462 responses

  1. Tito
    January 18, 2015

    Hi Ed Rempel,
    If I have 60 000$ heloc available, I would like to convert my remaining non deductible mortgage 200 000$ to smith manoeuvres. I would like to leverage 3 for 1 of 60 000$, if approved I’ll will have 240 000$ investing in mutual fund with ROC. The question is, if I receive ROC monthly to pay down interest and capital on the leveraging loan ( 180 000$) , will my deductibility interest decrease?

  2. Chirag
    January 25, 2015

    Hi Ed,

    Smith Manouevre with CCPC investment:

    I am not sure if this has been previously covered. I have a RBC HomeLine Plan and am seemingly in a position to set up the smith manouevre. I only have RRSP/TFSA investments, nothing that is non-registered. However, I do have a sizeable investment in stock of the CCPC company that I work for. Against this investment, I have a sizeable tax-deductible loan. So i already have a sort of smith manouevre set up through that as i use the excess cashflow from the dividends after paying off the interest to pay down the mortgage.

    My question is, what that CCPC investment, am I also able to setup a more traditional smith manouevre using the line of credit in the homelife plan to purchase publicly traded securities?

  3. Ed Rempel
    February 20, 2015

    Hi Tito,

    Yes, if you pay the ROC entirely onto the loan, then the remaining loan should all remain tax deductible.

    My question for you, though, is why would you buy a fund with ROC? Instead of compounding, exponential growth over the years, you are willing to settle for just paying the loan down?

    The difference in long term expected profit can be huge. You can use the “rule of 72″ to estimate.

    For example, if your fund averages 10%/year over time, then it doubles every 72/10 = 7.2 years. That means that in 20 years, it almost doubles 3 times. If you double your $240,000 investment 3 times, you are almost at $2 million.

    With ROC, instead of having $2 million, you could pay your loan off over about 8 years and then get $20,000 cash flow for 12 years. Wouldn’t you rather have $2 million?

    Essentially, with ROC you have lost more than half of the long term benefit. Plus you lose the tax benefits – you no longer get an interest tax deduction, and after 12 years the entire ROC payments are taxable to you but you can’t sell because your cost base is now zero and there would be a huge tax bill.

    If you just let our investment compound exponentially in a tax-efficient capital class structure, you are likely to build wealth far faster.


  4. Ed Rempel
    February 20, 2015

    Hi Chirag,

    Yes, you can use the Smith Manoeuvre for both a CCPC and normal public investments at the same time. As long as both are appropriate investments on their own, you can invest in both. No problem.


  5. fs
    March 23, 2015

    Hi All,
    Sorry for the long post, hopefully it will make sense to you all.

    I am a newbie to the board but I’ve been researching the SM and the cash damning technique for the past 4 years. At that time in 2011, I didn’t have the funds to start the SM but instead began to use the cash damming techniques instead. I was told that I needed ~50K to start to see a somewhat positive return using the SM. To be honest, I wish I would of started with $0, but at that time I took the advice. Here is my situation/question.

    In Aug 2011, I converted my primary residence into a rental property; the property already had a HLOC of $235K max, using $233K (basically maxed out now). Rental bringing in $2,200.00/month. I purchase a new home for my primary residence at the same time (Aug 2011) and setup a readvanceable mortgage of $297,600.00 @ a variable interest rate, 5 years closed, 30 yrs amortization, weekly accelerated payments of ~$300.00 / wk. $0.00 owning on the HLOC at that time.

    Fast forward to today, I’ve been using the cash damming technique since the very 1st mortgage payment (Sept 2011), paid the mortgage payment with all the Rent received plus the automatic weekly payment plus an additional $1000.00 (not every month but 60% of the time). Then moved the ‘new’ equity into the HLOC and using that to pay the utility, property tax bills, maint./repair expenses, interest on the rental HLOC and capitalizing on the interest paid on the primary residence HLOC. Additionally, every April/May I use the tax return to place an additional mortgage payment for that month. Let me tell you what a headache it has been insuring not to go over the maximum of mortgage payments that can be made in the year (~44K) with a minimum amount (5K) that can be moved over from equity to the HLOC and still keeping enough cash to pay the rental expense. But it’s all been worth it to see the non-deductible portion turn into deductible at tax time.

    With 17 months remaining until the term ends (Aug 2016) I am confident I will convert the $297,600 mortgage into the HLOC with ~$70K unused (left). This will leave me with a ~233K HLOC (Rental) and a ~220K HLOC (primary residence) all deductible for/at tax time. Now to my questions.

    1. In Aug 2016, if I convert the Rental HLOC into a readvanceable mortgage and use the unused portion of the primary residence HLOC ($70K) for a mortgage payment on the new readvanceable mortgage, that will free up $70K of equity, converting that to available HLOC, then using that to start the SM. The new HLOC will only be used for investing going forward. Am I able to do that? Am I violating any tax laws by doing this? I don’t think so, b/c both HLOCs are rental expenses now, I am just moving moneys from one HLOC to another, but that will free up the funds I need to start the SM earlier than later. Alternative, with the avail room in the primary residence HLOC I have ~ 30 months of rental expense covered, to which I can use the Rents I am receiving and 2 or possibly 3 (if timed correctly) tax returns to start the SM. But would like to hit it with the largest amount initially if I can. Sooner is always better.

    2. If I am correct, and this is where I am a little fuzzy on the inner workings of the SM, how do I keep ~2K cash flow going to ensure the rental expenses are being paid? Do I need to open 2 HLOC under the new readvanceable mortgage, one designated for investing and the other for rental expenses? That will mean that initially the entire amount will be place on the readvanceable mortgage as a payment but the equity split by a certain percentage to the 2 HLOCs, leaving less ( in my case) going to the investing HLOC for investing and more on the rental expense HLOC to use for expenses.

    2a. Is there a way to use a single HLOC? Let’s say, having the entire mortgage payment used to increase the equity, moving that equity to the one HLOC; investing HLOC. But how do I pay the rental expenses? Only way I can think of is to use the dividends from the investments as cash flow to pay the expenses of the rental? If so, I would need a healthy principle to achieve a 2K in dividends, how much do I need to achieve that?

    3. If am an entirely wrong in my assumptions, then what is next for me (if any)?

    Thanks in advance for your feedback.

  6. Harry
    April 14, 2015

    Once I pay off my RRSP Loan for my HBP will I have an RRSP again? I just pay my min on my taxes every year to pay it off. But wonder if I actually will have that RRSP again after the loan is zero??

    • FrugalTrader
      April 14, 2015

      @Harry, your RRSP contribution limit grows every year despite have an HBP balance (providing you’ve had earned income the previous year).

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