Smith Manoeuvre

Ed Rempel – Ed Rempel Organization

October 18, 2017

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Ed Rempel, CPA, CMA, CFP

Edward Andrew Rempel is a very popular financial blogger and fee-for-service financial planner with a ton of real life financial planning experience, having written nearly 1,000 comprehensive personal financial plans. He is an expert in financial planning, tax & investing. He is passionate about sharing his insights on and is known as an in demand keynote speaker.


Ed Rempel
9 Tremblay Street, Brampton ON L6Z 4B5
Phone: 416-576-3076
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DIY Smith Manoeuvre, Part 4

December 16, 2007


This is the fourth part in a series on implementing a do-it-yourself Smith Manoeuvre. You may also want to check out Part 1, Part 2 and Part 3 of the series.

Now that you are regularly withdrawing funds from the loan portion of your readvanceable mortgage and investing the proceeds in equities, there is only one step left: taxes. You should keep track of the interest paid on the investment loan, calculate the total interest expenses for the financial year and report it in Schedule 4 and Line 221 of your T1 General.

When your tax return is processed and a refund is issued, you should use the refund to pay down your mortgage and take out a loan and invest it to get the full benefit of the Smith Manoeuvre.


  • I’ve said this before and I’ll say it again: Check with your accountant before implementing the SM. I’ve personally never borrowed money, invested it in index funds and claimed a tax deduction of the interest expense. So, check with your accountant or tax advisor.
  • Despite the complexity, SM is simply a leveraging strategy. As you may know, leverage cuts both ways. There is no guarantee that even over the very long term, equities will return more than the interest you pay on the loan. That’s the risk of implementing the SM. Don’t believe anyone who tells you otherwise.
  • In the interests of full disclosure, I have no intention of implementing the SM. I simply pay down the mortgage and am happy with guaranteed, risk-free, after-tax return of roughly 5%.
  • An adverse tax ruling is a risk with the SM and even if interest deductions are currently allowed, they may not be in the future. For example, in the 2004 Quebec budget, interest deduction was limited to the amount of interest income in that year.
  • The Smith Manoeuvre Debate

    January 28, 2007


    About one year back, I did a review of The Smith Manoeuvre (SM) book and noted that the book should have talked about the pitfalls involved with the strategy. Many financial planners have left comments disagreeing with my review (though I reviewed the book, not the strategy) and I challenged one planner to show me how a client implementing the SM will come out ahead in the worst-case scenario (this particular planner uses segregated funds, so he tells me the worst case scenario is 0% returns).

    The planner’s client (let’s call him Joe) owns a house appraised at $350K and has a $260K mortgage on it. His monthly mortgage payment is $1,520. To implement the SM, the planner takes out a secured investment loan of $55K and invests the proceeds (less expenses) in segregated funds. To service the investment loan, Joe pays an interest of $275 per month.

    To make an apples-to-apples comparison, I am going to assume that Joe can make an extra payment of $275 towards his mortgage principal. If Joe can find an extra $275 savings for the SM, he can find a similar amount for a mortgage pre-payment.

    After five years, let’s assume that Joe’s home is still worth $350K (the home’s value doesn’t affect the outcome). If he had opted for an accelerated mortgage pay down, he would have a mortgage balance of $211K and he has a net worth of $139K. If Joe had implemented the SM instead, after five years, he would own the $350K home, an investment portfolio of $99K and a loan of $321K, leaving him with a net worth of $128K.

    What about after 10 years? With mortgage pre-payments, Joe’s net worth would be (Home:$350K – Mortgage:$149K) $201K. The SM would leave him with (Home:$350K + Investments: $160K – Loan:$321K) $189K. Even after 15 years, Joe would be better off with a mortgage pre-payment (net worth of $280K) than the SM (net worth of $270K).

    Now, surely over 20 years Joe would have come out ahead, right? Not really. With pre-payment Joe now owns his home free and clear. The SM also results in a mortgage-free home, but Joe now has a portfolio of $346K and an investment loan of $321K and a net worth of $375K. But, the key difference is that Joe hasn’t made a mortgage payment for 17 months, which if he had saved would have added an extra $31K to his net worth.

    The point of this exercise is not to show that the SM doesn’t work but that it entails taking a small risk, not any risk at all as many planners claim. You should also note that this particular SM example involves a higher leverage and would become risky if a severe real estate downturn should occur. Also, while segregated funds may give you peace of mind, it also comes with a higher price tag. If you are earning 8% in the markets and giving up 3% in expenses, you would probably just break even with the SM. I’ll close with a comment made by David Trahair, author of Smoke and Mirrors, in a recent Toronto Star column: “It’s a high-risk strategy because you’re betting the farm that some investment adviser can do better than you can. You have a guaranteed return from getting rid of the mortgage.”