ave you guys heard of the So, who came up with this idea
Smith Manoeuvre (SM)? For and how does this apply to making
those who don’t know what a mortgage tax deductible? Mr.
it is, it’s a Canadian wealth Fraser Smith has all the answers
strategy to structure your and he has written a book on the
mortgage so that it’s tax topic which explains how to do
deductible. Our US neighbors this properly. To summarize the
already get the luxury of Smith Maneouvre in a nutshell,
claiming their mortgage interest it’s where you borrow against the
and now there is a way for us equity in your home, invest it in
Canadians to do the same. income producing entities, and
There’s a tax rule in Canada use the tax return to further pay
where if you borrow money to down the mortgage. Repeat until
invest in an interest producing your mortgage is completely paid
investment (like a dividend off leaving you with a large
paying stock or investment portfolio and an investment loan.
property), you can deduct the Voila! Your mortgage is now an
annual interest paid on the investment loan which is tax
investment loan from your income deductible and hopefully, your
tax. Kinda wordy I know, in portfolio is larger than your
layman’s terms, if you get a loan loan.
with x amount of interest / year, Below is my understanding of
you can claim that x interest how someone would implement the
during income tax season if you Smith Manoeuvre (SM). Note that I
use the loan towards stocks or have not read the book, but this
rental properties. If you’re is information I have acquired
still confused, please read on from around the net and from
below where I will eventually speaking with various people that
explain everything step by have implemented the
step.
technique.
1. Sell all your existing HELOC limit will increase. So
stock in non-registered with every payment, you will
investment accounts and use it invest the new money in your
towards a down payment for step HELOC. Note that you SHOULD NOT
2.
the HELOC money to invest in your
2. Obtain a re-advancable RRSP as you will lose the tax
mortgage. This is a mortgage that deduction on the invested
has 2 entities, the home equity money.
line of credit (HELOC) part and
4. When tax season hits,
the regular mortgage part. deduct the annual amount of
Nothing unique about this setup interest that you paid on your
EXCEPT that as you pay down the HELOC against your income. So, if
mortgage, the credit limit on the you paid $6000 in interest
HELOC increases. This is a key payments for the year and you
feature that is needed when have marginal tax rate of 40%,
implementing the SM. Note that you will get back ~$2400 of
you usually require at least 25% it.
equity before you can obtain a
5. Apply the tax return
re-advancable mortgage. Some against your non-deductible
financial institutions that offer mortgage and invest the new money
these mortgages are:
that’s now in your HELOC.
RBC - The Homeline Mortgage
6. Repeat steps 3-5 until your
Firstline - The Matrix Mortgage non-deductible mortgage is paid
Manulife - ManulifeONE off.
Mortgage
As you can see, this process
3. Use the HELOC portion of will pay down your regular
your mortgage to invest in income mortgage in a hurry.
producing entities like dividend
The Advantages:
paying stocks or rental property.
* You get to build a large
With every mortgage payment, your investment portfolio without
waiting to pay off your mortgage
first.
general. align="center">
* You need a plan ‘B’ in the case
that you need to move and home values have gone down. If you type="text/javascript">
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Article Tags: investment, mortgage, tax
