[Cover Image of The Smith Manoeuvre]

The author, Fraser Smith, is a Vancouver-based financial planner, who devised the eponymous strategy to take advantage of the fact that while the interest paid on a mortgage for a personal residence is not tax-deductible, any interest on a loan taken out to make investments (in mutual funds or stocks or a private business) is deductible. The key to the Smith Manoeuvre (SM) is a readvanceable mortgage in which the lender is willing to advance a loan equal to the mortgage principal that is repaid with every payment.

The biggest problem with the book is that Mr. Smith never really explains the risks involved with his strategy. He claims that the manoeuvre is no more risky than a mortgage on a personal residence because the leverage involved is the same. True enough, but there are two key pitfalls to his strategy:

  1. A mortgage is a loan that is amortized over many years (25 years is the standard). Over this period of time, the principal balance will decline steadily. In the SM the principal balance remains the same.
  2. People are irrational. They will be willing to buy a home with a huge loan and even if housing prices decline, they probably won’t sell and rent immediately and will do their best to meet the mortgage payments. Taking out a huge loan and investing in the market is a completely different cup of tea. In a market correction or worse-yet, a bear market, they are going to panic and sell not having the stomach to take further losses.

Incredibly, Mr. Smith suggests the opposite. He suggests that people might be better off capitalizing the interest on their investment loans, which is really a fancy term for adding the interest due on a loan to the principal owing. Great, now we have compounding working against us!

I also found the book difficult to follow and the author has the tendency to rant instead of sticking to the topic. It doesn’t help that every few pages he wants the reader to purchase the $mithman Calculator (retails for $39.95), a software program to evaluate his strategy under various assumptions.

The vast majority of Canadians can safely skip the book and the fancy calculator and simply max out their RRSPs (remember, interest on loans to fund your RRSP is not deductible) and pay down their mortgage as fast as they can. Once their personal balance sheet shows very little debt, they can take out a secured loan (if they have the patience and stomach to make leveraging work) to make taxable investments.

That said, people who are lucky enough to have very stable jobs (and a predictable cash flow) and are willing and able to stomach the risks involved in a leveraged investment strategy might find the book useful.

This article has 84 comments

  1. I have this book on hold at the library and am waiting for it to be my turn. Personally, I can’t see myself using a strategy such as his – of what I know of it without ready the book. Emotionless investing is crucial here and although I am getting better at it, I am not perfect and fear that I would be taking on too much risk with this.

  2. Damn, you beat me to it! I bought this book used on Amazon 2 years ago out of interest from a friend’s suggestion. It’s since been at another friend’s possession, though I know not which one.

    I have to agree with much (if not all) of your post. You’re showing the old edition’s cover if I remember correctly!

    CC strikes again!

  3. My parents actually did the Smith Manoeuvre (although if you asked them what the Smith Manoeuvre they wouldn’t be able to tell you) and I am sort of doing this right now (but not in one lump sum, I am slowly converting my mortgage to an investment loan to the tune of just over $400 a month). For my parents it really didn’t work out well. One of the problems was that their time frame was too short. They started to do this in 1997/98 and expected to stay invested for 5-7 years. Well the year 2000 came along and threw a wrench into their plans. They were hoping to retire a couple of years ago and now they think they might be able to retire in a couple of years (at 63, a couple of years ‘early’).

    I think that the biggest thing to remember about this manoeuvre is that like using any leverage it magnifies return on both sides and the downside magnification hurts a lot more than the upside feels good. I haven’t read the book but I think that using the Smith Manoeuvre isn’t for the faint of heart or the novice investor and if some one decides to use it they should have a plan to unwind it over the long term. I don’t think that anyone should retire with a mortgage, whether that mortgage is invested or not.

  4. “Difficult to follow” is exactly words I was looking for. He run sometimes 100 km/h and other part of his book are turtle-speed. And I hate him saying all the time: “You don’t have to understand how it works, take it to any good financial planner and he’ll implement it for you. If he cannot, he doesn’t know what financial planning is!”. Excuse me! I’m the one who is going to borrow money, so I should understand what’s going on. I’ve read it once and won’t recommend to any of my friends and co-workers.

  5. Canadian Capitalist

    Alex: Good point. My opinion is that a moderate leverage is ok (if debt to equity is low).

    Vince: I couldn’t find the new cover on Amazon. Actually, I picked the book up at Costco of all places.

  6. CC,

    The new cover is at his own website. Maybe you’d like to add a review of the website too?

    http://www.smithman.net/

  7. I did a short shot on this last year, and it scared the “bee-jeezus” out of me, because anything that makes that much use of leverage to buy notoriosly unstable commodities (yes I am THAT paranoid about Stocks, just ask me about my Nortel stock that I own due to my affiliation with the firm). Wouldn’t it just be better to pay your mortgage off quickly and then buy your stocks? Just my simple opinion (emphasis on the SIMPLE).

    –C8j

  8. This is one of the few sites that has anything negative to say about this book. Most everyone else seems totally enamoured with it. Thanks for the counterpoint to all the “cut & paste” championing of this manoeuvre.

    I looked at the idea from a different perspective, though — if you were prepared to use the equity in your home once paid off to leverage a portfolio, an early start might give you a greater benefit.

    My distaste arose from the constant reference to the Black’s financial situation. The numbers provided seem so unlike any family situation that I am familiar with — most would not have as much money available. I was also disappointed that the only tax deductions that were addressed was that of investment interest — i.e. you’ve got to spend the money on interest to get a rebate. There was no real discussion surrounding the relative returns of RSP vs unregistered investments.

    I felt that it was worth a read, if only because it caused me to re-evaluate my financial plan.

    David

  9. Canadian Capitalist

    David: You make a great point. The author does want you to spend $1 so that you can get $0.35 back.

  10. I agree that the book has a TV infomercial-like way of presenting the material. Despite that I fond it quite enlightening.

    If the price of your real estate appreciates slower than your investment portfolio it would make sense to pay off as much of your mortgage and borrow some money for the purposes of investing.

    An added benefit, if the price of using the borrowed money for investment purposes costs less than borrowing money for the mortgage on you primary residence.

    The risk is of course the fact that it’s easier to make a mistake managing an investment portfolio than in picking a house. The value of the house generaly goes up.

    The bottom line is however that you generally want to invest whatever your money you have to at least preserve it from inflation. Whether you invest a part of re-borrowed equity or funds that you accumulated after paying off your mortgage the probability of making a mistake is similar.

    Istead of smith maneuver one could just save up for a downpayment on another house and rent it out. It all depends what kind of investments one is more comfortable with. The maneuver sort of allows you to do it drop by drop.

    I did not read any other reviews of this book, just trying to write down what I understood after reading it.

  11. You miss the key point. Anytime you make an additional $400 principle payment on your mortgage, you skip the interest associated with it. This is very important especially early in the amm of the mortgage. We are not talking about .35 or every $1 spent, we are talking about using that .35 to skip interest payments to the bank!!!!! The ways canadian financial institutions calcualte and ammortize mortgage payments ie (P and I allocations) are crimminal and this is what your are fighting with the SM>

  12. I am a financial planner, although not in anyway connected with Smith. I think that this strategy is very, very good. I understand many of your hesitations concerning leverage in general and thus this strategy. There are a lot of people who have made an awful lot of money by sticking to a conservative leverage program (you don’t need much more than about 5 percent to break even).

    Also, the fact is that the tax deduction from an RSP is the same as an interest payment (i.e. if the interest payment is equal to an RSP contribution then the tax deduction is also equal). Where the other savings are had is at the time of withdrawal. An RSP is fully taxable as income whereas any planner worth their wage can show you ways to make sure that you are getting dividend and capital gain rates.

    Anyway,those are just my thoughts on the matter.

  13. I think that you all are missing the big picture here this system works and works extremely well.
    I started this procedure less then one year ago and because of this system will have my 300k home paid for in two more years. I recieve 3000$ per month in distributions that go directly on to my home line. At the end of the year u get a big fat cheque back and put that back on your home line take it all back out invest and are building a portfolio of huge proportions.

  14. I’m afraid, many of those who oppose the idea either haven’t read the book, or didn’t understand it. To really appreciate the genius of it takes 2-3 reading.
    There is no excuse blaming the devil for high leverage, because Mr. Smith is correct pointing out that the real leveraging was the mortgage in the first place and since the level of debt doesn’t increase during the process, there is no leverage involved acually.
    I am also surprised to see that none of the detractors paid any attention to the fact that mortgages are twice compounded yearly, while investment loans are not compounded at all, (if they are not capitalized,) therefore, the difference in compounding alone make the strategy work, reducing about 3-4 years the time necessary to pay off a 25 yr. mortgage.
    Finally, nobody considered the investments of reduced risks, such as segregated funds, that are guarantied and thus protected against capital loss.
    In summary, even if your investment would earn zero returns and even if you paid the interest on the investment loan, you would still pay off your house with this method in 19-20 years, by which time and forever after that would receive thousands dollars of tax refunds, accumulate an invstment fund of approximately $350,000-400,000, and would never pay taxes again if you don’t want to, while the profit you make would be around $100,000 in 19 years, all tax free.
    I can’t see what is wrong with all this.
    I am particularly disappointed by this comment:

    Canadian Capitalist Says:
    April 9th, 2006 at 7:55 pm
    David: You make a great point. The author does want you to spend $1 so that you can get $0.35 back.

    This is a bit of nonsense, if you consider that the same dollar was spent on mortgage interest before and brought back no tax refund at all. Was that better? David is wrong and so is the Canadian Capitalist.
    The book is a bit difficult to read, but by George, it is richly worth it.
    I professionally apply and do this for my clients and haven’t met one yet who didn’t like it.
    If any one of you wants to take an other look, but now with a view to understanding it, I’d be happy to help. Here is my address:
    falconaire@sympatico.ca

    Sandor

  15. Canadian Capitalist

    Sandor: Thank you for your comment and thank you for stating that you use this method for your clients.

    As I pointed out in the review, the problem with SM is not logical (though I don’t see how earning 0% on the investments bought with borrowed money is coming out ahead, but for argument sake let us suppose that an investor is earning 7%-8% from a diversified portfolio) but psychological. It is very easy for people to stick with the method when equities are earning double-digit returns and paying 4% effective interest on the capital.

    The true test is when there is a prolonged bear market and investors could not stomach the losses any longer (or do not want to earn 0% and keep paying 4% interest) and want to get out. Guess what? The same people who will never sell their home will call the broker and say “Sell everything now!”.

    Personally, I am more than happy to pay down our mortgage fast using our savings. I stand by my comment that leveraging is a double-edged sword and should be used with extreme care and the book should have pointed out the risks involved in the strategy.

  16. This reviewer does a dis-service to the reader. The Smith Manoeuvre is no more risky than investing in a house with high ratio financing at a time when dwellings have become a commodity and trade like soy beans. The reviewer and many of the posters clearly do not understand the concept. Reread the book.
    The choice is clear, keep the blinders on and Ottawa happy at the same time or take control of your own financial future. Read the book and if you don’t understand it, do as Mr. Smith advises and hire a financial planner to advise you.
    Reviewer, study the principle of diversified portfolio management.

  17. My dear Capitalist,

    Perhaps you won’t mind if I give my answer item by item. Your rebuttal is a clear testimonial to your stiff upper lip; you do not want to do the mental excersize necessary to the objective evaluation of this strategy.
    So, here are my answers:

    Canadian Capitalist Says:
    January 9th, 2007 at 4:29 pm
    Sandor: Thank you for your comment and thank you for stating that you use this method for your clients.

    As I pointed out in the review, the problem with SM is not logical (though I don’t see how earning 0% on the investments bought with borrowed money is coming out ahead, but for argument sake let us suppose that an investor is earning 7%-8% from a diversified portfolio) but psychological. It is very easy for people to stick with the method when equities are earning double-digit returns and paying 4% effective interest on the capital.

    Well, one of the benefits of the SM is derived from the method of compounding; while mortgages are “compounded twice yearly not in advance,” the loan interest is not compoundd at all, because it is always paid up-to-date. This alone will make the Maneouvre work, although not too spectacularly.
    In the meantime, the yearly tax refunds are also added to the investments.

    The true test is when there is a prolonged bear market and investors could not stomach the losses any longer (or do not want to earn 0% and keep paying 4% interest) and want to get out.

    But you already pay that interest on the mortgage! What does it matter where do you pay it? The difference however, is that the loan interest is tax-deductible, while the mortgage interest is not. You must understand that you swap your mortgege for the loan, not combining, or adding the two together.

    Guess what? The same people who will never sell their home will call the broker and say “Sell everything now!”.

    This would be a big mistake!
    I invest these in segregated funds. As you know, segregated funds are guarantied as far as the capital is concerned. Therefore, losing money is not an option.

    Personally, I am more than happy to pay down our mortgage fast using our savings.

    If you would follow my advise you would continue doing that, but add to your savings the handsome investment loan. This would increase your positive leverage, (i.e. more money would earn returns at your usual rate,) hence the amount of money to reduce and convert your mortgage would be substantially more.

    I stand by my comment that leveraging is a double-edged sword and should be used with extreme care and the book should have pointed out the risks involved in the strategy.

    The comment, in general, is correct, but this is not really a case of leveraging.
    The book and subsequent articles point out precisely the opposite: when you bought the house in the first place you did leverage, because you had no equity to balance the loan; your lender had the strangle hold on your ownership of the property. When however, you borrow against the presently paid-up equity, your ownership is assured, without increasing your debt and the investment are at the ready in case you must pay back the loan for some unforseen reason.

    I suggest, send me a private email, (you have my address,) and I shall send you the ledger of an example case. Let’s talk turkey! All this carping is hypothetical until some numbers are put on paper.
    After that, or instead if you like, I can calculate for you your own case: based on the value of your house, the size of your outstanding mortgage, your tax rate and an other few secondary information, I shall calculate for you: how soon will you be out of your mortgage, how much profit (yes profit!) will you make on this, how much your progressively increasing tax-refund will be year after year, and any other particulars you want to know.
    I have concluded today a case for a part-time medical secretary, who has a 250K house, 118K mortgage and a very modest income. Her house will be paid off in 7 years, will receive a 3K yearly tax refund (practically as long as she lives,) and finish after 7 years with a 220K investment fund. She will also have about 40K profit! That is nearly 10% return on the mone yearly
    This woman will never be able to accumulate any retirement investments without this strategy. On the other hand if she leaves the investments in place for an additional 15 years (her age is 42 now) she will retire with nearly a million, after tax, and this investment fund will make 3 times the income for her then she was earning by working.

    But as I point out in my little flier, the first condition to qualify for this is the ability to think outside the proverbial box.
    Send me that email: falconaire@sympatico.ca
    You need help. (this is the place of the smily)

    Sandor

  18. Canadian Capitalist

    Sandor: It is very simple to convince me. Show me how in the worst-case assumption (0% investment returns over the next 7 years) your case comes out ahead. I am assuming that you would not qualify her for a higher mortgage than 118K.

    Also, I have no need for the SM. Our mortgage balance is quite low and I have no interest whatsoever in a huge leverage.

    Its funny that you should say I am not being objective when I have no stake in the success or failure of the SM. I am an engineer not a financial advisor. My livelihood doesn’t depend on it, so please confine yourself to addressing my points and not calling me for a “stiff upper lip” or “need help”. Thank you.
    My problem with the SM book and its defenders is the claim that it works under *every* market scenario.

  19. OK!
    I shall do it over the weekend

    Sandor

  20. intrigued, yet not convinced

    Hello Sandor and Canadian Capatilist,
    I have been introduced to the smith manoeuvre just recently and am a new home buyer. I have to admit the process is intrigueing, however I have obvious doubts. Reading your two arguments, that do make sense, has been interesting. Sandor I am hoping you can complete the 0% assumption request left by the Canadian Capatilist, I am interested in seeing the outcome.

    Reading and interested, Thanks!

  21. Canadian Capitalist

    Sandor has been in contact with me through email and we have been discussing our points of view. I am planning on a follow up post to this discussion within the next few days. Stay tuned…

  22. I have to admit that I am thinking of switching my mortgage with SM strategy but I have to see more positive comments about SM. I’d like to see Sandor complete that 0% assumption request. Thanks.

  23. Dear Sound Decision and All:

    We exchanged some friendly private letters with the Canadian Capitalist at the beginning of this week.
    I did relay the 0% calculations to our skeptical friend CC. (That is all investments earning 0% return for ever, not just for 7 years as he asked!)
    I don’t know what is delaying the publication of the results, but assume, he is working hard to prove it wrong and until he is ready we must be patient. Perhaps he is busy working in his daily job and didn’t get around to it yet.
    However, if I have CC’s permission I would be prepared to publish the calculations myself.
    To those of you too impatient to wait for him, I can send in private mail, the same ledger I have sent to him. (my address as always: falconaire@sympatico.ca)This may even be more beneficial to you, because by the time he announces his rebuttal you will be familiar with the concrete details of the subject.

    Sandor

  24. Canadian Capitalist

    The results will be published on Monday, Jan 29th, 2007. Thanks.

  25. Victor Lough,
    How can you claim you are in no way associated with Fraser Smith when your name appears on his web site in a list of Financial Planners? Fraser Smith claims all the names of Finacial Planners on his site were requested to be there by the persons themselves.
    Just an observation.

  26. Who would you set up your portfolio with? Your mortgage lender, broker? In essecce, are you just reclassifying your mortgage to an investment with your lender, if so doesnt your lender have to approve this before anything can take place?

    Be interested to see Sandor’s results of the assumptions as well.

    Thanks,

  27. Please kindly post the results of 0% assumption. It would be a great service people like myself who are just beginning to learn about SM. Thank you to both Sandor and Canadian Capitalist for their insights.

  28. Canadian Capitalist

    We debated the 0% assumption recently. The post is available here. Another tip: search “smith manoeuvre” in the main page to get related posts.

    Link

  29. Re: Is your Mortgage Tax Deductible

    I have again reviewed Smith’s book.

    My concerns about its’ content remain — Smith does not fully explain the ramifications of his ‘Manoeuvre’, in my opinion. Missing is a clear explanation for the permanent retention of the investment loan ‘until the age of 130′, a lack of clarity surrounding the interest expense on the investment loan for ’90′ years, a constant harping on Canada’s taxation system, and the use of a biased example throughout the book to paint a worst/best case example: the Blacks.

    According to Smith, the Blacks have a combined income of $100,000. Both are working. They are in the 40% tax bracket. They have a new $200,000 (fixed rate) 25 year mortgage at 7%, (Prime +3%) with a $1400 monthly payment. They have $500 per month of additional investment funds, and $50,000 in liquid investments. They can obtain an investment loan at Prime +1% = 5%.

    The Blacks should at worst be in the 31% tax bracket. Unless one of the Blacks is earning over $67,450 per annum (BC Tax Rates), their tax liability (and rewards via deductions) would be some 25% less than Smith claims. This impacts the rate of return of the Manoeuvre, as the tax is considerably reduced.

    As described in the book, the Blacks are clearly both risk averse and debt averse. They have a mortgage of only twice their annual income, and a GDSR of about 16%. In addition to having made a downpayment of at least 25% of their house value in order to implement the Smith Manoeuvre, they have created a $50,000 rainy day fund of secure, low risk (low return) investments, and are adding to it at the rate of $500 per month. They should have a quality FICO Score.

    So, I now offer the debt-averse “David Manoeuvre”

    The Whites live in an identical home on the same block as the Blacks. They, too,have a combined income of $100,000. Both are working. He in the 31% tax bracket, she the 21%. They have a new $150,000 25 year ING Direct mortgage at 3.25% (prime less .75%), with a $700 accelerated bi-weekly payment, and a 5 year term. They have $500 per month of additional funds to apply to the mortgage, and have put the ‘rainy day funds’ of $50,000 in liquid investments against the mortgage to reduce their principal. They can obtain a HELOC linked to their mortgage at Prime (4%). They will use this as their emergency fund should they ever need it. By paying $930 with each paycheque, the Whites will pay off their mortgage in seven years. At this point, MS. White will invest the $930 bi-weekly (pretty much her entire salary) with a return of 10%. Since they have spent the previous seven years learning about investing, they have become fairly savvy, and will be comfortable choosing quality investments in discussions with their well-referenced financial planner. Distributions that cannot be automatically re-invested will be taxed at her marginal tax rate. If we assume a 10% return (distributions spent) the Whites should have a portfolio of $1,154,723 at age 65. If we were to assume that the re-investment of dividends caused an annual return of 14% (a figure often indicated) their portfolio would be about $1,762,556, free and clear. There is no loan to pay off, and the Whites have paid no investment loan interest. Because they took the time to better understand the investment marketplace, they were fully aware of the rises and falls of the market, and understand how to take advantage of bear markets, as well as bull markets. They invested with a 17-vear view to grow their investments.

    While I can see that the Whites could add the Smith Manoeuvre to this scenario to some further advantage, would they feel the need? At age 65, they should be able to withdraw on the order of $16,000 per month (taxable) for living expenses for the next 25 years.

    Finally the Whites do not pay the mortgage costs described on page 21 in the book, and sensationalized in Smith’s Powerpoint presentation. While the Blacks have to earn $700,402 pre-Smith Manoeuvre to pay their mortgage, the Whites would only need to earn $261,069.10 to pay theirs. It is comments such as this that make me question the content of Smith’s book.

    Recognize that I am not an investment advisor, and that the above comparison is not meant to be exaustive. It just shows another, realistic path to an end.

    David

  30. Has anyone of you heard about a new book to be out by may 2007 called SMITH SNIDER.. I have a friend who is a financial advisor and was explaining about the new formula called SMITH SNIDER

  31. Hi, Roger,

    Smith/Snyder is a version of the SM used by Lloyd Snyder, an advisor in PEI. It involves leveraging more highly than with the SM and using a mutual fund with a high ROC distribution to fund it.

    Often this distribution is paid down on the mortgage and reborrowed. So, it is marketed as paying your mortgage off in 5 years. However, the strategy actually replaces the mortgage with a non-deductible investment loan or credit line.

    The Snyder Twist is one of several enhancements to the SM. These enhancements include:

    1. “Top-up” – borrow the available credit in your SM credit line to invest (up to 75% of the value of your home).

    2. “Rempel Maximum” – the maximum benefit from the SM that uses none of your cash flow. It is the maximum additional leverage that can be paid completely from the SM. For example, if your mortgage payment pays principal of $500/month (or $6,000/year), you divide this by the investment credit line or loan interest rate (say 6%) to get $100,000. This means you can borrow $100,000 (in either the SM credit line or an investment loan or some combination) and all the interest can be paid by readvancing the principal from your mortgage payment.

    3. “Snyder Twist” – Higher leverage with the additional cost paid directly or indirectly from the distribution from a ROC mutual fund. Usually this is a minimum $150,000 leverage. The distribution is paid down on the mortgage and readvanced to invest and/or pay the interest on the leverage loan.

    I’ve talked with both Lloyd and Fraser about it and compared projections. As I understand it, you would think that the Snyder Twist would also be a tax strategy like the SM, but it is not. I see the Smith/Snyder as a very effective tax saving and investment strategy (SM) combined with a leverage, investment (non-tax saving) strategy.

    We use this strategy basically only for retirees, since income is their main need and the tax issues that come back to haunt you after a few years are less important.

    There is another blog where Da Man describes it: http://www.redflagdeals.com/forums/showthread.php?t=150279&page=17&highlight=smith+manoeuvre . The discussion that follows shows the tax issues with this.

    Fraser has been talking about his new book for almost a year now, and we are eagerly waiting to read it. I owe a lot to Fraser, since I’ve used the SM extensively with clients and am continually amazed by how well it works. And it is understated, since the benefits we get in practice from the SM are usually much higher than are shown in his books.

    While I have concerns about how the Smith/Snyder appears to be marketed, it actually has benefits – just not the ones marketed. The Snyder Twist does not reduce your non-deductible debt or provide additional tax advantages, but it provides a way to leverage much more highly, which is usually beneficial long term, if you invest reasonably.

    We usually stick with the SM, the Top-up or the Rempel Maximum. They avoid having to calculate how much of your investment loan is still deductible and they allow us to choose investments only based on the best risk/return and tax-efficientcy. Usually, the funds with the highest ROC distributions, which are needed for the Snyder Twist, are not the best funds in risk/return, and certainly not the best in tax-efficiency.

    Ed

  32. The mortgage interest is being paid anyway, and this method is just a way of converting it from non-deductible to deductible. The only time this stratgey would be pointless from a tax benefit point of view would be of course if you weren’t paying any income tax. Although there are easy, legal ways to do this (email me if you don’t already know how) there is a cost to tax reduction and any *free* deductions lower this cost. This conversion ranks right up there with having a home based business for write-offs of pre-existing expenses.

    A good contrasting example would be to take a look at what John Singleton did back in the 1980′s. He had a $300k mortgage and $300k in investments. He took out his investment and paid off his house in full. Then he turned around that afternoon and drew against his house to buy back the same investment. Now instead of paying non-deductible interest it was fully deductible.

    Read the Supreme Court decision here: http://scc.lexum.umontreal.ca/en/2001/2001scc61/2001scc61.pdf

    Now maybe your clients don’t have $300k, but any prepayment to the mortgage would be a smaller equivalent. Instead of putting that $100 directly into the investment (or business expense, in the case of a home based business) simply flow it through the mortgage first. The same bill gets paid, the same investment made, but now you get to deduct the interest too.

    Once the mortgage is replaced by the investment loan, Singleton *could* keep making payments to pay down the investment loan, which would be the equivalent of making mortgage payments. But that would not be optimal. Why, you ask? Because it’s historical fact that home prices rise with inflation in the long run. When you have a paid off house, you are investing at an inflation rate (which is not good). Surely we’d rather be spending the $50,000 return on the 300K each year, instead of sitting on all that equity with no $50k to spend, as it appreciates at $15k a year with inflation.

    I don’t much like the investment suggestions in the SM for the same reason I didn’t like the Wealthy Barber: too much risk for too little return. The stock market is the last place you want this money to go, especially with a “buy and hope” strategy. It’s better off in secured, lower risk, higher return vehicles. Somebody mentioned rental real estate before, and that is a good example of secured cashflow. I wonder what the costs for the Seg Funds are these days, and if it’s really worth limiting the upside when security can be obtained other ways. There are numerous other sources of steady double digit returns with 100% collateral as security (which the stock market doesn’t offer).

    Feel free to contact me if you want to brainstorm some concepts and numbers. I love this stuff.

    Doug

  33. Hi, Doug,

    It sounds like you are talking about using the SM for private 2nd mortgages. What else could you mean by “secured, lower risk, higher return vehicles”? Private 2nd mortgages, while they are secured against a property are essentially unsecured loans to high risk people that can’t qualify for a regular mortgage. The average person who invests in a private 2nd mortgage cannot foreclose, since they would have to buy out the 1st mortgage first.

    In addition, getting paid fully taxable interest would eliminate all the large tax refunds associates with the SM.

    Stick with the stock market for the SM, since that is where the highest and most tax-efficient returns are. Here in the Toronto area, the TSX has had 6 times the growth of Toronto real estate in the last 30 years. And real estate still has 2/3 the downside of the stock market (worst decline 28% vs. 43%).

    Ed

  34. Pingback: Canadian Capitalist » Toronto Star Mention

  35. My wife and I seriously considering the Smith-Snyder Manouveur.

    Based on my understanding and speaking with the Smiths the leverage of the Smith-Snyder would let us pay off our upcoming mortgage in 3.7 years instead of 8 years. We could then, if we so choose, sell the investments we own and retire the entire debt. Then we could go about investing however we want and not have a mortgage over our head. (Or if we decide this is working well for us, leave the debt alone and continue the investment process).

    I realize there is always risks associated with mutual funds (I’ve averaged about 4% return over the last 12 years – yuch!) but it seems this is as close to a guarantee as I’ve ever seen. Am I missing something?

    Also, how is the Smith-Snyder different from the Smith-Rempel?

    if we can pay off our mortgage in 3.7 years instead of 8 years, it seems to me worst case scenario, I can sell the investments after those same 3.7 years, retire my debt and go out and purchase RRSPs and other investments without having to worry about a mortgage hanging over my head.

  36. Hi, Konfused,

    I’ve analyzed the Smith/Snyder and essentially only see a benefit for retirees. The main difference between the Smith/Snyder and the Rempel Maximum (or Smith/Rempel – hey, that’s a good name!) is the use of a mutual fund that pays out a fixed distribution that is all or mainly considered “return of capital”.

    There are 2 issues with it:

    1. The illustrations show the distribution and pretend it is the return of the fund. They use mostly a Stone or Clarington fund that have distributions of 12-14%, but neither of these funds can reasonably be expected to make that much. Therefore, the fund will almost surely decline.

    2. There is a tax issue caused by having the distribution paid out to you, unless it is entirely paid on the investment loan. Since the distribution is “return of capital” (getting your own money back), if you don’t pay it onto the investment loan, then that much of your investment loan becomes non-deductible. For example, if you borrow $100,000 and invest it into a fund that pays you a 12% ROC distribution of $12,000, then only $88,000 of the investment loan is tax deductible.

    You can then pay this down on your mortgage and make reborrow it, which converts $12,000 of your mortgage into a tax decutible credit line, but remember you just turned $12,000 of you investment loan into a NON DEDUCTIBLE investment loan.

    In the example you give, it’s very hard to believe you can get that much gain in 3.7 years, Konfused. In 3.7 years, you can only reasonably expect the funds to be up 25-35% in total (since they can only reasonably be expected to earn 7-9%/year as ordinary balanced or conservative equity funds). If you subtract the interest expense net of the tax refund (say 4%), you have a total gain of 10-20%. That won’t pay off your mortgage.

    You can’t count the distribution since it is NOT the return. Anyone could create a money market fund that paid out 20%/year, but that would not be what the fund gains.

    I consider the Snyder to be an UN-Smith, since it is a process to convert a tax deductible investment loan into a non-deductible investment loan. You need to be very careful in calculating the declining tax benefits, if you have a fund pay a distribution out to you.

    Any scenario I’ve seen with the Snyder will work even better if the distribution is reinvested instead of paid out (if there is enough principal payment onto your mortgage to cover the investment loan interest).

    In short, there are major tax benefits of the Smith Manoeuvre, but no tax benefits at all of the Snyder Twist. It is designed to get you to leverage more highly than you otherwise would, which may well benefit you, just not for the reasons stated.

    The difference with the Rempel Maximum is that it is actually an enhancement of the Smith Manoeuvre that creates additional tax deductions. Your additional leverage is entirely paid by readvancing the mortgage. Therefore, there is no need to have the ROC distribution paid out. The investment loan and the credit line attached to your mortgage are both 100% tax deductible.

    What’s more, you can now choose the very best investments based on risk/return and choose “all-star fund managers”, instead of having to choose a below average fund only because it pays out a high distribution.

    While you might think that you could leverage much less with the Rempel Maximum, since the only cash available to pay interest on your investment loan is the principal from your mortgage payment. In practice, though, we look at our clients’ full financial picture. Nearly always, there is no trouble finding the extra cash to make a higher mortgage payment, so that enough principal can be advanced for the amount of leverage that makes sense in your case. It comes from rolling other non-deductible debt into your mortgage (including the payment), just using a bit of extra cash flow, or diverting RRSP contributions to the mortgage.

    In your case, Konfused, if you are already paying your mortgage off in 8 years, you are paying quite a bit of principal down with each payment. Reborrowing this principal should be able to easily finance all the leverage you would want to do. Therefore, you can avoid the tax nightmare calculation of how much of your investment loan interest is deductible caused by having the ROC distribution paid out.

    Ed

  37. HI, Ed!

    I’m very curious to learn more about your “Smith/Rempel” manoeuvre. In a nut shell,I hate paying “income tax”, and I very much desire to pay down my mortgage, asap.

    Honestly, I’m not very investment savvy, and perhaps I’m going out on a limb here; not knowing you, and all; but my current circumstances of paying what I consider to be an illegal tax on my wages, coupled with another 15 – 18 years of mortgage payments on a small ~ $135,000 house, just don’t leave me feeling all warm and fuzzy inside, ya know?! Anyhoo, if it would be in anyway possible for you to guide me through the necessary steps toward achieving these goals, your help would be very much appreciated!!!

    I can be contacted privately, at assemblydweller@hotmail.com

    Thank you so much for your posts, here, as well as for any additional/more personal advice you can offer!

  38. I bought the book yesterday and read it all before going to bed (in the morning!).

    I found the rates indicated in the book for Blacks somehow unrealisitic compared to my situation. He assumed %7 mortgage (mine %5.1), %5 borrowing interest (mine %6), and %10 investment return (I tend to assume %8).

    Does anyone has the calculator? How sensitive is the strategy to these rates. Does it still work if I pay less interest rate on my mortgage than the my line of credit?

    Thanks for your help,
    Arash

  39. Arash,
    There is a simpar calculator on Red Flag Deals (http://www.redflagdeals.com/forums/archive/index.php/t-150279.html) site written by Frugal Trader (Million Dollar Journey) on December 18 which is referenced at this link:
    http://home.cogeco.ca/~pgannon/investment/Readvanceable_Mortgage.xls
    You can use it to assess some options.

    David

  40. Thanks a lot David ;)

  41. Just a disclaimer, I didn’t write that spreadsheet. :)

    FT

  42. FT said: “Just a disclaimer, I didn’t write that spreadsheet. ”

    OOPs, sorry, ’twas Cannon_Fodder.

    David

  43. I have been following this thread for a while now.

    I see the Lipson appeal was recently denied.

    Anyone have any comments on this news?

    Comment on the Lipson case here (see page 8):
    http://www.marcil-lavallee.com/english/Documents/JUNE2006.pdf

    The full Lipson appeal case is here:
    http://www.canlii.org/en/ca/fca/doc/2007/2007fca113/2007fca113.html

  44. Opps, that is supposed to be see page eight in the brackets of the first link (not a smile face)!!

  45. Does anyone have any thoughts on this. Someone with a $160,000 house and $100,000 mortgage is advised to refinance into a high ratio mortgage limit of $144,000 ($134k term, $10k line of credit)(paying $2880 in mortgage insurance fees, $1250 early payout penalty, $200 discharge and $1000 legal) so they can have about $40,000 to invest.
    They have also been advised to leverage the $40,000 investment into another $80,000 loan for investment purposes.
    They have been told that their mortgage will be paid off in 8 years (when in fact they will continue to borrow against their house, but for investment purposes),
    their investment will earn a 12% return, and they don’t have to worry about anything because “…it’s all right here in the book.”

    I am in the financial services industry and part of what I do is facilitate mortgage closings. With different numbers, that exact scenario has presented itself to me 3 times in the past month.

  46. Canadian Capitalist

    DF: What is being suggested has the interests of the planner in mind rather than that of the client. It is not only irresponsible, it is dangerous for the financial well being of the client.

    An investor can earn a 4% risk-free return today. Good stocks will probably have total returns in the 7% range (could be worse, could be better). To suggest otherwise is irresponsible.

  47. Distributions are being represented as returns. Tax Refunds are being hugely over-estimated. Initial costs are not being considered when clients are presented with the potential benefits. In short, “Advisors” are using what could be a sensible financial solution for many people as a tool to sell mutual funds and line their pockets. It disgusts me.

  48. Calgary Financial Planner

    Please understand this book aims to provide awareness of a common strategy that many advisors and clients have used for a century or more.

    However, to gain momentum and inspire readers, the book makes many assumptions to portray red-line scenarios. One common thread I have noticed throughout this discussion is that financial books (Fraser included) offer scenarios to motivate self-helpers and obviously generate discussion – this is GOOD. On the flip-side, some concerns are:

    a) Remember who is helping you – people trying to sell books, cash in on spin-offs AND yourself (the expert?) Don’t flog Mr. Smith, he has you all thinking. Flog Mr. Smith, he can’t possibly help you reach your goals through a paperback.

    b)The discussion goes nowhere – everyone is attempting to dissect the One best solution and there isn’t one.

    My suggestion is to partner up with a financial planner and the few hours you spend one-to-one will produce personalized gains and never have you coming back to attempting to do financial surgery with a auto mechanic’s licence.

    Inspire me?

  49. I’m curious about the example given by David of the “Whites” in his David manouvre. How do you come up with returns of 10% and 14%? Does any else have any opinions on his ideas because it seems pretty solid.

  50. Canadian Capitalist

    Ivan: Future returns are unknown at this point, so you can pick any number and argue that it is reasonable. Trouble is, future returns are likely to be very modest: in the 6.5% to 7.5% range. If you pick smaller expected returns, the SM calculations don’t look as attractive.

  51. Ivan,
    Ten percent is the number that Smith uses. Fourteen percent is less than the return that a number of common stocks have returned over the past ten years. These include: my local electric utility, my bank, the railroad company that maintains track in the area in which I live; all with dividends reinvested. I am a firm believer that we are all exposed to quality knowledge of companied with good returns that are not too far outside our circle. For example, anyone with kids should have been able to guess that Cabbage Patch Dolls would be a goldmine, but who bought in?

    See my comment at:
    http://www.canadiancapitalist.com/2007/03/12/smoke-and-mirrors-myths-part-3#more-629
    for more info on these returns.

    BTW, I am invested in none of these, so don’t ask me to predict……

    David

  52. The SM is a very poor strategy IMHO. The debt is not gone, and the assumption of high dividend returns on the funds is downright scary, not to mention the excess of leveraging on the MF’s.

    There are many other strategies that use a re-advancable mortgage and real estate trusts, as an example, whereby your mortgage is truely paid off in half the time, as well as creating an indexed income for life.

    It is really scary to see how many so called “professional” advisors are buying into this. I guess they are in it for the money and not for the client’s best interest.
    The SM is certainly not a wealth creating program. It is good marketing, however.

  53. addendum,

    I think DF has hit it right on the mark. There could also be tax consequences with the distributions if the CRA wanted to get picky.

  54. Hi No Tax,
    I’m interested to know more about how the real estate trusts use the re-advanceable mortgage to pay off the mortgage and create an indexed income. Do you have more info on that?

  55. I’m an individual investor in the stock market and have gone though years of self-education and experienced some trial-by-fire along the way. These days, I’ve got a lot higher pain threshold for temporary down-turns in the market.

    I know what I’m capable of earning (investment-wise) and can calmly weigh the risk of the loan. I doubt many can who aren’t either experienced (and have learned from it) or have the training to understand the strategy (as an investment pro should have).

    Those who suggest investment pros are trying to steal their money (read: house) or are just in it for the commissions have likely have neither the right experience or enough knowledge on the subject. This isn’t to say that there are no lousy investment planners and don’t get me started on stock brokers!!!

    I would suggest people get some of both before becoming one more ‘lost it all on the stock market’ story first, then try it.

  56. Ed,

    There are many other sources of secured investment vehicles available than 2nd mortgages. Funny that this is the only thing that comes to your mind. How about first mortgages, bonds, secured notes, partnership equity stakes, insured stakes, or rental real estate (you pick: residential or commercial), just to name a few?

    I haven’t got the upside/downside data in front of me for the Toronto market, but I do know that at the end of the day when you compare stocks to real estate, the latter would be the only one with something tangible behind the investment.

    What do you want to bet your house on, a secured tangible or a shrugging stock broker with empty answers?

    My $0.02.

    Doug

    PS. Perhaps you forgot to take the rent and leverage component of real estate into account when comparing rates of return?

  57. Hello All,

    Often what happens in these discussions is that we get lost in the tedium…we can’t see the forest for the trees. The essence of the issue is not what percentages are used, leveraging issues, the tendency for financial advisors to promote a concept they do not truly understand if it produces business, etc (though all geniune considerations). The essence of converting non-deductible payments into deductible payments is this: tax law.

    The popularity of strategies like Smith’s gained popularity following the Supreme Court of Canada’s decision in Singleton, as Doug Anderson alluded to previously. John Singleton essentially performed a ‘two-step’ in borrowing from his partnership capital account at his law firm. He used this loan to buy a house. He then took a loan from the bank to repay the partnership capital – that which produced income for him. It was the sequence of events that was key to the success of this for Mr. Singleton. What was also the key to success for Mr. Singleton was that the SCC was following a trend of looking at each individual step of the transaction rather than the economic reality of the whole series of steps as one transaction.

    True, a Canadian taxpayer has the right to structure his or her affaris the most tax effectively (Duke of Westminister principle). The economic reality is that Mr. Singleton borrowed money to buy a house. But in structuring the events cautiously, he was able to change the source of his debt from personal (mortgage, non-deductible) to business (repay partnership capital, deductible) and reap the reward. He satisfied the “borrowed money used for the purpose of earning income from business or property” provision of 20(1)(c). It’s all about ‘income’. The spirit of the Canadian tax system is not all that unfair…if you generate expenses to produce income that CRA can tax in the future, then generally these will be deductible. But if you generate expenses that do not produce any income for CRA to tax and these expenditures are the same as what every other reasonable person would generate to maintain their ‘personal’ lives, then they are not. (Please keep in mind that CRA does not view capital gains as ‘income’, nor does it view a loan/mortgate rate of 7% and a consistent investment return of 5% as a reasonable expectation of profit.)

    Winning this case in the SCC was a public coup, and many financially-minded individuals saw some potential (Mr. Smith) to help people, and yes, maybe make a little money for themselves.
    Here is the fly in the ointment: Interest deductibility is one of the most highly contended and litigated areas of the Income Tax Act. If you are not a lawyer drawing money from partnership capital to but a house and then take a loan to repay that partnership capital, DO NOT rely on the Singleton case as legal precedent.

    Secondly, GAAR (the General Anti-Avoidance Rule) in the Income Tax Act was in its infancy when Singleton hit the SCC. Despite the legislated tax law, if an event or series of events produces a misuse or abuse of the intent of a taxing statute, the GAAR can be called upon to recharacterize the transactin for its economic realities. See what happened to Lipson (link in “escompton” above)(aside from the attempt to use corporate business losses personally).

    Finally, there seems to be a trend by the court to return to the ‘economic reality’ of a series of transactions, and not the singular steps in a chain of events which made Singleton successful.

    Ideas to beat the taxman pop up all the time. How many people reading this know of someone who tried to operate a Bed & Breakfast in their homes in order to write off some personal expenditures? How many people bought into the art flip debaucle? You can take your chances with audit, or play it safe. The best strategy is to buy personal assets, like a house, with your cash or invested savings and use borrowed funds for business or investment financing.

    What is the worst that can happen?: the market plummets, you lose your investments and your house. Then CRA reassesses you and uses your CPP to offset the penalty and interest you owe. There’s always the rebel in the group that’s willing to take that risk and dabble in the ‘tax grey area’…and sometimes does well. Just a word of advice: if you don’t understand the basis of this strategy and the inherent interest rate and leveraging liabilities, and the tax risks associated, and the investment exposure…don’t do it.

  58. Canadian Capitalist

    Tax Guy: I am not a tax expert, so thanks for your detailed comments on the tax angle. It sounds to me that in your opinion, people who are implementing the Smith Manoeuvre are risking an unfavourable tax ruling in the future and many years worth of interest deductions are disallowed.

  59. Was playing a little devil’s advocate, and if properly structured, there exists a significant upside to what Mr. Smith endorses. But there is also significant downside, add to the comments of ‘No Tax’ and others above. There are other options with lesser risk.

    If we really wanted to settle this whole issue, Mr. Smith should take some of his royalty income earned from the sale of his publication and submit the scenarios discussed (with adverse assumptions noted above) to CRA for an Advance Tax Ruling. That would provide the many Canadians considering this manoeuvre with a degree of comfort, or at least some clarity.

    Before making any significant decision like this, I would strongly recommend speaking with a tax specialist/ tax lawyer. It may cost you some money, but it’s money well spent! It would suprise you how little some financial advisors/planners/ accountants really know about taxation.

  60. Canadian Capitalist

    Tax Guy: I have the same opinion as you. It is far less risky to simply pay down the mortgage. But the SM message is more popular because it taps into our desire to get something (more reward) for nothing (supposedly no additional risk). Paying down the mortgage, however, needs a bit of discipline. I guess it is a no-contest.

  61. Hi there, i just learned about this idea and the book during the weekend through a seminar… those seminar that wants to make money off of you.

    anyhow, it sounds very interesting. but once i looked into it, and asked a few questions, it came to me it didnt sound as good.

    I am not sure if what they presented is the real smith thing, please verify this for me, i’ll go over what they talked about.

    so you borrow a line of credit by using a 75% or 80% of the value of your house minus mortgage principal.
    put that into a new bank account to invest in some kind of fund, that gives you a consistant monthly return. with this return you make extra payments on your mortgage.
    then, you borrow more money every month to pay your interest charge, and the rest goes into a mutual fund.

    so at the end of the year, you get tax refund for the interest charges paid on the loan. and you pay off your mortgage a few years faster.

    this is basically it, thanks
    i’ll come back later to explain why i thought it got some problems with it.

  62. Hoboman,

    Yep, your methodology is pretty much correct. If you’re interested, I have described the Smith Manoeuvre step by step in this article:

    http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm

    FT

  63. Hoboman,

    You are not talking about the Smith Manoeuvre. That is the Smith/Snyder, which is a popular, but quite different strategy.

    I keep hearing stories like this from many people that don’t seem to be aware of the tax issues with this strategy.

    The “consistent monthly return” you are referring to is the distribution – not the return of the fund. This is a consistent amount of your own money they are giving back to you. The fund will gain or lose money – but it will pay you the same distribution even when it loses money.

    You need to be aware of the tax issues with the Smith/Snyder. If you have any amount paid out to you, then that amount of the investment loan is no longer tax deductible. Basically, if you have the fund pay a distribution – which is giving you some of your own money back – then the loan is not fully deductible.

    If you do the Smith/Snyder (any version involving having a distribution paid to you), then you need to do the Snyder Tax Calculation to figure out how much of your leverage you can claim.

    Tax Guy, your comments are well said. Both the Singleton and Lipson cases refer to swap strategies, though. The original Smith Manoeuvre is just borrowing to invest – which is no problem with CRA if done and tracked properly. We call it “leverage by dollar cost averaging”. It basically combines 2 effective strategies.

    Ed

  64. Doug: “What do you want to bet your house on, a secured tangible or a shrugging stock broker with empty answers?”

    Doug, it is true that there are a lot of stock brokers out there who hardly knows what stock investment is, but it doesn’t mean stock investment is bad. In fact, historical data shows that stock is better investment than real estate. In the last 25 years, the average resale price of single family home in Toronto rose by 4 times, detached house in Vancouver rose by 5 times, while the TSX total return index rose by 13 times.

    One rule my Dad taught me on stock investment is this — don’t listen to stock brokers’ advise, just get market information from them and analyze it yourself.

  65. Speaking from the mortgage end, where does the responsibility lie in ensuring that those entering into the SM know what they are doing? The “Adviser” isn’t the one lending you the money. Can the lender be sure that all the risks associated with leveraged investing have been properly disclosed, discussed, & understood? Can the lender be sure that the investment portfolio has the proper risk tolerance? Since my last note I’ve encountered another two situations where the borrower / investor didn’t have a clue what the “adviser” was going to put their money in, they were referred to a mortgage broker immediately without any questions as to whether or not they might already have a suitable mortgage product in place, encountered unnecessary fees and, most importanly, did not understand the concept. If there are any advisers out there reading this, get your acts together!

  66. One of “Fraser’s Followers” was just in my office with a copy of his investment confirmation. With everything else aside, assuming everything about the strategy is wonderful, why on earth would anyone want to invest in the Stone & Co Flagship Growth & Income Fund? People are drawing dowm 12% from a fund that has historical returns of 5%. I realize that there are thousands of investment options out there, but THIS is the fund that is being promoted. Is it because it pays better commissions and/or trailer fees? Is someone (other than the investor) making an extra buck or two as a result of this fund being promoted?

  67. DF,
    There has been a lot of discussion about this type of investment. Ed Rempel, a CFP from Ontario strongly discourages ‘Return of Capital’ investments, and accepting financial advice from those who promote them. Ed is a regular commentator on Million Dollar Journey, and a promoter of wise investing if you implement the SM.

    DAvid

  68. David,

    I only stumbled upon this blog so my comments may be far too late to be of interest, but if the Whites implemented the SM, then at the end of the 25 year period, assuming the figures you supplied (10% growth 4% dividends reinvested) then they would have around $4M in investments and a $150,000 LOC. Without knowing which province they are in, I can’t be more exact than that (due to the marginal tax rates of dividend tax income being quite different in the various provinces/territories). The reality is that the dividend income will be quite large as they near retirement and should likely put them in a higher tax bracket. Not a bad problem to have, especially when the alternative is to not implement the SM and have less than half the investment portfolio.

    If you combined the SM with the RM, then you would be looking at a portfolio somewhere around $14 – $16M.

    Personally, I would not feel comfortable inputting 10% growth and 4% dividends. If it works out that way, then I would be the happiest person to be wrong!

  69. Calgary Financial Planner

    A 37 year-old client just paid off his house in 6.5 years (from 25 years) using the Manoeuvre. Really!! Debate all the possibilities and what-ifs, but it is working. That’s why we planners are gold – we get stuff done.

    Nuff said.

  70. I am a real estate investor using Smith Manouvre.The system works great for me espically the cash flow dam he describes.
    Question is if there is a profit at the end of the year from an investment,this profit off sets the interest that is deductible from the line of credit.His book keeps saying in multiple pages that you get a tax refund.My two accountnats say how can this be?
    If $100,000 LOC at 6.25% is $6250 interest in one year.The $100,000 LOC earned 12% in one year.$12,000 return on investment,minus the $6250 interest owing leaves a profit of $5750.I would have to pay tax on $5750 at 30%(example)
    tax bracket.$5750 x 30%=$1725. $5750-$1725= profit of $4025. On a $100,000 investment that is only a 4% return on my money.
    Is this correct?

  71. Vancouver Guy:

    Though I’m not an account or even an active investor yet, my understanding is that the 12% would be capital gains, and only taxable when realized.

    Say for instance you start in year 1 and you earn 60,000 a year in BC. Your marginal rate is 30.65% or so and your capital gains tax would be 15.33%, but only when realized. So in year one you would get your tax deduction on the 6250 on interest, but unless you are actively trading you would have no capital gains. You may have dividends in there though which really confuses things. It seems to me the whole thing is incredibly complicated.

  72. If your two accountants are giving you this info, I would find a least one who knows what they are talking about.
    The idea is to structure your investment portfolio to make it as tax efficient as possible. You would use corporate class funds or funds that have a history of limited distributions.
    Traciatim is correct. Gains are only taxable in the year you realize them.
    G

  73. Thanks Traciatim and Guruwizard.I am a real estate investor not a financial planner type.
    The book can work even better for real estate investors
    Guruwizard when you sell the funds in one year,then will that will be considered capital not income.Still if you have a profit you will pay tax on that profit.So you could actually have to pay CRA tax for that year??
    I would have no income for the year in the previous example except a $12,000 cheque coming to me in one year.
    The investment would be in a 2nd mortgage. .
    So I would actually owe CRA money at the end of the year,with everything else being equal as far as employment income,expenses,etc.
    You are right Traciatim the whole thing is too confusing and complicated for most people.

  74. The nice thing about having gains is that you can realize them when you like. So in your example, with limited income, this year would be a good time to realize any capital gains if you had them.
    Remember that you only pay tax on half of your actual gain.
    This is the difference between capital gains and income (interest, rental, employment) which is 100% taxable.
    You’ll pay your taxes on capital gains realized this year when you file your 2007 return.
    If you don’t sell, you don’t pay any taxes, even if your investment is up in any given year.
    It would be the same as your real estate investment properties.

  75. So would the SM work if you had a down payment of $21,000.00 in your house and your remaining mortgage is $243,000 over 35 years.

  76. You should have at least 25% of your house paid off before starting SM. I don’t think the length of the mortgage is all that relevant because you are going to pay it off a helluva lot faster than 35 years if you are doing SM :-)

  77. Pingback: The Smith Manoeuvre Debate

  78. My Husband and I bought our first home 4 months ago (we are 30 years old no children we have approx. $20,000 worth of personal debt/student loans). Our mortgage is 290,000 we used a no down payment mortgage 100% financing. We have been offered a 50,000 LOC to attach to the mortgage to perform the smith manouver. This 50K is also 100% financed – higher interest – invested in mutual funds.
    We view this as we have nothing to loose if we go with it. We put “0″ into our house other than our regular accelerated biweekly mortgage payments which could be considered as rent because he did not put a 5%-20% down payment on the home.
    We were told that we will not be required to pay anything extra (considering the additional $50K) other than our original accelerated mortgage payment and we still benefit by gettin the net distribution.

    Do you think it is in our best interest to start the smith manouver?

  79. Kevin why do you state the below?

    “You should have at least 25% of your house paid off before starting SM.”

  80. Simply put, the Smith Manoeuvre (or in my case the Smith Snyder Manoeuvre) is the best money strategy for Canadians period. As long as you are in it for the long term and are disciplined there is no real down side. The eminent gains far outweigh any risks.

  81. Please remove the email address from post #32. Thanks.

  82. Canadian Capitalist

    Doug: It’s done. Sorry for the delayed response. I was traveling.

  83. Pingback: Garth Turner’s Dodgy Advice « MoneySense

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