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The Smith Manoeuvre – Canadian Tax Deductible Mortgage (2015)

Have you guys heard of the Smith Manoeuvre (SM)? For those who don’t know what it is, it’s a Canadian wealth strategy to structure your mortgage so that it’s tax deductible. Our U.S. neighbors already get the luxury of claiming their mortgage interest and now there is a way for us Canadians to do the same.

There’s a tax rule in Canada where if you borrow money to invest in an income producing investment (like a dividend paying stock or investment property), you can deduct the annual interest paid on the investment loan from your income tax. Kinda wordy I know, in layman’s terms, if you get a loan with x amount of interest / year, you can claim that x interest during income tax season if you use the loan towards stocks or rental properties. If you’re still confused, please read on below where I will eventually explain everything step by step.

So, who came up with this idea and how does this apply to making a mortgage tax deductible? Mr. Fraser Smith has all the answers and he has written a book on the topic which explains how to do this properly. To summarize the Smith Manoeuvre in a nutshell, it’s where you borrow against the equity in your home, invest it in income producing entities, and use the tax return to further pay down the mortgage. Repeat until your mortgage is completely paid off leaving you with a large portfolio and an investment loan. Voila! Your mortgage is now an investment loan which is tax deductible and hopefully, your portfolio is larger than your loan.

While I have a tendency to optimize, here is a is a slightly modified version of the Smith Manoeuvre (SM):

1. Sell all existing stock from non-registered investment accounts and use it towards a down payment for step 2.

2. Obtain a readvanceable mortgage. This is a mortgage that has 2 entities, the home equity line of credit (HELOC) and the regular mortgage. Nothing unique about this setup EXCEPT that as you pay down the mortgage, the credit limit on the HELOC increases. This is a key feature that is needed when implementing the SM. Note that you usually require at least 25% 20% equity/down payment before you can obtain a readvanceable mortgage. Some financial institutions that offer these mortgages are:

  • RBC – The Homeline Mortgage
  • Firstline – The Matrix Mortgage
  • Manulife – ManulifeONE Mortgage (read my Manulife One Review)
  • BMO – Readiline Mortgage (this is the SM mortgage that I have, email me if you want a referral)
  • For a complete list, check out The Smith Manouevre Resource. Included within the post are mortgage reviews, calculators, taxation issues and strategies related to the SM.

3. Use the HELOC portion of your mortgage to invest in income producing entities like dividend paying stocks or rental property. With every mortgage payment, your HELOC limit will increase. So with every regular mortgage payment, you will invest the new money in your HELOC. Note that you SHOULD NOT use the HELOC money to invest in your RRSP as you will lose the tax deduction on the invested money.  If you don’t already have an investment account, here is a review of the more popular discount brokerages available in Canada.

4. When tax season hits, deduct the annual amount of interest that you paid on your HELOC against your income. So, if you paid $6,000 in interest payments for the year and you have marginal tax rate of 40%, you will get back ~$2,400 of it.

5. Apply the tax return and investment income (dividends etc) against your non-deductible mortgage and invest the new money that’s now in your HELOC.

6. Repeat steps 3-5 until your non-deductible mortgage is paid off.

As you can see, this process will pay down your regular mortgage in a hurry.

The Advantages:

  • You get to build a large investment portfolio without waiting to pay off your mortgage first (the power of compounding).
  • You get to pay down your non-deductible mortgage in a hurry.
  • Your new investment loan is tax deductible.

The Downside:

  • You need to be comfortable with LEVERAGE and investing in general.
  • You need a plan ‘B’ in the case that you need to move and home values have gone down. If you invested properly, your portfolio should at LEAST cover your loan.
  • Your mortgage is NEVER paid off where you keep the tax-deductible loan (this can be a good thing).

In part 2 of this series, I will talk more about general questions regarding the Smith Manoeuvre. Like, making the extra HELOC interest payment IN ADDITION TO the regular mortgage, different investment options, and ways to optimize the SM even further.

Update May 2013 – Big mortgage rule changes!  The mortgage rules have changed where nationally regulated banks can only allow home owners to borrow up to 65% of their equity towards their “revolving” or home equity line of credit portion (only applies to new applicants – I believe existing HELOCs are grandfathered).  However, homeowners can still borrow up to 80% of their equity in total.  This means that the remaining 15% (80% – 65%) has to be in the form of an installment mortgage with a regular repayment schedule. Best to talk to a mortgage broker about how it affects you, let me know if you need a recommendation.

Continue to The Smith Manoeuvre – A Wealth Strategy (Part 2).

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 433 comments… add one }

  • Tito January 18, 2015, 4:06 pm

    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?

  • Chirag January 25, 2015, 3:36 pm

    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?

  • Ed Rempel February 20, 2015, 12:44 am

    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.


  • Ed Rempel February 20, 2015, 12:49 am

    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.


  • fs March 23, 2015, 3:54 pm

    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.

  • Harry April 14, 2015, 7:32 pm

    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 FrugalTrader April 14, 2015, 9:07 pm

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

  • KEYZD April 20, 2015, 2:53 am

    Hello all,
    I’m looking to set this up at the end of May and am reviewing lenders.
    My fear is that this may be a little complicated for the average bank or DIYer to setup.
    So does anyone know of a readvanceable product/lender that’s good with automating the SM? IE. Updating LOC space frequently & allowing the LOC to disperse funds to investments automatically?

    To avoid me doing this manually. Or outside of a re-advanceable.

    Any suggestions?

  • Ed Rempel May 9, 2015, 10:13 pm

    Hi Keyzd,

    5 of the big 6 banks have a workable readvanceable mortgage. The best one depends on your situation, though. Not all readvance automatically, some don’t allow investing directly from the credit line, some only allow you 65% instead of 80% and some are more competitive on rates.

    I would suggest to keep some flexibility when doing the SM and don’t lock in too long. We are recommending 2-year fixed now.

    We have a free mortgage referral service from our web site, if you want help figuring out which bank is best in your situation.


  • Ed Rempel May 9, 2015, 10:58 pm

    Hi fs,

    I see you have discovered the complexity of trying to do both the Cash Dam and Smith Manoeuvre at the same time.

    It is complex, so often it is better to do just one. The expected benefits of the Smith Manoeuvre are obviously many times higher than the Cash Dam, since the Cash Dam is only a tax strategy. The SM also has investment growth and generally more than 80% of the SM expected benefit is the investment growth, not the tax savings.

    Whoever told you you need $50K to start the SM doesn’t understand it. It is very common to start it from $1. In fact, you can start from $1 and use that to finance an investment loan (the Rempel Maximum strategy) if you want to start with a lump sum.

    I don’t understand your $70K transfer from your home HELOC onto your rental. It sounds like you are using non-deductible debt to pay down deductible.

    You would have a lot more flexibility if you kept your mortgage to 1 or 2 years, instead of 5. You have full flexibility at every maturity.

    To answer your question, yes you need 2 credit lines – one for SM and one for CD. Only one will readvance from your mortgage. Usually, you should have whichever one is the larger monthly amount readvance automatically. The other one will need a lump sum payment once per year or so.

    For example, you could setup $20,000 available credit for the CD for one year. Readvance the SM monthly, but leave $1,700 not readvanced each month, so you have another $20,000 available credit to move to the CD credit line at the end of the year.

    There are a variety of ways to do it, but all are complex. The simplest method depends on your situation.

    You will soon run into the question of whether to do the SM on a mortgage that is already deductible from the CD. The answer depends on which you expect to own longer – the investments or the rental. You can make your home mortgage tax deductible with the CD, but if you don’t want the hassle of a rental when you retire and sell it, then the mortgage is no longer deductible. The SM investments are usually held through retirement, in which case it is worth it to SM the deductible mortgage.

    I hope all this is helpful for you, fs.


    • Le Barbu May 11, 2015, 12:02 pm

      Ed, my question is about the process when you finally hit the max of HELOC (mortgage fully repaid). I use to capitalize the interests down the road and take the dividends to crunch the mortgage principal. At the end, should I : 1-Begin to use the dividends to pay for the interests or 2-Sell a little bit of the investment to decrease the HELOC and make some “room” for the interests (continue capitalization). Does it depends of particular situation or is there a kind of basic rule?

    • fs May 16, 2015, 5:04 pm

      Thank-you for the reply and yes it was very helpful. How do set up an appointment with you so we can get this started. The benefits are to great for me to wait any longer!

  • Ed Rempel May 17, 2015, 9:18 pm

    Hi fs,

    To contact me, click on my name to go to our web site. The best first step is usually to register for one of our educational webinars.


    • fs May 28, 2015, 8:36 am


      Done, thanks again!


  • SC May 27, 2015, 3:59 pm

    Quick question. I have heard a few people lately talking about this.

    If you refinance your mortgage and invest the money you get from this are the mortgage interest payments on the amount invested tax deductible?


    I have a $1mill home and currently $500k left on my mortgage. I Re-Fi back up to $800k and invest the $300k I get in an unregistered account. Is 37.5% (300/800) of my mortgage interest payments now tax deductible?



  • Ed Rempel June 13, 2015, 12:46 pm

    Hi SC,

    Yes, 3/8 of your mortgage should be tax deductible. It is better to split your mortgage into 2 and have a $500K and a $300K mortgage. Then you can track the $300K separately.

    There are 2 big advantages to splitting your mortgage:

    1. You can track it, which is important if you are ever audited by CRA.
    2. You can then pay down your non-deductible $500K mortgage quickly, while paying down the tax deductible $300K mortgage slowly to keep the tax deduction.


  • RevShark August 15, 2015, 2:01 pm

    Hey FT,

    Do you have a spreadsheet that works for the latest version of Microsoft word? I just bought my first home and was able to get all things setup for the SM with 20% down and accelerated payments etc… Also, do you have any tips beyond what you have posted here? Thanks for this great site and best wishes for your future 60k a year passive income.


    • FrugalTrader FrugalTrader August 16, 2015, 1:04 pm

      @RevShark, Thanks for the kind feedback. What error message are you getting?

      In terms of the SM, my advice would be to be aware of your risk tolerance. The normal gyrations of the market are enough to make a seasoned investor uneasy, but add leverage on top, and it’s a recipe for high stress investing for some. Just be ready for those ups and downs and keep your focus on the long term.

      • RevShark August 16, 2015, 11:42 pm

        Hey Frugal,

        Thanks for the quick response. I am getting #Value! in the yellow fields of your V2 spreadsheet. I have a huge time horizon as I am just newly graduated from Uni and have 40 plus years to be a working stiff. Thanks again for this great blog with a treasure trove of articles and comments.

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