying. This is 2.4%, which is about the same as your benefit of buying.

I notice you omitted utilities, CMHC fees (if there is no down payment), costs of buying and selling, and the PITA factor. And you won’t be tempted to waste all kinds of money on renovations.

What’s more, we should go back to comparing both leveraged. This $4,800 could make the payments for you on an investment loan of $120,000. Assuming you are in a moderate 33% tax bracket, you should pay $7,200 in interest and get a refund of $2,400.

Now if this $120,000 equity fund grows by 10%, that’s a gain of $12,000 – quite a bit better than owning.

Bottom line – rental real estate is a PITA and has a low return. Owning your own home, however, gives you the pride of ownership, which might make up for the additional cost over renting.

Now if you do the Smith Manoeuvre on your home or rental, this might make up the difference (depending on how you do it).


hi ed,
thanks again for your reply..

“Keep renting and put this $4,800 into an equity fund and you are ahead of buying. This is 2.4%, which is about the same as your benefit of buying.”

let me recap…
choice1- i buy a condo for $200,000 fully leveraged at 6% int..
interest cost – $12,000
rental saving- $ 7,2000

so my negative outflow is $4,8000

if instead i rent i save the $4,8000 agreed..

but in choice 1 would not i benefit by appreciation of around $10,000..around 5%
…how would the $4,800 saved be better than $10,000 appreciation…thanks in advance..

and hi ed from your website i know you are knowledgebale about insyrance too…if you have a spare moment can you educate us about universal might be useful for most of us here..i read a little about them..but the Management fees scared me of…

cihanlee said: “Well after thinking it over, I came across this idea, since the SM allows you to take your HELOC out and invest it, is it not smarter to pay down your mortgage say in 15yrs, and than take the full HELOC value from your house and invest this equity?”

I postulated this in the original Anti-Smith Maneuvre and on Canadian Capitalist’s site. Ed indicated how the SM could improve my suggestion. I also believe that your proposal matches that of Garth Turner, as discussed inteh Smith Manoeuvre book.

Have a look at the earlier posts.

In msg. 21 you have not added the additional costs of acquiring your $200,000 condo, which would be more than an equities purchase, so, at least in the first year your negative outflow would be far greater than the $4800 you describe. You would also have all the expenses of moving into a new place as you add those “finishing touches”.

If as Ed said, you purchased a loan with your $4800, you could have a portfolio of $120,000, which might appreciate at a compounded 10%. In the first year you would see a $12,000 return. Here’s where it really makes the difference — if you are in a changing job situation, where you might move to another location in a few years — people today are VERY mobile, the rental makes a lot of sense, as the ease of departure remains. Your portfolio moves easily with you where ever you go.

If, like many of us, you are more comfortable with leveraging to purchase your home than other instruments, then you’ll likely follow that route. If on the other hand, you’re willing to take the jump into leveraged equities, then a whole new set of options appear.

My rental experience was the best financial decision I ever made. When I was reduced to one salary, the house became a financial millstone, in a flat market. The apartment was half my mortgage payment, and included heat, hot water, laundry and taxes. I had to pay hydro, phone & internet. It was within walking distance of my workplace, and near all other daily necessities such as groceries, post office & liquor store! In addition to clearing all my debts, the 18 months I stayed there enabled me to add some $25,000 to my RSP. Were a similar opportunity to present itself, I’d jump at the rental in a heartbeat.


hi david,
thanks for your reply…agreed the $4,800 could service a portfolio of $120,000
1)do you not think the stock market is overheated right now..agreed the home market is heated too…but the home market does not scare one as easily as a stock market..

2)with respect to purchase of a condo it’s relatively easy to even get 100% finance..
would you or anyone here know of means to relatively get large leverage on equities(all i could get right now is 50% margin)..would there be any financial planners helping clients get large leverage on equities…

i understand that unlike in SM manoeuvre i don’t have a house/property to back my loans..

Have a look at some fundamental equities on the net, and see how most of the blue chips have performed. While some of the market (housing too) may be heated, quality stocks are there to be found. Have a look at Canadian Capitalist’s blog for my comment on this:

Play around with the Rent vs Own calculators — there are numerous ones on the ‘net, and see what might work for you. Just remember, for most folks, a house is just somewhere to live, not an investment, unless you can move to a cheaper place in the future.

A house can be a money pit, so be aware of the potential for regular, extra costs of ownership that will eat into your $4800!


Dear Frugal,

It seems silly, but although I do contribute the odd letter to the SM debate, I just discovered this page.
So, like a newborn baby, for whom all jokes sound funny, I would like to address your original article about your own prospects.
The only caveat I am making is that instead of disputing your cenario, I just ask about an alternative.
Namely, the first alternative is paying the HELOC interest instead of capitalizing it. It does sound distastful, but unless you pay it, you cannot deduct it from your taxes. Only the actually paid interest is deductible.
The other alternative would be the RRSP contributions. I think your house would be paid off even sooner if you redirected your RRSP contributions to the SM. Also, your portfolio would benefit from it too. Since you would give up the tax benefir of the RRSP what would be the benefit, you may ask. Well, it is up to you to calculate the alternatives, but you would get an other tax benefit instead and the money invested in the portfolio wouldn’t be burdened by the limitations of RRSP.


Hi Sandor,

FT is correct. Capitalizing interest still means you are paying it. And it is not true that you have to pay it – accrued interest can also be deductible.

Capitalizing interest is part of the Smith Manoeuvre, which fully fits the tax rules if implemented properly.

I might add that the Smith/Snyder may not meet tax rules. Most of the presentations I’ve seen promoting the Smith/Snyder will likely result in you losing your next tax audit. This is because a distribution is paid out from the fund and not applied fully to the investment loan.

You don’t have to worry about tax with any steps that are part of the original Smith Manoeuvre, though, if they are properly implemented.


My sympathy gentleman,
Hi Ed!

I am afraid you and FT are both mistaken.
If I may recommend CRA’s lovely bulletin IT533 for a closer look, there you will find the following:

“Contingent interest

¶ 6. Where an amount computed as interest expense is not payable in respect of a year because of an unsatisfied contingency, the provisions of paragraph 20(1)(c) are not met as the interest is not paid or payable since there is no legal obligation to pay (as was the case in Barbican), and accordingly, the interest is not deductible in that year.”

Bad news. Pay the interest and be done with it.



I reconsidered it.
You should pay the interest if it gets you more tax refund then it would make in the investment. If however, you could earn more by investing it, then it is worth forgoing the tax refund. Each individual case has to have its own calculations.


OK, one more.

In the early years of the SM you may forgo the tax refund, since it is small, but in later years you better take advantage of it by paying the interest, since that doesn’t grow unlike the tax refunds.



You are referring to contingent interest, not accrued interest. IT-533 about deducting carrying charges consistently refers to interest that is “paid or payable”.

Often interest is paid the month after it is billed by your bank. It is acceptable to use the accrual method (based on date billed) or the cash method, as long as you use it consistently.

Capitalizing interest IS paying it. Capitalizing only refers to where it is paid from. So capitalizing interest is definitely deductible.

With the Smith Manoeuvre (not the Smith/Snyder), all the interest is fully deductible, even though you capitalize it all.



They are so strict about interest deductibility that in the case of interests on policy loans, borrowed from life insurance policies, they only allow the deduction if the insurer issues a certificate about the payment of interest. What’s more, there is a specific form that the insurer must certify.
I don’t think the unpaid interest to be dedutible.
In fact, the paragraph below the one I sent before also tightens the screw even further, saying, that if the interest is paid in the following year it is still not deductible retroctively.



Oh, that’s your issue. All kinds of games can be played with insurance policies, so I can see why policy loans would have to meet higher standards. There are investments inside the policy you borrow from, so there is a different standard to make sure it is actually interest borrowed for investments.

This is not an issue if you borrow from a bank and buy normal mutual funds.

There is no doubt that accrued interest and capitalized interest are deductible. Just read IT-533 about interest “paid and payable” being deductible, allowing the “accrual method of accounting” and “compound interest” being allowed.

The quote you used is about “contingent interest”, in which the interest is not actually payable for some reason. That is not relevant to the Smith Manoeuvre (unless you borrow against insurance policies).

Forget about investing and borrowing with insurance policies and you won’t have all of these problems, Sandor.


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[…] my annual growing dividends to comfortably exceed the loan servicing payments when I'm finished paying off the non-deductible mortgage in about 10 years time.  That way, when the non-deductible mortgage is paid off, we'll have another […]


Does your Readiline mortgage balance grow daily (i.e. when you log in, do you see the accrued interest added to the balance)? What I have seen for the first month and a half was that interest was only evident when the mortgage payment was applied and the principal went down by less than the mortgage payment.

Now, for the month of September, every time the mortgage payment was applied, the mortgage balance went down by the entire amount! No interest!

I don’t know what is going on. It isn’t being added to the HELOC as far as I can tell.


Where does the mortgage interest go? Is your mortgage going down by exactly your payments or is the interest showing up once the payment is made? The easiest way to tell is to log on the day before the payment and note the balance and then log in after the payment has been made.

From my way of thinking, the interest MUST be added on to the mortgage portion of the Readiline or else you end up having the interest being piled onto the LOC which is at a higher rate.

Fantastic discussion on the Smith Manoeuvre. I considered this a number of years back, but I personally cannot stomach the idea of leverage, and did not proceed with it. Instead, I setup a self-mortgage through my RRSP in March 2008. Lucky timing for me, as I sold most of my RRSP holdings to get the mortgage advance and avoided the late 2008/2009 financial collapse.

Frugal Trader, looks like you completed the SM in Spring 2007. In Oct 2007, TSX Composite was 14,000. Four years later TSX Composite is at 12,500 (-10%) and in between hit a low of 7500 (-50%). The US has fared worse.

I’m a newbie, and forgive for being forward, but are you willing to share your experiences in this time period. Did you go thru the SM worst case scenario where investments were less (or significantly less) than the HELOC amount owed.

Hi Johnny Canuck,

You may have lucked out by avoiding the 2008 crash, but it is important to look at these strategies based on reasonable long term expectations.

We are not fans of the RRSP mortgage strategy. In general, it is a combination of:

1. The most expensive mortgage in Canada.
2. A dreadful return on your RRSP investment.
3. High fees.
4. A mistaken belief that you have no mortgage.

In the long term, I expect my RRSP investments to make at least 10%/year (I’m an aggressive investor). I don’t have mortgage, but our clients’ mortgages have all been at rates between 1-3% for the last several years. Normally, the have no mortgage fees at all.

The RRSP mortgage strategy cannot come close to any of these. I think the RRSP mortgage only makes sense for GIC investors.


Hi Ed:
Perhaps this should be a separate discussion, but I will post a response in this thread.

While I would agree that a self-directed RRSP mortgage is not for everyone, I disagree with your comments which make it sound like it never makes sense. Here’s how I use it and make it work for me.

1. Most expensive mortgage in Canada ( perhaps you can explain why you believe this is so). My mortgage is only a portion of my RRSP (35%) and I treat it like the fixed income/bond/preferred share portion of my portfolio.
2. Dreadful return. The return is 6.5% which I believe you would have a hard time saying is a ‘dreadful’ return for a fixed income/bond/preferred share type investment. I chose the posted rate rather than the best possible rate that I could get to have a high return.
3. High fees. Yes, there are fees involved. One-time legal fee to setup the mortgage, one-time Canada Mortgage and Housing Corp (CMHC) insurance fee, and on-going annual trustee fee. The size of the mortgage and the amount of equity which you have in your home determines if the cost of these fees is high, medium, or low. General rule of thumb, if less than say 50,000-100,000 the fees may be too high. Also, if you do not have significant equity in your home, the CMHC insurance premium will be too high. However, in my case, the mortgage is larger than 100K, and I have 65% equity in my home so the CMHC premium was low. So, your comment about high fees, while it is a factor, is not always the case.
4. I am well aware that I still have a mortgage. Coincidentally, I recently adjusted the payments on the mortgage to ensure that I will be mortgage free before we become empty-nesters.
5. Risk management — which you do not list — I sleep better knowing that the fixed income portion of my portfolio is extremely low risk, highly flexible. I am not worried about the safety of government bonds, corporate bonds, changes in interest rates as it pertains to my fixed income portfolio. I am not chasing higher bond/preferred share income while increasing my risk.

I recently did a check on the CAGR of the TSX Composite, S&P 500, and the DJI 30 over the past ten years. The GIC investor likely earned more over that 10 year period and slept a lot better than those who have gone through the Financial Crisis in the markets.

Lastly, if your clients have earned 10% per year on your recommendations over the past 10 years, you have served them very well indeed.

Compound Annual Growth Rates

From———————To—————–DJIA——S&P500– NASDAQ
January 2, 2001 – January 27, 2012 1.56% 0.23% 1.88%
January 3, 2002 – January 27, 2012 2.16% 1.22% 3.24%


Hi Johnny,

The part of the strategy I can’t get past is your 6.5% mortgage. We have all our mortgages between 2-3%. 6.5% is about the most expensive mortgage I have seen in recent years.

Two other points:

1. The risk is that you are not diversified. Your RRSP is now also linked to your income, just like the rest of your finances. If you run into financial difficulties, you could lose your home and your RRSP at the same time.

2. The last 10 years were bad for the stock market, but that is not the normal long term return that it is reasonable to expect.

RRSP mortgage strategies seem to become popular at the worst possible times. When stock market returns are low, RRSP mortgages become more popular, along with any other defensive strategy.

Then the market turns strong again, so people cash in their defensive strategies (after the market rise) and buy into the market close to the top. That is the normal, but unfortunate, cycle.

When you do the math on all parts of the RRSP mortgage strategy and compare it to a normal strategy with good quality investments, the long term expected returns are dreadful. Whenever it becomes popular, I think that is a bullish sign for the stock market.


Hi Ed:
While I doubt that I can convince you that an RRSP self-directed mortgage is a good thing, I will try to explain my logic on why it works for my wife and I.

The Mortgage Details
Our self-directed mortgage was taken for $200K on a home valued at $700K, with a 10 yr amortization @ 6.5%. Over the life of that mortgage, we will pay a total of $3250 in fees ($1,000 + $2250 for the CMHC insurance and 10 years x $225 as the annual fee to the bank for handling the paperwork). $3250 / $200K = 1.625% which I consider a low fee not a high fee.

The Motivation
The mortgage was taken out 3 years ago at near market top (not bottom) — agree this was blind luck, but the motivation was not about where the market was going or fear. The motivation was risk reduction and cost certainty on our mortgage.

Risk Reduction
We no longer needed to be fully invested in the stock market. By my calculations, if we could achieve an annual return on our investments of 5.5% going forward, we would be able to retire very comfortably and not run out of money until the age of 90 (all without selling our house or counting on any government monies). So, we no longer needed to chase 8-10% returns. And if we could lock in a sizeable chunk of our portfolio at 6.5% for 10 years, we would be ahead of the game.

Cost Certainty – I can’t argue that 6.5% mortgage rate is very high (it is!), however, we are not paying that extra money to the bank –we are paying it to ourselves. In effect, we are increasing our RRSP contributions by paying a higher mortgage interest rate than the best market rate. I am self-employed and my wife has recently started to work after years of raising our children. Our total income is at its highest point ever. The payment on a ten yr am is 20% of our take home income (which is very comfortable) — while leaving room for us to pay it down faster with lump sum payments.

My wife and I have other investments comprised of mostly stocks and preferred shares totaling $360K ($40K in TFSA, $320K in RRSPs).

The Worst Case Scenario
While recent history shows that anything can happen, it is highly unlikely that we would lose our home and our RRSP/TFSA at the same time. Even if Canada experienced a 50% drop in housing prices, and a 50% drop in the stock market, we would still have considerable equity in our home ($150K) and in our other investments ($180K). And with a sizeable amount in our TFSA, they could be used as our safety valve for an extended period without work

Lastly, since we hold our own mortgage, we have considerable flexibility to use other means to “save” our home if that became necessary
a) we could renegotiate a lower rate (with ourselves)
b) we could renegotiate the amortization period (to say 20-25 years)
c) we could renegotiate to pay interest only on the mortgage

And of course, we have life insurance and disability insurance to protection against those risks as well.

Thats the logic behind why we used our RRSP to hold our own mortgage.



Hi Johnny Canuck:

Well done! I think your strategy is excellent – and entirely appropriate given the strength of your personal balance sheet and assuming that you’re still earning (i.e. not retired).

You don’t often hear stories from individual consumers who successfully set up a non-arm’s length mortgage in a self-directed RRSP. There are very few CMHC Approved lenders that will actually allow you to do this these days – and there are rules to be followed. However, the tax and investment benefits can be outstanding.

I’m a big fan of the Smith Manoevre (SM) and its variations and I own and operate a program called the Tax Deductible Mortgage Plan (TDMP), but I have to admit, the strategy you describe can be better than all variations of SM and TDMP because there is no leverage – as you effectively act as both the lender and the borrower at the same time. I describe this strategy in my book; Mortgage Freedom under the heading “Be Your Own Banker”. It works best when it’s material enough to absorb the fixed setup costs (e.g. minimum $150K) and only if your balance sheet can handle the lack of liquidity – and by the way – an interest rate of 6 or 6.5% is perfect in the current environment.

What interests me about your Post is the comment that “..since we hold our own mortgage, we have considerable flexibility..” and you cite three examples including changing rates and making your mortgage interest only. My understanding of this strategy is that your mortgage has to be insured and abide by certain rules and I’m only aware of two lenders who offer this product. To my knowledge, neither provides the flexibility you describe. I’d be interested to know who is servicing your non-arm’s length mortgage and why you think you have such flexibility to change the terms – even though your own RRSP is the lender.


Hi Sandy:
Our self-directed RRSP mortgage is handled by TD Canada Trust. It has the same flexibility and terms as a regular TD mortgage (20% prepayment annually, double up payments, skip a payment, etc). The original mortgage term was 7 years with monthly payments and a 20 year amortization, negotiated in March 2008.

In the spring of this year, many of the major banks were offering 3.99% on a 7 year and 4.99% on a 10 year fixed mortgage including TD. We decided to “renegotiate” our self-directed mortgage as follows

1. blended and extended the rate – original was 6.5%, now its 5.75%
2. increased the term – original was 7 yr, now its 10 yr (Note: TD will blend and extend if the new term is longer than the original term)
3. we switched to bi-weekly payments
4. we increased our payment amount (for an effective 10 year amortization)

No additional fees or insurance was required – no new money was advanced.

To get completely new terms, we would need to “break the contract” by paying the break fee penalty (the money would be paid into our RRSP, not to the bank). (Side note: I tried to have the various penalty clauses removed since we are lending the money to ourselves, but TD said that was not possible)

Although this is not a scenario that I hope ever comes to pass, we could “break” the self-directed RRSP mortgage contract, use our TFSA monies to pay the penalty fees into the RRSP, and then negotiate an arms length mortgage outside of our RRSP.

However, on the flip side, if I was to die before the mortgage term was completed (again hoping this doesn’t happen – hehe), the life insurance could be used to pay off the mortgage immediately, as well as pay the penalty fee directly into the RRSP.

Lastly, as previously stated, I did examine the Smith Manoeuvre. Two things stopped me from pursuing it – the possibility of RevCan revoking it retroactively (which has not happened), and the use of leverage which puts you in a delicate situation until such time as the investments grow large enough to have a margin of safe over the investment loan. But the idea was and is a great one for those with a higher risk tolerance and a long investment horizon.

p.s. Not sure if TD Canada Trust would do this now — we set this up in March 2008, before the financial meltdown. I have had a banking relationship with TD and its predecessors for about 30 years. For those old enough to remember, my first loan was from Canada Permanent (a trust co) bought by Canada Trust who merged with TD Bank.



Johnny Canuck:

We don’t really view the Smith Manoeuvre as a competitive strategy to what you are doing – it’s more of a question as to which stage of mortgage homeownership you are in. I routinely recommend this RRSP mortgage strategy to homeowners who have their Principal Residence paid off (or almost paid off) and have a substantial RRSP (typically they will be in their 50’s). It is also good for most post-TDMP clients – after all debt has been converted into a tax deductible loan and where both home equity and RRSPs have grown significantly.

Smith Manoevre and TDMP clients (more typically in late 30’s and 40’s) are not ready for this strategy yet primarily because their personal balance sheets are not strong enough. Even if cash flow is great, homeowners with sizeable mortgages are usually always better off completing the TDMP or SM first and considering this strategy later.

Under your plan, borrowing from your own RRSP not only guarantees a predictable rate of return, it gets your fixed income assets into your registered plans and frees up your cash to invest in your non-registered plans. Tax wise, everything is in the right place and technically, since there is no leverage, the risk is more acceptable – especially as one approaches retirement. However, if you’re too close to the forced RRSP meltdown age (71), this strategy becomes riskier on the liquidity side and I may not be so quick to recommend it.…

At TD Branch, this product is still available through TD Waterhouse. Canadian Western Bank is another option..but that’s it as far as I know. I’d be interested to know if there are any other lenders out there…

Hi Johnny,

I hope you know I’m not trying to rain on your parade. I am just trying to educate people.

Here’s my issue with the RRSP mortgage. You are putting extra money into your RRSP without getting a tax deduction on it. You will now have to pay tax on that amount.

Let’s look specifically at your situation. Let’s compare it with what most people do, if they essentially want no risk.

Today, you can get a mortgage as low as 2.7% and you can get a GIC as high as 3.1%. For ease of math, let’s say you can get both independently at 3%.

So, you could get a mortgage from the bank at 3% and you could invest your RRSP in a GIC at 3%. No fees.

With your RRSP mortgage, you have a 5.75% mortgage for $200,000 and a 5.75% fixed interest investment in your RRSP. This is 2.75% higher than you would have normally, or $5,500/year higher mortgage interest and RRSP return.

If you look at the math, you are paying an extra $5,500 and putting it into your RRSP. You don’t get 5.75% compound interest on it in your RRSP. It becomes cash in your RRSP that you need to invest in some way.

To see the net effect, let’s say you immediately withdraw that $5,500. If you are in a 40% tax bracket, you pay $2,200 in tax and have $3,300 left over.

If instead of that, you had kept that extra $5,500 in your chequing account, you would still have the entire $5,500.

Do you see my issue, Johnny?

Your artificially inflated mortgage interest results in putting money into your RRSP that you now have to pay tax on to get out.

And you paid $3,250 in fees to do this.

I’m just reading an awesome book called “Thinking Fast and Slow” by Daniel Kahneman. (He is the main guy that proved the “efficient market theory” false.) The book is about all the ways that the human mind is systematically illogical. I would highly recommend it.

I think the RRSP mortgage is one of those situations. It sounds good intuitively because you are “paying your mortgage to yourself” and your RRSP has a “high risk-free investment”. However, the fact that you are making an inflated mortgage payment into your RRSP does not change the fact that you have to pay it with real cash – and then pay tax to get it out.

It’s one of those strategies that sounds great to an intuitive mind, but does not work on paper.

Sandy’s version is better in that he uses a tax-deductible mortgage at the end of the Smith Manoeuvre to put into the mortgage. This of this as a “tax-deductible RRSP mortgage”. This solves the tax issue, since you pay an inflated tax-deductible interest amount into your RRSP – which you then have to pay tax on to get out. The tax evens out.

You still have to pay the fees, though.

Sandy’s strategy is not bad. However, if you can borrow from the bank at 2.7% or 3.5% and then invest in your RRSP and make more than that over time, then you would be ahead of the “tax-deductible RRSP mortgage strategy”.

The Smith Manoeuvre is a leveraged investing strategy designed for people that want to build wealth. It is not for GIC people or people that want little risk. It is a riskier strategy.

In our practice, the people doing the Smith Manoeuvre are usually quite comfortable investing for the long term in investments that should average more than the bank will charge them for a mortgage or credit line (e.g. 3.5%/year) long term. So, they would not normally be interested in the “tax deductible RRSP mortgage strategy”.

Why settle for RRSP returns the same as your mortgage rate when you can make far more with effective investing?

In short, even if the mortgage is tax deductible, I still see little benefit in the RRSP mortgage strategy.

If you doubt me, put all your figures into a spreadsheet and compare them to some other reasonable strategy. The math is needed for the human brain to question what it intuitively believes to be true.