If you want a good laugh, here is an update on Dan White, who criticized the SM based on the Lipson case. See post 16 above.

Here is a link to Jamie Golombek’s web site and an article about Dan White called “Dumb Write-offs”:

http://www.jamiegolombek.com/printfriendly.php?article_id=916

Read especially the tax deductions claimed in the last several paragraphs. :)

Ed

There is also the age credit clawback of 15% and the GST clawback of 5%, both of which start at an income of about $32,000 for 2009. This is a total 25% clawback in addition to income tax.

This clawback is based on the gross-up for dividend income. With the 45% gross-up, there is a 20% clawback on dividend income in addition to income tax starting at an income of about $32,000.

The GST clawback is only on income up to about $40,000, but the 15% clawback on the age credit applies all the way up to income of about $67,000. It overlaps the start of the OAS clawback a bit.

So, one clawback or another applies for all income for seniors under $22,000 and between $32,000 to $105,000. The only seniors at low tax brackets once you include the clawbacks are those in the narrow income level between $22,000-32,000.

There are more details in an article on this site about Clawbacks for Seniors ( http://www.milliondollarjourney.com/tfsa-vs-rrsp-clawbacks-income-tax-on-seniors.htm ). The article shows 2007 rates which are quite similar, except for 2 years of inflation on the tax bracket income levels.

Ed

The other issue regarding keeping the SM going for life or paying it off is about your tax bracket after you retire. Many Canadians (probably about half) will be in higher tax brackets after they retire than while they are working – once you include the clawbacks on the various government programs for all seniors.

Essentially anyone over 65 with a taxable income less than $21,000 or over $41,000 is at the highest marginal tax bracket (45-50% or higher). If you are likely to be in any of these tax brackets after age 65, then the interest deduction would benefit you even more than it does today.

You may need a different investment philosophy if you are focusing on dividends. Dividends are highly tax for about half of seniors, since the clawbacks are on the “grossed-up” dividend.

For example, if you are over 65 and your only income is $1,000 of eligible dividends, you will lose $730 of it to the government! That is because you would qualify for the GIS supplement, but there is a 50% clawback. It is reduced by $.50 for every dollar of income. This clawback is on the grossed-up dividend, so your $1,000 dividend will be grossed-up to $1,450 of taxable income – and your GIS income will be reduced by half of this.

For seniors with income below $21,000 or over $41,000, it is more effective to avoid dividends. (There is an article on this site about clawbacks for seniors with more info.)

So, if you plan to keep the SM after retirement, you may want to change your investment strategy.

Ed

Whether or not your pay off the loan should depend mainly on your comfort with leveraged investing.

The average Canadian couple will live 30 years after they retire (retire at 62 and last to die averages age 92), which definitely qualifies as “long term investing”.

For this reason, if you invest effectively, you will most likely have both higher income and lower tax if you keep the SM going. Remember it is “good debt”. You can pay it off any time, but you make a profit in the long run, so you are probably better off with the debt (and the investments).

Over the 30 years, there will be on average 6 bear markets, but the markets always come back (if your withdrawal rate is reasonable).

The lowest 30-year return ever for the S&P500 was 5.1%/year. Interest rates after tax have always been lower than this for all 30-year periods.

It comes down to having faith in your investments (and in the markets, free enterprise, and humanity). We believe that if you don’t have faith in your investments, you should not do the SM in the first place.

Ed

- Keep proper records of your interest payments for tax purposes
- As FT says, you need to see how you can tolerate the risk so instead of taking the lump sum and investing it, divide it into portions and invest so that you get a sense of your tolerance level.
- If you plan on investing in dividends, once you decide on your investment portfolio/stocks, you could wait to purchase near the ex-divi date so you get 3 months worth of dividends but borrowing cost at a week or 2.
- Some of the risks are interest rate, asset value, dividend safety and your ability to pay the interest payments.

Brian

Sounds like you guys have a great financial situation, congrats!

I can’t really tell you if it’s a good idea or not to leverage, that’s a personal decision. If you can easily tolerate the risk and the volatility of the market, then sure, leveraging may be a good idea for the long term.

A few things to note though:

• Even though you have your LOC at prime right now, there aren’t many prime LOC’s being offered anymore. When it comes time to renew, don’t be surprised if your rate jumps to prime + 1 or more.
• Leveraged investing has larger advantages for high income professionals like yourself as the tax deduction will be larger.
• If you are going to use a LOC to invest with, make sure that you don’t use that account to spend on anything else. Ie. Use it for investing only.

Those are just a few things off the top of my head, anyone else?

Keen Newbie Investor

I have an interesting opportunity that I would like to put forth for advice from yourself or other followers.
I have a professional school LOC that still has significant borrowing room (about $125 K). I will be done my degree shortly and will start a high cash earning job.

The LOC has 1.5 years before the bank gives the options of creating a repayment plan or reapplying for a new LOC based on your new professional status. The reapplication has previously been granted 95% of the time, but given the current banking situation it’s possible it may be difficult to get re-approved.

I had always read about the SM and am very comfortable with long term, high equity investing. I am particularly keen on Bogle’s concepts and index investing for the long term. My wife and I are under 30 and have long income earning years ahead.

I have the added benefit that my wife is in the same professional program with the same LOC. I can transfer all personal debt to 1 LOC and leave the other as a purely investment LOC. We can realistically paydown our personal debt in 2-3 years based on our current lifestyle, while making our current mortgage payments (no accelerated paydown)

What do you think about leveraging my LOC with ~$50 K- 75 K bought into diversified index funds (likely iShares and Vanguard) purchased monthly or bimonthly through a discount brokerage over 4-6 months to lessen the market timing effect/ obtain dollar cost averaging over that period?

I see this current market downturn as a significant buying opportunity and figure I’d have the 50-75 K invested 5 years from now anyway, so why not get a head start and have some sizable tax refunds to help with mortgage paydown?

My wife is on board with aggressive investing/ concept of leverage for the long term, but needs more convincing regarding DIY investing. We also have fairly secure, recession proof jobs that shouldn’t leave us hanging w/o income to pay this debt down.

Thanks for any comments and advice.

BTW, I plan to discuss this with a financial planner/ other professionals

Keen Newbie Investor

Bob Aaron has published several articles on the SM and is 100% wrong on all of them. He always quotes Dan White, who has no tax qualifications and is flogging some crazy tax scheme. 100% of accountants and tax experts in Canada will disagree with them.

I’m surprised that any newspaper even publishes their crap.

Ed

Here is a commentary from a lawyer:
http://www.milliondollarjourney.com/how-exposed-is-the-smith-manoeuvre-to-the-lipson-case.htm

http://www.milliondollarjourney.com/the-lipson-case-outcome-and-the-implication-for-the-smith-manoeuvre.htm

http://www.yourhome.ca/homes/article/578887

if this was brought up already, can someone please refer me to the place where I can find the discussion and/or tell me what the net outocme of the discussion was?

Thanks!

RRSP meltdown looks like a great idea, I will look into that!

Assuming that you would need to take another mortgage out for the new house, what are some suggestions to structure the purchase (and still maintain an investment portfolio)?