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  • The Smith Manoeuvre

    Posted on April 20th, 2010 No comments
    The Smith Manoeuvre

    The Smith Manoeuvre

    The Smith Manoeuvre (or the Smith Move) is by far one of my favorite Canadian tax strategies. It’s a move that takes your mortgage and allows it to become tax deductible. Normal Canadian citizens are paying endless amounts of interest on their mortgage without any tax breaks, but the smith manoeuvre changes the game for us.

    How it works: In the simplest way possible to explain, the Smith Manoeuvre is a way to turn your mortgage into an investment loan, which allows us to write off the interest on the investment loan. In Canadian tax law, the income tax act allows us to write off interest on income producing investments or rental income properties. So the objective here is to take your mortgage and convert it into an investment loan, which in turn gives you a nice tax credit.

    Who Qualifies: Anyone who has savings, investments, or liquid cash. Without anytype of current investment or savings, you will not be able to pay off your mortgage and borrow against your investment. For the best case scenerio, it’s ideal to have investments or savings that total your full amount of the mortgage.

    Advantages

    • A legitimate tax strategy and/or loophole that allows you to save money on your interest
    • You can pay off your non-deductible mortage quite fast
    • You can build a solid low risk investment portfolio while you still have a mortgage

    Disadvantages

    • You need to have some sort of savings or investment in order to execute this manoeuvre
    • The money you invest comes with risk

    Executing the Smith Manoeuvre:

    1. Liquidate your investment, savings or use your cash to pay off your mortgage.
    2. Once your mortgage is paid off, you need to apply for a readvancable mortgage. For a readvancable mortgage, you’ll be required to put 25% down payment. This mortgage will be made up of 2 products, the HELOC (home equity line of credit) and your regular mortgage product. They key in combining both of these loan types is so that you can pay off your mortgage and allow your home equity line of credit to increase.
    3. As your home equity line of credit increases, you can use this money to reinvest in dividend paying stocks or any type of investments. It’s important that you choose very safe investments because high risk investments would defeat the whole purpose of the Smith Manoeuvre. Also make sure you do not invest in RRSP’s or any other type of investments that don’t allow for your interest to be written off.
    4. After you execute the Smith Manoeuvre, it’s very important that you make the proper claims during tax season. When filing your tax, make sure you deduct the total amount of interest you paid on your home equity line of credit. This full portion will be deducted from your income at your personal tax rate.
    5. Take your your tax return and all the income you made from your dividend paying stocks and pay off your mortgage. Once you pay as much as your mortgage off you can go back to using your home equity line of credit to invest your money again. Keep repeating this every year until your mortgage is paid off in full.

    Once you finish executing the Smith Manoeuvre you’ll feel great, nothing feels better then coming up with a legitimate tax strategy to help your finances. There is no need to use expensive accountants or outrageous tax lawyers. The Smith Manoeuvre is something anyone can do. I hope this helps, if you have any questions just make a comment and I’ll be happy to try and help.

    The Smith Manoeuvre Video: