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The Smith Manoeuvre Resource

Written by FrugalTrader on Mar 5, 2008 filed under Smith Manoeuvre

Over the past year so, MDJ has posted many articles on the topic of using a HELOC to invest in equities aka: The Smith Manoeuvre.

This article will compile all the posts into a single Smith Manoeuvre Resource. Hopefully, you’ll find it useful.

The Basics

Calculating Smith Manoeuvre Returns

Tax Considerations

Leveraged Investing

Feel free to bookmark this page as I will be updating it as new SM articles are written.

17 Comments, Comment or Ping

1. David

I’m not certain how this will apply, but people should be aware that the Supreme Court of Canada will be hearing the case of Ludco, and will likely making a statement about the ability to deduct interest for investment purposes.

While Ludco is an interesting case and there are a lot of issues that don’t apply to a person doing a SM, the Supreme Court doesn’t take cases unless they want to make pretty broad statements on the law.

I don’t know if they will overrule Singleton, the case that opens up the law for SM, though it was possible before the decision, but if you’re planning on doing it, or are doing a SM, pay attention to this case.

Mar 5th, 2008 @ 12:42 pm
2. FrugalTrader

David, i’m skeptical that they’ll cut out the tax deductibility of investment loans. If they cut that out, that would mean that they would have to cut out the tax deductibility of expenses for a business! Afterall, that’s what business expenses are, they are used to produce INCOME for the business which is exactly what an investment loan does.

Mar 5th, 2008 @ 1:08 pm
3. David

FT, they may suggest that such loans are still available for active business income, rather than passive. The ITA draws this distinction already.

I’m not going to lay odds on it, but the CRA has been negative on the “Singleton Shuffle”, so the Supreme Court may use this opportunity to tell the CRA to allow the deductions, or they may agree that GAAR, which was not argued in Singleton, applies and this is merely an avoidance technique for people investing in passive streams.

Mar 5th, 2008 @ 4:01 pm
4. Deborah

Leveraged funds are unwinding…

http://globaleconomicanalysis.blogspot.com/2008/03/hedge-funds-unravel.html

Mar 5th, 2008 @ 10:19 pm
5. The Financial Blogger

Great resource!
I think I will review some of them… It is always good to go back to the basics after a while…

Mar 6th, 2008 @ 8:28 am
6. str8jkt

Might want to add your latest post - the blueprint one, to this thread..

Mar 6th, 2008 @ 1:09 pm
10. Chinstrap

First of all, great website!

I have used a simple version of the SM in the past - credit lines on my principal residence, plus dipping into margin in my brokerage accounts. This has allowed substantial tax deductions in the past..

But Question.. now that our mortgage is paid off, what rules, guidelines do people follow to determine how much leverage to put on the house to then invest in equities, mutual funds, etc.?

I managed to pay off my principal residence through stocks but mainly via buying and selling principal houses/condos.. Perhaps another discussion point

May 14th, 2008 @ 1:13 pm
11. FrugalTrader

ChinStrap, if you have your principle residence paid off, you can borrow up to 80% of it’s value in the form of a HELOC without incurring any CMHC fees. If you have a higher risk tolerance, and a little more aggressive, you can use that money to invest in equities and claim a tax deduction on your interest paid.

That’s in essense what the SM ends up to be. When the non ded mortgage is paid off, the tax ded investment loan will remain.

May 14th, 2008 @ 1:19 pm
16. PhilC

For a smith manoeuvre:
If the house is jointly owned and the HELOC is joint. Does the investment account need to be joint also? Does this affect tax-deductibility?

Sep 18th, 2008 @ 5:06 pm
17. Ed Rempel

Hi Phil,

The tax ownership and the legal ownership can be different. You can borrow jointly but invest the money in an account in your name, your spouse’s name, or a joint name. Then you can decide who has officially borrowed and that person(s) can claim the interest deduction and claim any taxable income on the investments.

However, once you claim it once, you cannot really change it in the future without repaying the loan and reborrowing again - so think carefully about who you consider to be borrowing to invest. It should be the one that would benefit the most over the long term.

Ed

Sep 18th, 2008 @ 9:57 pm