Using our example, we have a 120k HELOC setup at 2.5%/a. Mortgage is locked at 5.79%.
We’ve pulled 100k of that into investment bonds returning 15%/a, paying out quarterly. Our first quarter payment came in and it was only 2 months worth, so we held that in the tracking account to pay the HELOC interest costs. I’m debating whether or not I should “capitalize” that interest by pulling that money back out of the HELOC, and getting back up to the original $2500, or just leave it at the eroded amount.

Now, our second interest payment has arrived, and I’m ready to get this into full swing and make a mortgage payment. So, assuming I capitalize that interest, I’ll have $6250 in the tracking account. So, I’m thinking I withold the 40% for tax, make a mortgage payement of $3750, pull 10k out of the heloc and reinvest it, and go on my merry way till next quarter. Rinse, repeat.

All the while, we’re still making our accelerated payments of $700 into the mortgage.

So, am I on track or have I botched this?

Is it true? if so, i have to xfer money from my HELOC account to my saving account very month so Etrade can withdraw it? I am so confused

Thanks for any helps

[...] Hopefully by this point, we would have employment lined up, but if not, we would need to dip into our portfolios or line of credit.  If rates were to remain low like today (2.25%), it would be a toss up on whether to use the line of credit or liquidate our portfolio.  The largest downside of the line of credit is that it would create an additional monthly expense, unless we were to capitalize the interest. [...]

How do you keep track of how much the interest payment will be for the current month. It will always increase, and I can see myself making errors on the amount if I calculate it myself.

Do the LOC’s have automatic interest payments where the bank will automatically pull the funds out of an account?

Based on the SM Money flow diagram shown here, if I make a capital gain in my discount brokerage account, but do not withdraw that gain and simply re-invest it, then will I still be able to claim all of the interest paid on the originally borrowed money?

Thanks,
Universal.Trader

I read that quote from Fraser and have not talked with him since then. I’m not sure exactly what he means, but he was advocating mutual funds with ROC distributions. I took his quote about Cash Dam as referring to this, since I believe he had been using Cash Dam as an explanation for the ROC process.

Anyway, it works perfectly for rental properties and nonincorporated businesses. It is purely a tax strategy – not an investment strategy. Your mechanics sound exactly right, Alan.

Ed

Thanks for the quick reply. I read one article in specific where Smith said he wasn’t going to be recommending it after the Lipson decision….and then all the naysayers started blogging! At any rate, I read IT-533 and, trying not to be daft here, but the mechanics for me would be – pay eligible expenses from HELOC, draw on property revenue for lump sum on personal mortgage portion of HELOC…right?

Thanks again.

What are you reading? The Cash Dam is specifically mentioned and allowed by CRA in IT-533.

I have seen quite a few advisors use the Cash Dam as somehow an explanation that allows an investment loan to stay deductible if you take ROC distributions out of a fund. That doesn’t fly, but that isn’t Cash Dam.

Using Cash Dam with rental properties works well to make your home mortgage deductible.

Ed

This is a very good site with lots of good and useful information.

I am very close to setting SM based on the money flow diagram shown here and have a simple question. You have shown in your diagram that the investment funds should be funded from BMO HELOC to brokerage account. If fund from BMO HELOC to BMO Checking account and from BMO Checking account to Brokerage Account, would that be still okay from revenue canada tracking point of view.

The reason I want to do it this way is my Checking account (for using in SM) is ready and I have that already linked with my brokerage account. However my HELOC is just getting approved and will be set-up sometimes next week. What they said is that once it is setup next week, then I can order the checks which will arrive in 2 to 4 weeks and then I can use that to link it with my brokerage account. However based on the current situation in stock market and 10%+ dividends, I want to get in to market sooner rather than waiting for about 4 weeks.

Would appreciate your response.

Thanks,
Universal.Trader

I’ve set up an SM with BMO and Interactive Brokers (IB). The problem is that the dividends produced from my investments at IB can only go back to the funding account or else I have to wait 60 business days. The funding account is the HELOC attached to the BMO Readiline product.

What I want to do is apply the dividends against the mortgage portion, reborrow from the HELOC and then send them back to the IB for reinvestment.

One option is for me to do the following steps – will CRA be okay with this trail and allow me to claim the interest deductibility?

1. I send the dividend payments to the HELOC (right down to the dollar) from IB
2. I then borrow immediately from the HELOC and send to my personal banking account
3. I then pay down my mortgage with that portion from my banking account
4. I then reborrow that same amount from the new room created at my HELOC and send that to IB.
5. I invest that amount at IB so that it is now deductible.

I hate that this is convoluted but there is no way that I can send a payment from IB directly to the mortgage since BMO won’t allow it. I can’t send it to my bank account directly unless I’m willing to wait 60 days.

As it turns out, because it took me awhile to find opportunities to invest and generate significant dividends, I can wait another week and the 60 day threshold will be met. At that point, I can send it to my bank account directly. What I don’t think will work is sending it to the mortgage directly. Why? Because in order to ensure that there is an EFT link between the two accounts, IB sends some money (less than $1) to the account AND withdraws money from the account. With my BMO mortgage you can’t apparently send money to it except from the BMO linked savings/chequing account and you certainly can’t remove money.

I hope this helps anyone else in this particular situation trying to achieve the same results.

Check out this post:
http://www.milliondollarjourney.com/which-spouse-should-claim-the-investment-loan.htm

Regarding SM, is there a way to save my tax only?

Thanks.

I have a Scotia STEP and i haven’t yet withdrawn any funds from it. When I do, will the minimum payment be the interest only or the usual 3%. if it is 3%, can i still do the Smith Manoeuvre?
thx

One interesting thing to note – the statement from BMO for the interest due portion on the HELOC was not extremely clear that it was already set up for pre-authorized debit. I’m so used to seeing bill payments that put it in bold letters near where the amount due is placed. For BMO’s statement, they have it at the bottom of the transaction details. I wasn’t totally convinced that I didn’t have to make a manual payment but one call proved that it was set up for automatic payment.

Now, it’s off to the banking website to set up a scheduled withdrawal from the HELOC to pay itself the interest due!