Table of Content

• What You Should Know
• What is the Smith Maneuver
• How Does the Smith Maneuver Work
• Example of the Smith Maneuver in Action
• How It Works
• Is the Smith Maneuver Risky

What You Should Know

• The Smith Maneuver is a financial strategy that can make mortgage interest tax-deductible in Canada.
• It allows homeowners to borrow from their home equity to invest in income-generating assets.
• The strategy can help pay off a mortgage faster while potentially generating investment income
• The risk level depends on the type of investment chosen.

What is the Smith Maneuver?

In Canada, unlike the United States, mortgage interest on a primary residence is not tax deductible. The Smith Maneuver, created by Fraser Smith, is a legal tax strategy designed to convert non-deductible mortgage interest into tax-deductible investment loan interest. This strategy can potentially accelerate mortgage repayment and help homeowners build wealth.

How Does the Smith Maneuver Work?

The Smith Maneuver works by taking advantage of the tax deductibility of investment loan interest. If you borrow money to invest in capital property that generates income, the interest on that loan may be tax deductible. The strategy involves securing a readvanceable mortgage and using the available equity to invest. Below are the key steps:

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Step 1: Get a Readvanceable Mortgage

A readvanceable mortgage is a combination of a traditional mortgage and a home equity line of credit (HELOC). As you make mortgage payments, your HELOC limit increases, allowing you to reborrow funds.

Step 2: Borrow from the HELOC and Invest

For every dollar of mortgage principal repaid, an equal amount is borrowed from the HELOC and invested in income-generating assets such as stocks, bonds, or rental properties.

Step 3: Claim Tax Deductions on HELOC Interest

Since the borrowed funds are used for investments, the interest paid on the HELOC can be deducted from taxable income, leading to tax savings.

Step 4: Reinvest Tax Refunds to Accelerate Mortgage Repayment

The tax refunds generated from deductible interest can be applied towards the mortgage principal, reducing the loan balance and increasing the HELOC limit.

These steps are repeated until the mortgage is fully paid off, converting a traditional mortgage into a tax-efficient investment loan.

Example of the Smith Maneuver in Action

Let’s assume you take out a readvanceable mortgage from Scotiabank’s Scotia Total Equity Plan (STEP) for a home valued at $800,000, with a mortgage balance of $500,000.

• HELOC Limit: $140,000
• HELOC Interest Rate: 3%
• Marginal Tax Rate: 43.4%
• Investment Type: Dividend-paying stocks with a 4% yield

How It Works:

• You invest $140,000 from your HELOC into dividend stocks, generating $5,600 in annual dividends.
• Your HELOC interest expense is $4,200 annually.
• The tax deduction on HELOC interest reduces your taxable income by $1,822.
• Your tax refund is used to pay down the mortgage principal, increasing your HELOC limit.
• The process repeats, accelerating your mortgage payoff and building your investment portfolio.

Readvanceable Mortgage Lenders in Canada

Several Canadian banks offer readvanceable mortgage products that can be used for the Smith Maneuver:

• RBC – RBC Homeline Plan
• TD – Home Equity FlexLine
• Scotiabank – Scotia Total Equity Plan (STEP)
• CIBC – Home Power Plan
• BMO – Homeowner ReadiLine
• National Bank – All-In-One
• Meridian – Flex Line Mortgage

Is the Smith Maneuver Risky?

The level of risk in the Smith Maneuver depends on the type of investment chosen.

Low-Risk Approach:

Investing in Guaranteed Investment Certificates (GICs) or government bonds minimizes risk but offers lower returns.

High-Risk Approach:

Investing in stocks, ETFs, or real estate offers higher potential returns but comes with market risk.

Interest Rate Risk:

HELOC interest rates are variable and may increase, affecting borrowing costs.

Can I Use the Smith Maneuver with Safe Investments?

Yes, even risk-averse investors can benefit from the Smith Maneuver by choosing low-risk investments. If your HELOC interest rate is 3% and your mortgage rate is 2%, you would need a marginal tax rate of at least 33% to break even.

Final Thoughts

The Smith Maneuver is a powerful financial strategy that can help homeowners make their mortgage interest tax-deductible, pay off their mortgage faster, and build an investment portfolio.

Are you looking to buy a home in Edmonton, Alberta? Call Nate Nagle with RE/MAX Excellence, your local real estate agent, at (780) 966-8154. I would be happy to guide you through the Edmonton, Alberta housing market.

Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial advice. Before making any major financial decisions, consult with a qualified financial advisor.