Comments on: Smith Manoeuvre and Filing Income Tax

By: tony

tony — Sat, 28 Jan 2012 17:39:05 +0000

thanks!
I have been keeping all well documented; I did claim in the 2010 tax return the investment interest deduction and so far they have not requested any extra documentation; will do the same this year for the 2011 tax return/

By: Ed Rempel

Ed Rempel — Sat, 28 Jan 2012 17:32:23 +0000

Hi Tony,

I just noticed your post. To answer your questions:

1. It is complex, but possible, to claim an increase in your mortgage. You do not have it separate, but it is reasonable to assume a proportionate amount of your mortgage was used to invest. You would have to do the math. I would suggest to separate the remaining balance into a separate credit line when your mortgage comes due.
2. CRA is concerned with the “current use” of the money you borrowed to invest. The fact that you held it in cash for a bit before investing it is not a significant problem. The investments sound like they are all fine. Dividends are not necessary to make the interest deductible. Essentially stock market investment is fine, unless it has a prospect barring dividends (IT-533). We normally try to avoid tax on investment income as much as possible with tax-efficient investments.

By: tony

tony — Sat, 29 Jan 2011 14:53:16 +0000

when it was the time for me to renew my current mortgage, I requested an extra 100K to be added to the 5y fixed mortgage, which the bank provided to me and I deposited into a savings account receiving not much interest for a couple of months (I was planning to use the money to buy an apartment), then I moved the money to an investment account where I initially bought a money interest paying instrument for a month which paid also not much interest and then I finally decided not to go with the apartment purchase and purchased investments which some pay div/interest (stocks, etfs) and others have capital appreciation oly but at the time do not pay dividends.

questions:

1) you mention the loan to come from a a Readvanceable type of account… what I about the loan I took which came as an increase in my mortgage principal paid as a cheque to me? is it good this type of loan to apply for interest deduction in the interest paid for such portion of my mortgage loan?
2) based on the type of investments I explained above: is the full amount tax deductible or do I have to split the amounts and timelines when the money was producing interest/dividends and claim such portions only?

By: CanadianFinance

CanadianFinance — Thu, 26 Mar 2009 19:49:22 +0000

Canadian Tax Resource Blogger,

Thanks for the info! I’m only a couple a months from moving into my new house and starting a Smith Manoeuvre.

By: Canadian Tax Resource Blogger

Canadian Tax Resource Blogger — Wed, 25 Mar 2009 03:22:09 +0000

@ Nick,

I agree with FrugalTrader: Simply print off your bank statements andtally the interest.

By: Canadian Tax Resource Blogger

Canadian Tax Resource Blogger — Wed, 25 Mar 2009 03:20:56 +0000

@ OG,

The loan on the full $5,000 is deductible because you have invested for the purposes of earning income…I assume the loan you advanced has interest terms.

By: Canadian Tax Resource Blogger

Canadian Tax Resource Blogger — Wed, 25 Mar 2009 03:19:13 +0000

@ Elbyron

It is usually better to split the investment loan from other forms of loans. It makes record keeping much simpler and tax filing easier. That being said, you could use the LOC for other purposes, but again you must ensure you attribute the interest expense appropriately.

By: FrugalTrader

FrugalTrader — Tue, 24 Mar 2009 22:16:43 +0000

OG, you can call CRA directly to confirm, but I believe that your investment should be tax deductible.

Nick, the easiest way is to pull the statements to see how much you have paid over the year.

By: Nick.

Nick. — Tue, 24 Mar 2009 18:11:59 +0000

Thanks for this — it’s very timely. You refer to interest expense calculations. On a line of credit where you only need to pay the interest charge monthly, is the correct formula: I = Prt, where I = interest charge, P=balance of loan, r=Interest Rate of Loan, and t=Number of Days of loan. Thanks.

By: OG

OG — Tue, 24 Mar 2009 17:36:27 +0000

Thanks for the information – I have been considering this and what I should do. I’m hoping someone here can help. I took out a HELOC to make an investment into my friend’s company. The way the investment was structured I payed $1.00 for 100 shares and provided a loan to the company for the remainder – $4999.00. (I was told it was structured this way for tax purposes.) In my mind I’ve invested $5000. Can I deduct the interest I’ve paid on my HELOC? Thanks!

By: Elbyron

Elbyron — Tue, 24 Mar 2009 15:25:42 +0000

Can I use the same LOC for SM and also for other deductible expenses such as fees & maintenance on a rental property (i.e. cash damming)? If so, is there any need to try and split up the deduction for interest paid on the LOC or is that irrelevant since it’s all deductible?

By: Canadian Tax Resource Blogger

Canadian Tax Resource Blogger — Tue, 24 Mar 2009 14:59:41 +0000

FP,
Yes the treatment is the same as a leveraged investment loan.

By: FrugalTrader

FrugalTrader — Tue, 24 Mar 2009 14:38:00 +0000

FP, yes, it should be the same thing.

By: Four Pillars

Four Pillars — Tue, 24 Mar 2009 13:46:30 +0000

Good stuff – I have to look at my tax return from last year to see how I did this. One question – can I assume that the SM tax reporting is the same as a normal leveraged investment loan? They are more or less the same animal no?

By: FrugalTrader

FrugalTrader — Tue, 24 Mar 2009 13:33:59 +0000

Thanks again Tax Blogger! This post should help a lot of readers out, myself included.

By: Ray

Ray — Tue, 24 Mar 2009 13:09:45 +0000

Thanks Taxman for the tip on personal use of LOC.