Strategic Mortgage Advice

The Smith Maneuver

In the United States, mortgage interest is tax deductible if you meet certain qualifications. However, mortgage interest isn't tax deductible here in Canada. That doesn't mean that there aren't a few cool tricks that you can use to improve your tax situation, and that includes turning your mortgage interest into something that could be tax deductible.

The strategy known as the Smith Manoeuvre is something that we Canadians can use to our advantage.

The Smith Manoeuvre is a strategy that Fraser Smith developed as a financial planner. It worked well enough that he wrote a book about it in 2002. Its basic premise is to make your mortgage tax deductible, but it can do so much more for your personal finances than just that.

First, in order to properly execute a Smith Manoeuvre, you need to have a re-advanceable mortgage such as Scotiabank’s STEP (Scotia Total Equity Plan). You need to have a re-advanceable mortgage for this to work because it relies on using your home equity to restructure your finances.

With a re-advanceable type of mortgage, your Home Equity Line of Credit (HELOC) increases with every dollar paid down on your mortgage principle. This is the basis of the leverage that you will use with the Smith Manoeuvre strategy. With a Smith Manoeuvre, you then use this increasing credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies, since the dividend returns from these companies have favorable tax status.

For this loan to be tax deductible, you must invest in a non-registered investment account. RRSPs, RESPs, and TFSAs do not qualify. You also cannot make any non-investing purchases with the HELOC money. This is to keep a clean paper trail for the CRA, and to show that the entire loan is for investment purposes. It is very important that you follow this procedure correctly, or you could find yourself in trouble — and owing money to the government.