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Tax Deductible Mortgage Plan (TDMP) – Worth It?

There was comment in the popular Smith Manoeuvre thread about comparing the tax deductible mortgage plan (TDMP) to the traditional SM.  Here are my thoughts on the issue.

What is TDMP?

The TDMP is a basically a way for someone interested in leveraging their home to invest to hand off the whole setup.  That is, TDMP will arrange the readvanceable mortgage, investment account/investments along with arranging payments, and mortgage pay down.  Coincidentally, their setup is very similar to the way that I have constructed my leveraged investment strategy.

What Does it Cost?

While not everyone has the time to watch their investments, automation can be a good thing. The automation with TDMP, however, comes with a cost (and other problems).  From their site:

The TDMP Setup fee is $2750 + GST and recurring Cash Management fees are $39.95 per month. These fees are 100% Tax Deductible and are funded from the proceeds of the plan so you are never out of pocket.

The Problems

While the fees are high (even if they are tax deductible), the biggest problem I have with TDMP though is their choice of investments.  The TDMP invests in a high distribution fund, and uses the monthly distributions to pay down the non tax deductible mortgage.  High distributions are great right?  With a leveraged investment account, it really depends on the content of the distribution.  Their 8% income fund has at least a portion of the distribution in the form of Return of Capital (ROC).

The TDMP withdraws all of the distribution and uses it to pay down the mortgage, similar to my modified Smith Manoeuvre strategy.  As readers of MDJ know, withdrawing ROC from a leveraged investment account can mean tax trouble for the underlying investment loan.  Basically as time passes, and the mortgage gets paid off, the investment loan will slowly become a non tax deductible loan due to the return of capital.

Over time, the investor will be left without a mortgage (hooray!) but with a large non-deductible investment loan in the place of a mortgage (boo!).  So basically back to square one.  Without the tax deductibility of the investment loan, the investor will be taking higher risk and will most likely face sub par returns after fees.

Final Thoughts

In my opinion, the only way that TDMP would make sense is if they use an income fund that payed distributions in the form of dividends onlyDividends are tax efficient and can be withdrawn from a leveraged investment account without any consequence to the underlying investment loan.  That way, when the mortgage is eliminated, the investor will be left with a tax deductible investment loan.

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FT About the author: FT 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.

{ 61 comments… add one }
  • Tom @ Canadian Finance Blog July 6, 2009, 2:09 pm

    Good review FT. I hadn’t looked into what they were investing in, the fees were enough to turn me off. Besides picking stocks for a SM seems more fun!

  • Brendan July 6, 2009, 2:38 pm

    Isn’t this called the Smith/Snyder manoeuvre?

    I don understand why anyone would knowingly do this, yet alone pay the crazy setup , and monthly fee’s?

    What would be the point of swapping the mortgage for a non deductible loan?

    Since the investments are ROC, would you eventually be left with zero investments, and a loan outstanding?

  • NoDebtGuy July 6, 2009, 3:34 pm

    People without a full understanding of the process only see “tax deductible mortgage” and when presented with the basics think it is a good idea. This company makes it easy for them and shows that they will save money. Makes it a no-brainer for people who don’t do their research and don’t know there are better ways.

    Mortgage acceleration products are marketed the same way. Without doing proper research and reading through blogs such as this people do not find out that there is a cheaper, more effective way!

    People without the DIY attitude will always pay extra for these types of products.

  • Victor July 6, 2009, 5:33 pm

    People without the DIY attitude will always pay extra for just about all types of products (and services).

  • Jared July 6, 2009, 11:28 pm

    Does anyone know any income funds that do pay distributions in the form of dividends only?

  • cannon_fodder July 7, 2009, 11:29 am

    It would be interesting to calculate whether a person has a high likelihood of coming out of ahead instead of doing nothing (i.e. just pay down the traditional mortgage). Just because there is a better way to achieve a better result doesn’t always mean that less effective paths should be dismissed.

    If you check out the articles here and on redflagdeals.com on the Smith Manoeuvre, there are still many people who don’t understand the basics in spite of the copious posts. If the TDMP can provide a real and appropriate benefit to those unsophisticated investors then it can be a good thing. Hopefully, over time, those investors will accumulate more knowledge and graduate to becoming more self-sufficient.

  • Brian Poncelet,CFP July 14, 2009, 11:58 pm

    I think when the market was doing well this idea seemed to be OK on paper. Where it really falls apart is when you have 2008 returns,have an investment loan that distributes 8% so now the fund is down 30% and you still have to pay the loan. From a math standpoint is is difficult to recover. To add to the trouble fund companies have cut the distributions! So now to fund this loan to support a fund that is down, out of pocket money comes to play.

    As far as dividends are concerned you still have to pay taxes on it. As the dividends grow so does your tax bill!

    So you lost not only the taxes you paid, but also the opportunity cost. Had you not paid the taxes out your pocket what you have earned over the years at a modest rate of return over time. The amount may be large!

  • pete July 16, 2009, 12:18 am

    hey all I guess i am one of those foolish people that got into the tdmp. I did not go with the company (but attended the lecture) so i don’ thave to pay these ridiculous fees but did use one of there financial planners. I am not the most informed person these topics (bad me) but it does sound good in theory i think. After reading this i talked to my advisor and he told me that yes we are getting roc from the distributions but my HELOC portion increases so i still will get a tax return from my investment loan. The scenario and spreadsheet they gave us also indicate this. I am second guessing myself now but so far it seems to be working well. I have only been in it since the beginning of this year but have knocked off over 10000$ from my mortgage. I know you say that this appears good because it gets rid of my mortgage (ie bad debt) but leaves me with another debt (ie ILOC & HELOC). but with the smith manuever isn’t it the same because u will eventually get rid of the mortgage but have the HELOC/ILOC still needing to be dealt with? I will still have Interest that can be claimed just like the smith manuever aswell but will have my bad debt paid off much quicker. Also how would this approach (TDMP) differ from the rempel maximum other then the roc? Also my financial planner did indicate he would do my taxes aswell because of the calculations needed at tax time. Any feed pro or con would be greatly appreciated.

  • Brian Poncelet,CFP July 16, 2009, 3:02 am

    Pete,

    You got lucky and missed some down turn but the ROC is still the same. If the fund company cuts the distribution (which they will) the pain may return.

    It seems like you are using two different advisors…just stick with one! The whole idea of the ROC is great using your own money but if this market comes down again or stays flat you may be in trouble (remember, distribution cuts means more money out of your pants to pay for the loan!). As far as Ed goes he has made some good comments about ROC. Are you doing this yourself and using different advisors, or is the other TDMP advisor out of the picture or are getting two different view points?

    The other things you need to do (maybe you have done them) is review the risk management (life, disability, criticall illness insurance etc.) if something happens to you and you have a loan on top of a mortgage are you covered? Do you have a will? You know the drill!

    Selling investments is easy the other stuff is boring and no one likes talking about it! But ask yourself why do banks tell business owners to buy insurance? To cover the debt if they can’t pay!

    I hope this helps.
    Ps. what city was the seminar in and when?

    cheers.

  • pete July 17, 2009, 2:57 am

    hello brian and thanks for the quick feedback. I am only using one advisor and he was at the seminar i was at but didn’t talk. The seminar i went to was in oakville and i attended it last spring. After talking to the mortgage guy and the financial advisor a few times and when we had a follow up meeting about 6 months later we found out that the tdmp people jacked up all of there prices but these 2 guys (esp the financial planner) have been great with us and help us set eveything up with none of these fees. the mortgage guy was ok (he did get us prime) but the financial advisor has been fantastic in my opinion coaching us since day one and making sure everything is going smoothly and correcting things very quickly when it hasn’t. It looks to me that he has chosen good funds and the distributions will be the same until next year and then we will see if they change or not. As for risk management i believe i am covered. My wife and myself have upped our insurance to cover both the loans and the mortgage with a couple hundred thousand to spare if god forbid something happens. I am also covered thru my work 2x my annual salary a good pension and my job is fairly secure. We have been a little lax on our will but that is the next thing on our to do list. Our next step is getting all this extra money from the redistributions into the wealth fund and get that building up aswell. As i said earlier i think i got in at the right time (ie after the markets really tanked so my losses won’t be that huge) except for the mortgage rates not being prime-x%. Things are working smoothly and the way they indicated. so far i am really pleased but who knows what the future holds. take care.

  • Brian Poncelet,CFP July 17, 2009, 7:50 pm

    Hi Pete,

    I am going to give you some homework. First call the fund company yourself and ask if they have ever cut the distribution. They will most likely tell you yes, last year or this year ask them if they will cut it in the future they will tell you maybe. Unless the fund does toward the 8% you will see distribution cuts! Next see if they have a tax department, ask how the ROC fund (borrowed money) works on your tax return. They will tell you it must be prorated down! This means over time this will not be tax deductible!

    Once you done that I will give you some more home work on why (assuming you have kids) the term insurance is too little and how it’s going to cost you a lot of money over time.

    If you have any questions, drop me an e-mail.

    regards,

    Brian

  • Ed Rempel July 19, 2009, 2:01 am

    Hi Pete,

    You may have paid $10,000 off your mortgage, but if you have done this with ROC distributions from a fund, than $10,000 of your investment loan is now NON-deductible.

    The mortgage paydown looks good, but there is actually no benefit to it whatsoever. You have not reduce your non-deductible debt. All you have done is reduced your mortgage by $10,000 and made $10,000 of your investment loan non-deductible. In total, you have the same amount of non-deductible debt.

    The Smith/Snyder version of the SM (that has the ROC payments) has what we call “4 Meaningless Transactions”:

    1. Take ROC distribution.
    2. Pay it onto your mortgage as an extra peyment.
    3. Reborrow the extra amount to invest from the SM credit line.
    4. Do the calculation at tax time to only claim interest on the amount of the investment loan that is still tax deductible (essentially the amount of the investment loan less the total of all ROC distirbutions).

    These 4 transactions in total accumulate absoluately nothing. If you just reinvest the distribution and skip these 4 steps, you will have:

    1. The same amount of non-deductible debt.
    2. The same amount of deductible debt.
    3. The same amount of investments (although probably invested more effectively than in an income fund).
    4. A lot less work.

    Just so you are clear now it works, if you borrow to invest, but then cash in the investment and spend the money, then obviously you can no longer deduct the interst on the investment loan. This is the principle with the ROC payment. It is not taxable for the first few years, because it is considered that you are getting your principal back (return of your capital). Paying it onto your mortgage means it is no longer invested, so that amount of the loan is obviously not deductible.

    For example, if you take a $100,000 investment loan and take payments of $8,000/year, after 1 year, only the interest on $92,000 of the investment loan is still deductible. After about 12 years, none of the interest is deductible.

    What’s more is that it is up to you to do this calculation. CRA does not do it. They just look at your calculations and if they are not correct, CRA can deny everything. It is up to you to prove your claim for the interest deduction.

    What to do with your investment loan after the 12 years? After 12 years, NONE of your investment loan is tax deductible. Now what do you do to get rid of this loan, since you cannot deduct any of the interest (and it is probably at a higher rate than your mortgage).

    There is also a “ticking time bomb” with the ROC strategy, since the ROC payments become fully taxable after 8-12 years, once your cost base reaches zero. Also, when you sell the fund, most for all of the proceeds will be a capital gain, since your cost base is reduce by the ROC payments.

    So, just when the loan interest is 100% NON-deductible, then the ROC payments start to be fully taxed as received (as a capital gain).

    The process is complicated and makes people think they are paying their mortgage down more quickly. It is a good “sales technique”, but not an effective financial strategy.

    The difference between this and the regular SM or the Rempel Maximum is that, in these latter 2 strategies, 100% of the investment credit line and investment loan (if you use one) remain fully tax deductible.

    These strategies are much simpler, since they don’t involve all the “Meaningless Trasnactions”, – and they follow all the tax rules. They have all the benefits of the ROC strategy (assuming you leverage the same amount), with 1/3 the work, no “ticking time bombs”, and your tax return is easy because all the interest remains fully tax deductible.

    Ed

  • pete July 23, 2009, 11:40 am

    hello ed good to hear from you. I have read your scenario a few times before and this is what got me concerned. I might of jumped into this a little quickly but 10000$ has not all come from the roc (actually about 7000$) and my tax returns (from interest) do go up for the first few years and then does decrease later on (i assume from the roc) but it actually never gets to zero ever and stays consistent after the 8yr mark (in the 2000’s) as i wont be using the roc anymore for my mortgage so i will have some tax deductible debt throughout this process until i decide to pay of the loans. I do have my financial planner doing the reurn so this will not be a concern in regards to the calculation. It also seems that the income fund will theoretically pay off all my investment loans (if i wish to sell) in about 11yrs but may take a little longer aswell depending on the investments (but i assume this applies to the sm/rempel aswell). I know this may not be ideal but i don’t lose my tax deduction fully ever and mortgage will be payed off quicker aswell as the income fund will increase very rapidly once the mortgage is paid off as i will be able to put much more into it on a monthly basis. My one question for everyone is it better to pay off my heloc/iloc loan once my mortgage is done or aggressively put my money into the income fund to build this up much more quickly. Thanks for any feedback.

  • Brian Poncelet,CFP July 26, 2009, 6:13 pm

    Hi Pete,

    Did you ever call the fund company and ask about the ROC and distribution cuts? The key is you have do some research yourself then once you get some facts you take your next steps.

    Brian

  • Ed Rempel July 26, 2009, 9:27 pm

    Hi Pete,

    Are you sure that you have done the Snyder interest calculation correctly (calculating the amount of interest that is still deductible)? Would you be able to pass a CRA audit?

    I would suggest that, after your mortgage is gone, you start paying off the rest of your non-deductible debt. Most of your investment loan will not be deductible. It is not easy to fix this since the loan is partly deductible and partly non-deductible. Payments to pay down the loan are assumed to be prorated.

    You always retain some tax deductible interest because the credit line you are reborrowing from remains tax deductible. However, the investment loan becomes 100% non-deductible once you have received enough ROC payments.

    At that point, the best strategy is often to create a new mortgage to pay off the investment loan, since it is not deductible and a mortgage will be at a lower rate.

    If you look at your non-deductible debt as a new mortgage or loan you need to pay down, you will realize that all the transactions did absolutely nothing. They are the “4 Meaningless Transactions”.

    If you had reinvested the distributions from the beginning (leaving them in the fund) and never paid extra on your mortgage and not reborrowed the extra amount, you would still be in exactly the same position as now. It all looks cool, but does not change a thing – you still have the same amount of non-deductible debt, the same amount of deductible debt and the same amount invested (except that you probably will receive a lower investment return because you are focussed on income).

    The one other question I have for you is what rate of return are you assuming for the income fund? Remember, the ROC distributions you receive are NOT the return – they are just giving you some of your principal back.

    If your “income fund” is a balanced fund, a long term reasonable return expectation would be about 6%. If the fund is paying out 8%, you should expect the fund to decline by 2%/year on average.

    If this process pays off your mortgage and investment loan faster than your original mortgage amortization, then you are probably assuming an unrealistic return.

    Ed

  • Dan August 11, 2009, 4:50 pm

    Ed , Pete and/or Brian,

    I am currently at the mortgage application stage of the TDMP process to convert my standard mortgage to a reinvestable mortgage with the LOC component. What I have read has made me second guess my next steps.

    Ed, what is it that you offer through your services that differs from TDMP other than the rates. I am not well informed in the investment world and during my initial meeting with the investment side of the house, I felt very re-assured that the funds would be invested in a pension fund type portfolio. The investor showed me various printouts of what I could expect to see based on a 5 – 8% market return.

    I do not want to simply pay off the mortgage and be left with an equal outstanding debt. My understanding is that the LOC is payed out from the investment portfolio after the mortgage is done….or you can continue the process to continue to build wealth.

    Why is this being sold by the local Mortgage Brokers and Banks if it has so many pitt falls?

    Pete, you seem to be pleased with the process thus far. I would be very interested in picking your brain as I not been able to speak with anyone directly who has “pulled the trigger” on this yet.

  • pete August 11, 2009, 10:08 pm

    hey dan i am pleased with the process so far but i wished i researched a little bit more about it as i am not very financial savy and didn’t realize that the distributions were roc and would count against my tax deductibility. I have addressed this with my financial planner who is helping us and he did indicate that this was true but also said that we would not lose all of it in the process so to me its a good thing as (a)my mortgage is paid off in approx. 6.5 yrs with the extra money per month and the lump sum with the tax return on my investment loan and heloc loan, and i could pay off my heloc and iloc in aprox 9 years if i cash in my investments (b) i never lose the my tax deductiblility at all It eventaully increase to the low to mid 3000$ and then decreases to the mid 2000$ and stays stable from then on untill i pay off the loans. I believe this occurs because the heloc investment loan is increasing as distributions come out of it. I believe eds is pretty much the same but he doesn’t use the roc so u keep the full amount of tax deductibility thus keeping the returns the same always but doesnt pay off the mortgage as quick because of the non extra payments. So i don’t know what the big deal is as we never actually lose our tax deductibility of the loans. For claiming ed is right that u do have to do a calculation to figure it out but my financial planner will do this for me so i will not have to worry about cra and as ed has said in the past if roc is being used make your financial planner do your return and sign it aswell if he is sure of the proccess and the rules of cra so i am covered there aswell. I am second guessing myself a bit after reading some comments but it seems some of them do apply to my situation and some do not. My brother in law got me onto this method and is doing it aswell and has a better business sense then me as he graduated from uwo ivey institute and is more familiar with these things. All in all i am very happy so far, i didn’t have to pay all those stupid fees that the ask as i am doing it on my own with some help, the funds my financial advisor picked seem solid and doing fairly well. As u said the income fund can be cashed in at any time to pay off the loans whenever i want and my mortgage payments that i would have been making will go into the income fund to build it up quickly and compound even quicker thus building up faster than waiting for my mortgage to be paid off. I get rid off my “bad debt” and never actually lose all of my good debt. Sorry for the ramble and i have to go but would love to here other people thoughts.

  • Dan August 11, 2009, 10:54 pm

    Pete,
    Thanks for the trply. I believe that I may have you beat in the lack of financial savy. My portfolio currently is used only for photographs. I agree that the suggested set up and on going monthy fees charged by TDMP are high however, what cost does one put on piece of mind when dealing with this amount of money, investing in this market and the potential of having the CRA knocking on the door if it is set up or maitained poorly. I’m 46 and would like to retire without a mortgage in 12-13 years…this seems like an attainable goal based on the numbers I been presented with.

    I will have to check into the ROC situation and have forwarded a request for info from Ed so I can do a 1 to 1 evaluation of his solution vs TDMP’s.

    It seems you may have found the solution in going with a financial advisor that was at the TDMP seminar. The one I have met operates out of TO but is up in Ottawa enough to hold my hand through the process until I become comfortable.

    I would also like to hear from others on both side of the coin.

  • cannon_fodder August 11, 2009, 11:33 pm

    Dan,

    For whatever it is worth, both FT and I decided (independently) to construct an SM portfolio heavily laden with blue chip dividend paying companies. My reason was that I could create a portfolio that, with my high marginal tax rate, would deliver a dividend stream that would more than cover the interest payments. Now, 1 of my 12 stocks has suspended its dividends and another has cut it in half. Yet, I’m still in good shape and my SM portfolio is positive in spite of being invested in September of last year.

    If you are not able to ‘jump start’ your SM portfolio (e.g. possible if you have a lot of untapped equity in your home that can be released through the HELOC) then perhaps you should look at a couch potato portfolio (there are articles here about that) and find some TD eseries mutual funds that come close to it.

    Why take that approach? Because if you have periodic small investments to make, you don’t want the commissions of buying stocks directly to constantly depress your returns. Mutual funds like the TD eSeries are low MER funds with no cost to purchase. You may decide, perhaps when they achieve a certain size, to sell them and then buy couch potato ETFs for an even lower way to participate in our stock markets.

    Look for an investment club (or clubs) in your city. You may find that really helpful to be amongst a group of people with various opinions but no conflict of interest. Hopefully you can find one that welcomes the inexperienced to gently guide them through the field of investing.

  • Dan August 12, 2009, 9:04 am

    Cannon_fodder,
    Excellent information…to show you just how little I know about the investment game…when you refer to 12 stocks the deliver a didvidend stream, is this different from the ROC returns?

    My plan as of today is to put my faith in my investment planner and follow his instructions/directions. As I had indicated previously, he has advised that my portfolio will mirror the big pension funds ( Ont. Teachers, RCMP….). He has advised that the exposure will be diverse in risk elements however, nothing at the high end of the scale.

    I will check into the investment clubs in the Ottawa area, if nothing else, I can learn the language to better understand.

    Just to be clear, you do not support the TDMP process based on the fees what exactly? but do support the SM process as it can be self administered with a litle help setting it up?

  • cannon_fodder August 12, 2009, 12:18 pm

    Dan,

    Yes, the dividends do not include any ROC returns. It is pure dividend income which, you may well know, is the preferred type of income from a tax point of view except at the highest of marginal tax rates (capital gains income wins out at the highest levels). For example, in Ontario you can make around $35k in just dividend income without paying tax – in BC it is more than $60k!!!

    I would not support the TDMP process because of its high expenses. I’d always council people to don’t bother getting into something this sophisticated until they understand to a good degree leveraged investing and all of the risks/rewards. Of course, once you do, then it should be relatively straightforward to do everything yourself.

    Even if you took out an SM friendly mortgage and then just borrowed once per year to invest, how much more difficult is that than coming up with those lump sum RRSP contributions? I have only once worked with a financial advisor that I knew had my best interests at heart. He ended up quitting the industry because of the conflict of interest he would have to live with every day.

  • Ed Rempel August 20, 2009, 1:52 am

    Hi Dan & Pete,

    Just so you are clear, the ROC distributions do NOT pay off your non-deductible debt any quicker. When you take the ROC distribution and pay it down on your mortgage, the amount of your investment loan that remains deductible is reduced dollar for dollar for the extra amount you pay on your mortgage.

    If you receive a $1 distribution and make an extra $1 mortgage payment, then your mortgage is $1 less but $1 of your investment loan is no longer deductible. So, your total non-deductible debt is still exactly the same.

    This is why we call this process the “4 Meaningless Transactions”.

    You receive the ROC distribution, pay it onto your mortgage, reborrow the same amount to invest and then do the Snyder tax calculation to see how much of your investment loan is still deductble.

    At the end of that, nothing at all has changed. You have the same amount of deductible debt, the same amount of non-deductible debt, the same amount invested – the only difference is that you did a bunch of work.

    If the projections you are seeing show your total non-deductible debt being paid down more quickly then if you reinvested all distributions, then you should question the assumptions.

    For example, the distribution is not related to the return of the fund – it is only getting some of your own money back.If the fund is a pension style, which means a balanced fund, then you can probably only expect long term returns of 6-7%, so if it is paying out 8%, the projection should show the “income” fund declining every year.

    This is especiallly true now when interest rates are so low and expected to rise, so the bond portion of your balanced fund will likely make hardly anything. Bonds decline when rates rise.

    You asked why the mortgage brokers and banks are recommending this. They all just do the mortgage. A ploy that that appears to pay off your mortgage more quickly is a good selling feature that helps sell mortgages.

    You can find details of our service on our web site or by calling or emailing us. This is not an appropriate forum for talking about our sevice, but since your asked, in short, we are a comprehensive planning firm that focus on helping our clients figure out and achieve what they really want in life. We believe that the planning is what most people need most – not investment A vs. investment B. This includes advice in all financial areas, doing tax returns, etc., all of which is done for no fee. However, we are selective and only work with clients that are serious about their goals and work 100% with us.

    With the Smith Manoeuvre, we do a few things differently all to get the best and cheapest mortgage, most effective investments and maximize tax savings. Our clients don’t normally pay any fees related to the mortgage or SM, since we are the advisor setting it up, not the mortgage broker. (TDMP needs to charge fees becauses they are a mortgage broker firm that is administering the SM.)

    We are not restricted to only the 3 SM mortgages available to mortgage brokers. We have access to all SM mortgages, especially the ones with a few banks that tend to have the best products and rates. We also save money for our clients by sticking with 1-year terms (the best now) or variable (the best in normal environemnts) that are proven to save money.

    The real key to the SM is the investments, so we focus on finding the best investments based on quality of fund manager and risk/return, instead of looking for funds that pay high distributions.

    Ed

  • twp October 28, 2009, 2:57 pm

    I am 28 years old, so very green in regards to investing. From my perspective i would not be concentrating on getting rid of my mortgage. I would always have the same mortgage to use for building a portfolio rather than paying off my mortgage. Isn’t that what this stragtegy is all about? Also what better tax is there to pay than capital gains? I guess it comes down to wheather you want to build a retirement portfolio or get rid of mortgage.

  • Dan October 28, 2009, 4:32 pm

    twp,

    Since my last posting here back in August, I have pulled the trigger and started the TDMP process, converted my mortgage, pulled the equity out of my house and invested it for growth. I am not suggesting that you get rid of your mortgage….quit the opposite.

    If I were 28 again (18 years ago ) and had this as an option, I would not have hesitated. It is not that I am only paying off my mortgage much faster with the additional $800 per month principal only payments that are now being made on top of my regualr mortgage payment as a result of my investments, I am freeing up that $800 equity PLUS the principal portion amount of my regular mortgage payments every month (an additional approx. $400) for continued investment. As the principal continues to get hammered down monthly, that $400 grows because the interest amount on the mortgage payment is calculated on the outstanding principal balance, thus increasing the available equity amount for investing every month.

    At the end of the process, I can keep my existing mortgage open and continue to funnel all of the money (regular monthly mortgage payments that I no longer need to make ) through it and build wealth at an accelorated rate with the continued tax deductions annually or, cash out some of the investment equal to the outstanding balance of the Line of Credit and pay it off. I am then mortgage free years early, the LOC is payed off and closed and I have the ‘growth’ portion of the investments for my retirement and I can continue to invest my freed up cash flow (without the tax deductable advantages….not the way I’m planning to go!).

    The bottom line is, if I started this 18 years ago, I would be at the end stage of having the house payed off, funnelling the full mortgage payment amount through the system and have many more years to build the wealth at the accelorated rate. Of course, this process was not available 18 years ago so you have a significant advantage.

    Really something to think about if you have some equity just sitting in the walls of the house not doing anything.

    Let me know if you have any questions and good luck!

    Dan

  • Brian Poncelet, CFP October 28, 2009, 5:26 pm

    Dan,

    My concern is fees ($40 per month) and the mutual fund ROC (the fund that is distributing the money).

    A number of funds had to cut the distribution beacuse of poor market returns in 2008 leaving anybody doing what you are doing short money every month. If we have a correction (after the market hit the lows in march) which I think is overdue then expect new cuts to start to happen sometime in 2010.

    The other problem I see is taxes on the ROC fund you may be using. I hope this works out for you but unless fees are covered for you and you get lucky with the funds I see this as a sad story…money wise.

  • Ed Rempel November 20, 2009, 4:32 am

    Hi Dan,

    What are you going to do with the NON-deductible investment loan that results from taking the payments out of the leveraged investments?

    Once your mortgage is paid off, are you planning to start paying that off? Or will you convert that into a new mortgage and start converting that amount?

    Who is going to do your tax return?

    Ed

  • Dan November 20, 2009, 2:02 pm

    Good Morning Ed….4:32 am??…don’t you sleep?

    As for the NON-deductable investment loan…As you know from your time working as TDMP rep., it MAY only become non-deducatable once the mortgage is paid off (some 14 yrs from now ).

    At that point, I have 2 options…

    Pay off the investment LOC attached to the morgage by cashing in the investment portfolio that has been generated over that 14 yrs from taking the equity out monthy and investing it … this option leaves me with no mortgage, no outstanding LOC and little to no wealth portfolio but the mortgage is payed off 16 yrs early leaving me with what was the full mortgage payment amount monthly for investing…I win

    OR

    Continue the process of funneling the full amount that WAS the mortgage payment through the account thus keeping it as a deductable investment loan and increase my wealth portfolio until it is well in excess of the amount I owe on the LOC.
    At this point, I sell off a portion of the wealth portfolio, pay off the LOC and am left with no mortgage, no LOC and a significant amount left in the wealth portfolio…I win again

    As for who is doing my tax return…are you offering??….I’m open to your involvement and input.

    Dan

  • B. Firmino November 21, 2009, 11:25 pm

    Good evening everybody!!!

    I am 26 and i bought a house 3 years ago (JAN 2007). I didn’t get well informed and i got a mortgage with nbc 5 year term closed with the interest rate of 5.45% . Now i want to change, i would like to refinance, and this time, i want to get well informed before proceeding with refinance. first i was going to apply for manulifeone, but i read bad reviews and talked with a broker who told me not to go with them, and that same broker told me that nbc as a good product all in one which is good but not for everybody. i would like to know what are the best products right now, and i would like to know more about this TDMP and the smith manouvre.

  • Dan November 22, 2009, 3:51 pm

    Hi B. Firmino,

    I am not a mortgage broker but do know some very good ones depending on your location. I’m in Ottawa.

    I believe that morgage rates are as low as 2.25% for variable and somewhere around 4.1% for 5 year fixed…you should do some looking around though.

    Your first step should be to go to TDMP.com and complete the on line test to see if the TDMP process will work for your particular set of circumstances.

    A TDMP rep will contact you by e-mail which will include a wealth flow chart based on the numbers you provided them on that test and set up an appointment to contact you by phone. This is a very informative conversation.

    The next step is the TDMP rep will set up an introduction between yourself, a qualified mortgage broker and an investment broker…. This is an even more informative conversation.
    I am personally with CIBC Firstline who TDMP work with as they have the ‘Re-advancable’ mortgage you will require to utilize the TDMP process.

    There are other providers of similar services to TDMP and you should ensure you do due diligence prior to selecting any of them. Ed Remple, who contributes to this blog is one of the people who offer a differing approach to the method.

    Some are more user ‘involved’ than others but TDMP is more suited to those, like myself, that are not market savy but are willing to learn as they go. This service has a small monthly fee and a set up fee, both of which are fully tax deductible and the set up fee is built into your new mortgage when you re-finance.

    The others seemed to me to be more for those that have some investment knowledge.

    I’m pleased with the service I have received for the less than $40 per month fee which is also built into the monthly process so your not paying any more than you already are for you monthly mortgage payment.

    Let me know if you want more info…. Glad to pass on anything that will help others make an informed
    Decision.

    Dan

  • Ed Rempel November 22, 2009, 5:24 pm

    Hi Dan,

    The time on this blog is definitely not my local time.

    We were never reps for TDMP. We have always used our own strategies. They were one of our mortgage providers for 2 months, but we went back to working with the banks were we have been getting better service and products.

    We looked at TDMP’s strategy. It is called the “Smith’Snyder” and was developed by an advisor in PEI named Lloyd Snyder.

    We analyzed it in depth and could not find any advantages at all compared to the Smith Manoeuvre. It looks like you are paying off your mortgage quickly, which is a great selling feature and it might persuade people to leverage more highly than it would otherwise.

    However, when you analyze it in depth, you see that having the investments pay out distributions reduces the returns of the strategy. For example, if you take $1,000 distribution out of the investment, this is not profit but an arbitrary amount of your own principal that you are getting back.This is why your investment loan becomes non-deductible with every distribution you receive.

    When you receive $1,000 distribution, then $1,000 of your investment loan is no longer deductible. You can then pay that $1,000 down on your mortgage. So, your mortgage is $1,000 less, but $1,000 of your investment loan is NON-deductible.

    The end result is that exactly the same amount of debt is deductible, the same amount of debt is non-deductible. The only difference is that the non-deductible investment loan is at a higher rate than your mortgage.

    After about 12 years of transactions (5.5 in your case), your mortgage is paid off but replaced by a NON-deductible investment loan for the same amount (less the payments your were making anyway).

    You can create that entire effect in one day. The process in the Smith/Snyder, when you analyze it completely, only manages to convert your mortgage into a NON-deductible investment loan or credit line over 12 years. If you call your bank today. you can tell them that you want your mortgage to be a credit line, with the same balance owing. Then you will have created the same effect as the Smith/Snyder, but you will have done it in just one day.

    We only do tax returns for clients, but you will need to make the “Snyder Tax Calculation” on your tax return every year. Since you have received some ROC distributions, not all the interest you paid on your investment loan is tax deductible. It is up to you to calculate the correct amount.

    Your 2 options down the road both have tax disadvantages. After about 12 years, the book value of your investment will be down to zero, because you will have received 100% of the principal back on your investment with the ROC distributions over the years.

    At that point, let’s look at your 2 options:

    1. If you sell to pay off your NON-deductible investment loan, 100% of the what you sell is taxable to you as a capital gain. This would be true even if the investment has not gone up. So you would need to sell $200,000 of investments to pay off $150,000 loan, for example. Since your investments is paying out a distribution every month, you should not expect the investment to have gone up much at all.
    2. If you keep receiving payments, 100% of those payments are taxable to you as a capital gain from then on.

    We consider the process to have “4 Meaningless Transactions”:
    1. You receive the ROC distribution.
    2. You pay it down on your mortgage.
    3. You reborrow to invest the same amount (in addition to the principal that you would normally invest with the Smith Manouevre).
    4. You do the “Snyder Tax Calculation” to calculate the declining amount of your original investment loan that is still tax deductible.

    After the 4 transaction, essentially nothing is any different.

    If you doubt me, do a projection of the entire process you are doing, and then compare it to what happens if you reinvest all the distributions. You will find that you will be slightly ahead.

    At each year, you will have the same amount of tax deductible debt, the same amount of NON-deductible debt, the same amount of investments, etc.

    All that work for nothing!

    What you lose, though, is 4 things:

    1. You probably lose investment returns because you looked for investments that pay a ROC distribution, instead of find the best investments.
    2. You refinanced your mortgage into a NON-deductible debt at a higher interest rate.
    3. As Brian mentioned, lots of fees that do not apply with the Smith Manoeuvre.
    4. Tax risk, because it is up to you to do all those tax calculations every year. CRA has started to focus on leveraged strategies like this where the investment principal is paid out each month.

    Ed

  • Ed Rempel November 22, 2009, 5:37 pm

    Hi B. Firmino,

    We have found that the best way to save money on your mortgage is to avoid the “5-year fixed mortgage trap”. Banks and mortgage brokers make more money on long terms, so they often try to subtly persuade you to take longer term fixed rates.

    Studies consistently show that long term fixed mortgages nearly always cost more money. One study I saw from a mortgage broker showed that, since 1950, five 1-year mortgages would have saved you money compared to one 5-year mortgage 100% of the time.

    You save money by always going either short term or variable.

    With this process, we have been getting rates for our clients between 4-5% almost all of the last 15 years, so today’s 5-year rates are hardly even low by historical standards.

    In today’s market, we think 1-year terms are best. We are getting 2.05% for 1 year now (with possible legal and appraisal fees) or 2.5% with zero fees of any kind.

    There is a lot of good info on the MDJ site about the Smith Manoeuvre. FT has done a good job of putting together what is probably the best source of info on the Smith Manoeuvre.

    Read a bunch of the articles and comments, and then if you have any questions, you can post them.

    Ed

  • J-Fry January 18, 2010, 4:15 pm

    Hi folks; pressed for time as I’m due for mortgage renewal (term is up) and I’m currently investigating TDMP or Manulife One options.

    I have to make a mortgage decision right away in the next couple days and am feeling I don’t have proper time left to research more on the subject so it looks like I will likely have to allow my current mortgage to rollover for a year open/convertible.

    I guess short-term while I do more research the M1 would be a better option? (it being what-seems-to-be one big open account, especially if it varies with prime)

    Thanks for your input.

  • Brian Poncelet,CFP January 28, 2010, 11:20 am

    J-Fry,

    I’d use a check list:

    If I lost my job…how fast could I get a new job at same pay etc.
    If I got disabled…Coverage? How much? How long most company plans only last two years, and do not factor bonuses.
    Life insurance…need more if doing this.

    Risk how did I handle the melt down of 2008? If it happened again and took more time to recover, am I ok with it.

    Fees are important, how much advice am getting? If tax help and risk management is not included (which does not come from the mortgage broker) then do it yourself.

  • Dan January 29, 2010, 1:18 pm

    J-Fry,

    Do your homework and talk to as many ‘informed’ people as you can to get the most accurate correct information….go to the source!

    Each plan works some what differently and all have plus’s and minus’s. I’m pleased with TDMP in the ease of set up and the follow up by the staff. Tax time is upon us and TDMP offers a full service tax package as I sure others do.

    At the end of the day….it’s all about how well you sleep at night with the decissions you’ve made.

  • Ed Rempel January 29, 2010, 8:51 pm

    Hi J-Fry,

    “Ed’s Mortgage Referral Service” is still available and is a free service. We have contacts with all the mortgages that work well for the Smith Manoeuvre, know the pros and cons of each and always know what the best deal is. We also have good advice on what term to take.

    If you send us the answers to the 10 questions, we’ll contact you to refer you to our contact for the best Smith Manoeuvre mortgage. The 10 questions are in an MDJ article at:

    https://www.milliondollarjourney.com/ed-rempels-picks-for-the-best-smith-manoeuvre-mortgage-ii.htm

    Ed

  • Chris Komura April 15, 2010, 12:57 am

    Sorry to resurrect this long-dead discussion but I can’t resist.

    I nearly signed up for TDMP a few years ago, right before the economy tanked. I’m sure glad I dodged that bullet.

    Very curious about how TDMPers have fared over the last couple of years with ROC distributions being cut and mortgage interest rates being near zero anyway (e.g. not much tax savings to be had).

    Interesting that Dan never came back.

  • Dan April 15, 2010, 10:13 pm

    Good evening Chris,

    In the immortal word of the Who’s from Whoville (Horton Hear’s a Who)

    I’m here, I’m her, I’m here!…. I just had nothing of value to add…. until now.

    I cannot comment on how those that were involved with TDMP prior to the melt down fared, as I only started the process this past October, I don’t think I’m the right guy to comment.

    I can however say is that as I renewed my mortgage in October to start the TDMP process, I have a very low interest rate which as you have indicated, results in minimal tax savings…. But, I am saving more than I was without utilizing the process in the many years prior and received a larger tax return last month than I had in previous year as a result – Win

    Of more importance to me right now is the fact that I am hammering down the principal on the mortgage each and every month. I receive a letter every month from my mortgage provider thanking me for the additional principal only payment and advising me that my total amortization period has been reducted by an additional month, each and every month – Win

    As the principal is being hammered down, the amount of interest I pay on my regular monthly mortgage is reduced as well. This means that the monthly amount available to be readvanced for my investment portfolio increases – Win

    My investment portfolio has also seen significant growth over the last 4-5 months and I am very well positioned to see continued growth on this front – Win

    At the end of the day, it is a win/win/win/win for me.

    Are thier other service providers out there with similar processes?…Yes

    Could I have gone with them?….Yes

    Would I have seen similar results? …… Best guess, likely

    Am I still sitting on the fence wondering if I should pull the trigger?…..Nope, I’m in the game!

    As I am not in the Toronto or Vancouver area, I opted to go with a service provider that has a National presence.

    I was also very impressed with the investment advisor who comes to my city on a monthly basis.

    I particularly like the fact that once the process is established, TDMP runs it for me as I am to busy in my own professional and personal life to manage another major project. I do monitor the process monthy, but I am a spectator now watching my wealth grow……( I win again )

    Dan

  • Brian Poncelet,CFP April 15, 2010, 10:40 pm

    Dan,

    Sounds like you had good luck in your timing. I am helping someone with a TDMP who started in 2007 . Borrowed $172,000… today it is about $109,000. Had his funds distribution cut (over 25%), so now more money is from his own pocket to support his loan.

    2009 was/is had very high returns which I am very surprised. In 2007 BMO’s stock for example was around $61, the same as today three years later.

    If/when we have another pull back, the funds that distribute the ROC (return of capital) will be cut. Don’t take my word for it, call your fund company ask them what happened in 2008/2009.

    Brian

  • Ed Rempel April 16, 2010, 12:05 am

    HI Dan,

    We have also been offering a Rescue Service for people that did the Smith/Snyder. Today, their funds are about $65,000 and the investment loan has been converted to principal plus interest. So, it is a “Race to Zero”! Which will reach zero first – the fund or the investment loan???

    I take it you are receiving payments from the fund each month that are considered ROC? Who is doing the “Snyder Tax Calculation” for you to determine what portion of the investment loan/credit line interest that is still tax deductible?

    What is your plan after 8-10 years if NONE of the investment loan is tax deductible, but all distributions from the fund are taxable?

    Ed

  • Brian Poncelet,CFP April 30, 2010, 3:13 pm

    Dan,

    I talked to a TDMP client and they are being charged $300 for two tax returns!
    The tax firm was of course recommended to them by TDMP.

  • Brian Poncelet,CFP April 9, 2011, 5:58 pm

    Dan,

    Since it is tax time again are you geting T’3 slips from the mutual fund companies?

  • Wayne September 25, 2011, 3:09 am

    All,
    Given all the financial uncertainty out there, does anyone know how TDMP has been working for clients as of late?

  • Brian Poncelet,CFP September 25, 2011, 10:30 am

    Wayne,

    I think you know the answer. Tough times!

    Plus as a bonus, T3 & T5’s will need to be added to the taxable income for the tax year.

    Losing money (on paper), paying taxes (for real) you should not have to hurts.

    The big problem not talked about is risk management. No increase of life insurance, disability, etc. to offset the increased debt load if one’s health changes…which can happen anytime … usually when the market is down!

    Brian

  • Wayne September 25, 2011, 12:56 pm

    Thx Brian
    I just got a sliding HELOC, so I am now considering the TDMP as I really like the full service simple approach. However, I too got caught in the down side of the markets a decade ago – I am in hitech, so I thought I couldn’t lose! Of course the tech boom went bust (including the company I was at) and have been licking my wounds since.

    What has worked for me is real estate, so I was looking at a rental property approach for a TDMP accelerator or portion of a wealth portfolio. Anyone have thoughts on that?

  • FT FrugalTrader September 25, 2011, 1:17 pm

    Wayne, if you are experienced in real estate investing, then there is no need to use TDMP. Just use your HELOC towards an investment property and it’ll be tax deductible.

  • Brian Poncelet,CFP September 25, 2011, 4:25 pm

    Wayne,

    I think Real Estate is excellent in many ways, however I think the smart money is waiting for the market to fall. I was talking to a friend of mine and he was proud that his 25 year old son was able to register… to buy a small townhouse for more money than I paid for my house which is 3-4 times the size back in 1995!

    At that time, no line ups just cash and I was moved in less than 30 days.
    No HST costs, low property taxes.

    As interest rates moved down (about 8-10% back in 1995) people could borrow more money and the prices (real estate moved up).

    If this economy stalls (debt with US, Europe, etc.) no jobs created or lost, even low interest rates will not keep real estate from going down.

    I could be wrong but what really hit me was a client who is making excellent money bought a cottage this year because “real estate always goes up.”

    Real estate bottomed out in Dec. 1995 (in Ontario). so he was only about 25 years old at the time…which means anyone under 40 really has not seen a real estate cash or correction of 20-40%. In these cases, it can take 10 years to recover.

    If you can wait, I believe prices will be better in 2-3 years.

    Brian

  • Nathan Parkhouse September 25, 2011, 11:12 pm

    Hi Wayne:

    I’m an independent Financial Advisor in the GTA. I have over 100 clients engaged in the TDMP program since 2006 and I highly recommend TDMP because they provide excellent service to my clients.

    TDMP is a long term plan, so “day to day” market conditions don’t really figure into it.

    In my view, today’s low borrowing costs combined with market uncertainty (i.e. discounted/cheaper entry point) make it an excellent time to consider entering a plan like the TDMP.

    Nathan H. Parkhouse, CFP, CIM, FMA, FCSI
    Financial Advisor

  • Ed Rempel September 26, 2011, 1:42 am

    Hi Wayne,

    Yes, I can understand. I lot of people were burned in the tech bubble. It can be difficult to get back on the horse.

    I met a couple in about 10 years ago that were burned in the 1987 crash, and then had never invested in equity investments again. They missed the huge bull market in the 90s. I told them that they had lost far more NOT being in equities in the 90s than they lost in 1987.

    It is worth investing in the stock market investments, though. That is the asset class with the highest long term returns. The last 30 years have been among the best ever for real estate, but the stock market still had 6 times the growth as real estate.

    The key to investing in equities is to think long term. Investment decisions that seem very difficult can be obvious when you think long term. For example, the worst-ever 25-year return for the S&P500 was back in the 1800s and was 5%/year. That would mean you would more than triple your money. Not great for 25 years, but not bad for a worst-case scenario.

    Getting advice or being in a “full service”situation may help you get back in.

    My guess is that TDMP investments help up reasonably well in the recent downturn. They generally restrict themselves to mutual funds that pay the highest ROC monthly distribution, most of which are balanced funds.

    Their “accelerator” does not accelerate anything, though. We modeled all 7 versions of the Smith Manoeuvre. The one used by TDMP is the “Smith/Snyder”, which involved taking a large loan to buy a mutual fund that pays a high monthly ROC payment. This payment actually reduces the long term benefit of the SM, however, and is one of the “4 Meaningless Transaction”.

    Just so you understand, if the fund pays a $1,000 monthly distribution, they normally suggest you pay this down on your mortgage. Doing this, however, converts $1,000 of your investment loan to NON-deductible. It does not reduce your debt or your NON-deductible debt any faster than the regular SM.

    After 12 years (typically), you have paid off your mortgage and replaced it with a NON-deductible investment loan. Then you have to start all over again paying off your new NON-deductible debt.

    The problems with it are:

    1. All this does nothing at all, but it makes it look like your mortgage is being paid down faster.
    2. You have to calculate how much of your investment loan is still tax deductible each year (a complex calcuation).
    3. By restricting themselves to funds paying high monthly ROC distributions, they ignore almost all of the best investments available.

    In general, we would advise to avoid any distributions when you borrow to invest. The main investment focus should be on the risk/return of the investments, but it is also good to try to be as close as you can to 100% tax-efficient.

    Ed

  • Jason Henneberry September 26, 2011, 2:57 pm

    Wayne,

    I am an independent mortgage broker and have personally helped several hundred people setup and implement the TDMP. I would also like to add that at one time I was an employee of TDMP.COM and therefore I cannot help but offer a biased opinion. Nevertheless, here are my thoughts:

    It seems there are several topics that are being discussed simultaneously which should probably be addressed separately including the decision to invest, either in the capital markets or in the real estate market and the benefit that comes from actively managing your investment cash flows for greater tax efficiency through a professional service such as the TDMP (as opposed to doing it yourself).

    I am a licensed mortgage broker (not an investment advisor), however, I will point out that the TDMP does not require you to select any specific type of investment. Investment recommendations are made by the independent investment advisors in consultation with their clients. Some financial advisors like the steady cash flows associated with Return of Capital funds and others prefer dividend paying investments or interest income (e.g. real estate). TDMP supports all types of investment cash flow and will track and properly calculate the deductibility nature of investment loans when affected by return of capital.

    There are advantages and disadvantages to any investment and it’s up to you and your financial advisor to select investments that are appropriate for you. What I can tell you is the TDMP provides an annual review as part of its service and my clients are pleased with the service from TDMP and are happy with the strategy as a long term retirement plan.

    In any case, it appears that you are leaning toward investing in real estate, presumably a tenanted property that provides regular rental income. If this is the case, and you also have a non-deductible mortgage on your Principal Residence, there may be some significant tax and financial benefits that can be achieved using your rental cash flows to convert your Principal Residence mortgage into a tax deductible investment loan. The TDMP provides full administrative support for this strategy – so it might be worth looking into.

    The decision to become an investor should be made independently and on the merits of the investment. Whatever you may choose to invest in (stock markets, real estate or your own small business), you can think of the TDMP as a managed service or a “plug-in” that allows you to achieve greater efficiency from your investment cash flows without having to worry about the details.

  • Sandy September 26, 2011, 8:38 pm

    FT, Ed, Brian, Nathan:
    I know we don’t always agree on the details of how we execute SM Strategy for our clients, but we have to credit Fraser Smith for inspriing all our businesses – and giving us so much to discuss over the years.
    Fraser passed away yesterday, peacefully – after a long battle with cancer. He was a good friend to us all!
    -Sandy

  • Brian Poncelet, CFP September 28, 2011, 9:20 am

    Sorry to hear about Fraser Smith. I think for some he made some people think about how (good) debt can be used for long term planning as one tool.

    Brian

  • Ed Rempel September 28, 2011, 5:50 pm

    Hi Sandy,

    Wow, I’m very sorry to hear about Fraser. I had not even heard that he was sick.

    I’ll miss him. I enjoyed every meeting & talk with him. He was always open and had that folksy way about him.

    His idea was brilliant and his book was a classic. It was a bit of a tax rant, but that was Fraser. Do you know, Sandy, how far he got in his new book?

    I did think he went off the rails a bit recently, changing his strategy and giving up his license. He was never able to completely convince regulators of his views.

    You are right, Sandy. We all owe a lot to him.

    Ed

  • Sandy September 28, 2011, 8:09 pm

    Ed:
    Fraser was indeed brilliant and inspirational. The Smith Manoeuvre was an important book. Probably the most important Canadian personal finance book ever.

    I don’t know for sure if Fraser ever started on his new book – but I suspect he didn’ get too far along as he focused his last few years transferring his business to his son, Rob, ensuring his legacy continues and guaranteeing a decent living for his loyal team at the same time.

    I don’t agree that he went off the rails or changed his strategy per se. He simply ensured that he transferred his business to his family and his team and also, very cleverly, moved it into a less hostile regulatory environment at the same time – like he had a crystal ball or something…

    Any way you cut it; brilliant, loyal and generous: that was Fraser!

    As for convincing regulators of his views..that torch passes to us now. You up for it? Me too!

    Rob McLister provides more insight in a touching memorial piece on his blog at: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/09/remembering-fraser-smith.html

    -Sandy

  • Brian Poncelet,CFP October 1, 2011, 10:45 am

    FT,

    Question: when is the worst time to sell?
    Answer: when the market is fallen.

    With the TDMP and other plans, one of the problems is a fund used to distribute money to pay down the mortgage faster is usually a balanced fund which goes down when markets go down…

    In order to continue, the distributions once a year the fund company will look at the hit the fund took and cut the distribution for the following year. If the market is up no problem…if down, big problem!

    So as an example 2008 the TSX year end returns for 2008 was -35% the Fidelity Canadian Balanced Fund was -20%. Add the distribtuions of 8% for the year and the real return maybe closer to -28%! In January of 2009 distributions would be cut meaning the client has to come up with more money out of pocket to support the loan, or now buy less new funds when the market is down.

    For 2011, if the markets remain underwater more cuts to distribtuions can be expected for 2012.

    I would suggest if one was to check this has happened, is to phone the fund companies that are suggested directly…see if distributions have been cut in the past, then you have your answer.

  • Sandy Aitken October 1, 2011, 7:40 pm

    Brian: You make a good point: mutual funds may not always be the best choice for the leveraged investor. That’s why, at TDMP.COM, we support several different approaches for homeowners seeking exposure to the capital markets. I’ll explain what that means in a moment, but first I’d like to clear up a common misunderstanding about our company.

    TDMP.COM is a financial planning services company; our technology platform provides support to hundreds of financial advisors and mortgage brokers across the country. We offer various services to their customers for which we charge fees. As to whether it’s worth it, the simplest answer is that some people see the value in paying fees for services – and others do not. Generally speaking, sophisticated investors with a DIY attitude will not. But many mortgaged Canadian homeowners see the value of a well structured financial plan and will seek professional help to achieve their goals.

    I wish to clarify that TDMP.COM has never recommended nor sold mutual funds. Our policy is to be neutral on the investment choices made by qualified investors in consultation with their licensed advisors – we are Switzerland…and we try not to judge. However, if we feel an investment or a client is not suitable for the TDMP program, we will refuse the business.

    In 2008, investors in mutual funds suffered losses (regardless of what financial plan they were in) and distributions were cut by some fund companies in 2009. I can only attest to the overall experience of TDMP customers during that period. While those were anxious times, the fact is, that although distributions from investments were compressed, the cost of borrowing was compressed even further as the Prime Interest Rate dropped from 5.75% to 2.25% during the same period. Since the TDMP is primarily a cash flow strategy, investors were protected because cash flows remained positive. Also, it should be noted that the TDMP client portfolio is insured against margin calls. Mandatory Margin Call Insurance for leveraged investors has been TDMP policy since the day we opened our doors in 2006.

    The result: No margin calls, no TDMP clients went cash flow negative, no leverage loan defaults, no mortgage defaults, no lawsuits. And in due course, the markets recover, the sun shines again – and all is well in a long term financial plan.

    So what has changed in the last few years? Some financial planners are electing to refer their clients into Portfolio Managers – instead of picking mutual funds. It’s an interesting trend. We think this is good for customers in the following circumstances:
    1. Where after tax costs are lower
    2. Fees are tax deductible
    3. Investment advice is better
    4. Portfolios are less volatile
    5. Results are more stable

    TDMP.COM is a different company today than it was three years ago. As Jason points out, we provide a lot of support to real estate investors and business owners who want to drive business revenue through their own mortgage – converting it into a tax deductible investment loan. Today, homeowners with small amounts to invest can gain direct access to Portfolio Managers for advice that was previously only available to the very wealthy. Interest rates remain at historic lows and, as Nathan points out, uncertainty in capital markets will be viewed by some as an opportunity to increase investments when the price is right.

    There is no question in my mind that mortgaged homeowners that choose to invest by leveraging the equity in their homes, will do better over the next twenty years than those who do not. That’s why I wrote a book on the subject. TDMP.COM is just one of many options for those who need professional help in achieving their financial goals. Is TDMP worth it? I’d like to think so! :)

    Sandy Aitken, B.Eng., AMP
    Author: Mortgage Freedom: Retire House Rich and Cash Rich
    President & CEO, TDMP.COM

  • Dan October 2, 2011, 2:20 pm

    It’s good to see Mr. Sandy Aitken contributing to the discussion flow here. I purchased the late Mr. Smith’s book several years ago and ‘tried’ to read it however, it was written a few levels over my head and it was at a time before any of the banks really knew what I was talking about when I went in to ask questions.

    I recently received Mr. Aitken’s book ‘Mortgage Freedom: Retire House Rich and Cash Rich’ (as a client of TDMP for the past 3 years) and can tell all who are interested, it is a well written book and spells everything out at a level that is understandable for anyone. As a very satisfied TDMP client, I am biased….but lets face it, so are most of the others who have been posting here. I believe that anyone who is looking to get involved in any strategy should search out advice not only from the professionals offering there services but from other clients…. The professionals are going to sell you on their serves, the clients are going to share their experiences…. Which do you think is most valuable when you’re first thinking of signing up?

    Dan

  • Ed Rempel October 2, 2011, 5:25 pm

    Hi Sandy,

    The advantages of the “Portfolio Managers” you quoted is mainly marketing and mostly not actually true.

    You are referring to Portfolio Managers in a “Separately Managed Account” (SMA), instead of using a mutual fund. They are often used by higher net worth investors (HNW), but some are accepting smaller accounts now. However, similar to most HNW products, it is 98% marketing.

    The strangest claim is that tax costs are lower. This is despite the fact that most investors with these SMAs are paying far higher capital gains tax than mutual fund investors.

    This is especially true with corporate class mutual funds which often have little or no tax for many years, while investing directly with SMAs results in tax most years.

    Here’s some insight into the marketing that I find funny. These SMAs are marketed by snob appeal with the claim that you do “not mix your cost base with the masses”. Your account is separate from other investors. This sounds good at first and appeals to HNW people – even though it is actually a huge DISadvantage. :)

    The reason is that mutual funds have a “capital gains refund mechanism” (CGRM) that results in far lower capital gains – and this results from the big advantage of mixing your cost base with the masses.

    An illustration will make this concept clear. Let’s say you invest in a mutual fund that goes up 10% every year for 20 years. Let’s say that the fund manager sells half the holdings every year and has taxable capital gains in the fund every year. Let’s also say that half the investors in that fund sell every year and new investors buy.

    The result is that the investors that hold the fund for 20 years may have zero capital gains tax. Why? The fund gets a credit for the capital gains claimed by the investors that sold.

    In the above example, the taxable gains every year would all be allocated to the investors that sold each year.

    If you invested with the same fund manager in his private SMA as a HNW investor, you would probably be claiming taxable capital gains on your tax return every single year! :)

    See? The CGRM is a huge advantage from mixing your cost base with the masses.

    Despite this, the marketers of PMs still claim lower taxes as an advantage. They tried this on me, but since I am an accountant that understands fund accounting, I can see through the marketing.

    “Not mixing your cost base with the masses” has snob appeal – but means you pay more tax. We find nearly all investment products marketed to HNW investors are pure snob appeal with little or no advantage – and often are a disadvantage.

    In fact, I have found most of the people recommending SMAs are unlicensed. They either lost their license or were never licensed. A license is required to recommend mutual funds, but not for private Portfolio Managers using SMAs (because it is only a referral and the PM handles all the suitability issues.)

    For example, a mortgage broker with zero investment or financial planning education or licensing can be paid a referral fee as a “financial planner” by the PM. By referring to private PMs, an unlicensed mortgage broker can be paid for the investments in an amount similar to what qualified financial planners make.

    There is an advantage of being able to deduct the fund manager’s fee every year, but this applies only to non-registered accounts and the advantage is much less than you may think. In a mutual fund, you also get a deduction but it is applied against the taxable half of capital gains. In other words, with a mutual fund, you get the same deduction but it is used to reduce future capital gains tax instead of being claimed each year.

    In short, this deduction is really mainly a timing advantage, instead of an actual tax savings.

    We researched a bunch of these PMs. You have to take them on a case by case basis. Quite a few PMs also manage mutual funds.

    In general, we find they are among the better local guys, with most investing just in Canada or the US. It’s a bit like having the better players on our local Brampton hockey team, instead of having NHL superstars.

    We find that the best stock pickers (All Star Fund Managers) usually are not just investing locally, are often not actually in Canada and have very high minimums (e.g. $10 milllion) on any direct accounts (if they do them at all).

    In short, you have to be careful to separate marketing claims from fact.

    Ed

  • Sandy Aitken October 2, 2011, 9:22 pm

    Dan:
    Thank you very much for your post. It’s always great to hear from a happy TDMP client and I’m very pleased that you found my book useful.

    Ed:
    Good comments! We have also spent significant time researching PMs. There’s a lot of data to sort through and you’ve shared much information here – thx for that.

    Today, the great majority of TDMP clients are invested in mutual funds and generally speaking we are big fans. We simply ensure that an experienced, properly licensed mutual fund advisor is on every file, and that seems to work just fine.

    But I have concerns related to the scalability of the mutual fund model going forward – and I can’t help wondering if there is a better way. I like the concept of having our very own “all star” Portfolio Manager whose sole purpose in life is to create an investment policy statement specifically for the TDMP clients, and then actively manage all these accounts to that very specific investment mandate.

    The advantage would be that when events happen around the world that create volatility – or when interest rates rise, decisions could be made to adjust all client portfolios with a single click…In theory, this should be a better way to pro-actively manage a very large number of client accounts. But it’s not easy …and then there are all these other issues you point out – e.g. tax. I’ll keep you posted on our progress and appreciate your feedback.

    When it comes to financial planners and licensing, the most important thing, IMO, is that the financial planner is proficient and dedicated to his clients. Licensing is a matter of personal choice and in my experience it doesn’t really correlate to proficiency. For example, there are some really good financial planners out there disguised as mortgage brokers. For their own reasons, they have elected to license as a mortgage professional and choose to fulfill the investment advisory role in the manner you describe in your post (i.e. by referral to PMs – effectively outsourcing the investment advice). For them, this works! As long as the financial planner is well-educated, dedicated and proficient, one could argue that outsourcing investment decisions to a properly qualified “all star” PM might prove to be a better practice at the end of the day…

    -Sandy

  • Ed Rempel October 14, 2011, 12:13 am

    Hi Sandy,

    “Good financial planners out there disguised as mortgage brokers”??? Are there also accountants and lawyers cleverly disguised as mortgage brokers? Is this just on Halloween or all year round? :)

    Pardon my attempt at humour, Sandy, but the term “financial planner” is already far over-used. It’s hard to get exact stats, but probably at least 97% of people that call themselves a financial planner are actually just a mutual fund salesperson or an insurance salesperson.

    The issue is that this makes it difficult for the public to understand how to get real advice.

    Next week is “Financial Planning Week” – an annual part of the Financial Planners Standards Council’s (FPSC) attempt to advance the profession. Here is part of the agenda to give you an idea of some of the issues: https://www.fpsc.ca/sites/default/files/documents/Symposium_Agenda.pdf .

    The difference is that a real financial planner will prepare a comprehensive, written plan that plans the finances for your life goals, including all major financial areas of your life. The written plan should include your retirement plan, education savings plan, tax optimizing plan (before and after retirement), cash flow, effective debt structuring, insurance & estate plan – and finally an investment plan.

    Being properly licensed for any products you recommend is more than just a “personal choice”. A professional does not seek to get around licensing and compliance rules.

    Accountants also have some issues with the public understanding them, since anyone can claim to be an accountant. However, a qualified accountant should have an accounting degree – either a CA, CMA or CGA – and have qualifying experience and professionalism.

    Similarly, the minimum standard for a “proficient” financial planner should be:

    – a CFP designation
    – being licensed for any products they recommend
    – doing the work of a financial planner, by preparing comprehensive written financial plans
    – professionalism (not salesmanship)
    – dedicated to his clients.

    Ed

  • Barry October 3, 2012, 6:26 pm

    Hi there…..wondering if you are thinking of doing a new review of TDMP in the near future? I just started their plan and there was no initial fee or monthly fees (but there are managment fees for the invenstment portfolio), so maybe they have changed their approach.

    Thanks

  • Ed Rempel October 4, 2012, 4:47 pm

    Hi Barry,

    Are you going to get return of capital (ROC) income paid to you monthly? If so, then how are you tracking the decline of the deductibility of the investment credit line?

    Ed

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