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.”

This article has 265 comments

  1. You didn’t account for the fact that the $275/month interest on the investment loan is tax deductible. Part of the ‘hook’ for the Smith Maneuver is that you can turn your mortgage interest into a tax deduction. So for some one in around the 40% tax bracket that $275/month would mean around a $1320 tax refund which over 5 years still wouldn’t account for the $11,000 difference noted in your example.

    As I have mentioned before, I don’t think that the SM is for everyone and I don’t think the majority of people that learn about the SM really understand what risk they are exposing themselves to if the market doesn’t give positive returns. I think that for the majority of people it makes much more sense to do what you have suggested here; just pay off your mortgage and then make the payments you were making to your mortgage to your investments.

  2. I should have started my last comment with “It doesn’t look like you accounted for the tax advantages of an investment loan.” I can’t really tell from the example if you did account for it…

  3. Well, personally I always prefer to keep things simple. Paying down the mortgage versus SM not only sounds simpler, but it also means waaay less stress and in my books that will always win out. 🙂

  4. the SM sounds similar to the UK Endowment mortgage debacle. Basically, you pay just the interest on the mortgage and also buy life insurance and investments. At the end of the term, supposedly you will have sufficient equity to repay the mortgage *and* also be left with a lump sum to enjoy. That was the plan. Sadly 80% of people in the UK (source: BBC) with endowment mortgages are now facing a shortfall and unable to repay the mortgage at the term end.

    Further reading:-


    Caveat Emptor

  5. Canadian Capitalist

    0xcc: The numbers given to me did account for the tax refund. The tax refund is used to pay down the mortgage and a loan taken out and added to the investment portfolio.

  6. Ok, thanks for the clarification. I was sort of wondering how the investment was growing if this was a ‘worst case’ analysis where the investments were returning 0%.

  7. I must congratulate Mr. CC for the thorough analisis presented above and thanks for taking the trouble.
    My conviction however, is not the least shaken.
    It is virtually impossible that a portfolio should return 0% over 20 years. The analysis also neglected to account for the difference in the compounding of interests; mortgage vs. loan.
    Also, the assumed $275 added to the mortgage payments reduces Joe’s cash flow, while the same amount deployed to the debt service will attract a tax refund.
    And now let’s see item by item CC’s contentions!

    CC: “What about after 10 years? With mortgage pre-payments, Joe’s net worth would be (Home:$350K – Mortgage:$149K) $201K.”

    Sandor: He will indeed have that net worth, but it is dead equity in his house, doing nothing for him.

    CC: “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).”

    Sandor: Surely, if he stopped here the $4,949 yearly tax refund would soon make up for the difference of $10,000 in his net worth. But if he continues the program, the tax refunds will increase about $400 progressively every year, reaching $7,000 in year 21. If he sticks with it, chances are that he never pays taxes again as long as he lives.

    CC: “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.”

    Sandor: So, Joe made a modest profit, $25,000, just for doing the “right” thing. The main difference therefore, is, that the accelerated mortgage payments would bring him to the same place, at the same time, but without the portfolio, without the profit, and without the perpetual tax refunds.

    Then here is an other comment from CC that is worth a bit of an answer.

    CC: “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.”

    Sandor: This is slightly mistaken. Segregated funds usually charge 0.1-0.5% above the MER of the underlying fund. This small difference is well worth the guaranties. However, the gains announced are net of the MER, therefore the above mentioned 8% is net 8%, after the management expenses are already accounted for.
    Finally, if you have a quote to show how : “dangerous” the SM is, let me quoute in return from IE: Money, June/July 2003:

    “Smith tells the tale of how the tax official came around years ago after he first opened shop. Rather than make a case against Smith, the investigator asked if the maneouvre would work for him. “I new I was onto something at that point,” he says.”

    But of course I could quote many other fragments from my lovely collection of related articles. The fact however is that this strategy is devised for everyday circumstances, (as opposed to 0% return for 20 years,) for everyday people. Under those circumstannces it works and it works beautifully.


  8. Canadian Capitalist

    Sandor: We are talking in circles here. You’ve already counted on the tax refund to reduce the mortgage principal. You can’t count it again.

    And the 8% market returns that many experts think is reasonable is before fees, taxes and other expenses. Seg funds, on average, have a MER that is 0.66% higher than regular mutual funds, which themselves have a MER of 2.5%.

    “… but without the portfolio, without the profit, and without the perpetual tax refunds”
    And my key point: without the risk.

    Since we have now established that the SM doesn’t work for 0% returns, tell us how much returns we need to generate just to break even. My guess is it is somewhere around 5% with today’s prime rate.

  9. I think that if you invest properly for the long term, the Smith Manoeuvre will win every time. However, the question is whether the risk is worth the reward. Betting the ranch so to speak..

    My Smith Manoeuvre Article – Part 1

  10. Canadian Capitalist

    FT: I read your posts on SM. Very balanced and you correctly point out the risks.

    I think the key words in your comments are “invest properly” and “long-term”. I am not sure about the “win every time” part. It depends a lot on how the money is invested, whether attention is paid to minimizing costs, taxes and commissions etc. and how long a time period we are talking about.

  11. I think the main question here is who is this “manoeuvre” targeting? It will work for people with the investment savvy and stomach to stick with it through three+ years of low or negative returns. But how many people like that are really out there? I know plenty of people who, despite having an investment timeframe of 10+ years, panicked and sold when the market tanked in 2000. I’ve talked to people whose reaction to a stock going up 25% in one year is to buy.

    I realize segregated funds are designed to limit losses, but does that take the MER into account? Wouldn’t a 0% gain actually equate to a loss of the MER for that year? My investment advisor has always said segregated funds are a waste of time. If you want to manage your risk, keep a percentage of your portfolio in bonds.

    A scheme like this requires a lot more discipline than most people have. As far as get-rich-slow schemes go, this one comes with a lot more risk than the Wealthy Barber approach of investing 10% of your income off the top, or giving up the daily latté.

  12. CC,

    If you’re in for the long term, aka, rest of your life, how can you lose? You’re investing in equities while paying down your mortgage, not paying down your mortgage THEN investing. You have the extra time and compounding on your side. If you invest in strong dividend paying companies who have historically increased their dividends annually, how can you not come out ahead? Wouldn’t investing in these strong companies also reduce the risk involved? Even when markets have tanked in the past, how many banks reduced or eliminated their dividend?


  13. Canadian Capitalist

    FT: It is easy to have conviction in the market when returns are okay or even great. Not so much when there is a bear market.

    It is very hard to see your own capital being lost in the market. How would it be if you lost money that you had borrowed to invest? Would you still have the discipline to keep investing?

    I speak from experience on this issue. You fill out forms and silly questionnaires to figure out your risk tolerance, you can convince yourself all you want that you are in for the really long haul, but guess what? You find out what your risk tolerance is when a bear market hits.

    Luckily for me, I kept investing through the bear market and was amply rewarded for it. But I know plenty of people who stopped investing in equities altogether. They were in it for the long term too.

  14. Sandor: “It is virtually impossible that a portfolio should return 0% over 20 years.”

    True, however according to my quick calculations, one would have to average about
    3.75% in dividends to meet this goal. Other instruments would require a higher return, as they are not so favourably tax advantaged. (I assumed capitalization of interest in my calculation.)

    Sandor: “The analysis also neglected to account for the difference in the compounding of interests; mortgage vs. loan.”

    That may be, however, usually mortgages are available for prime -0.75%, while LOC are at bank prime. In the early years of the mortgage this would make a considerable difference in monthly payments. Also, the semi-annual compounding of a mortgage saves interest costs over holding the same amount at the same interest rate in a loan.

    Sandor: “Also, the assumed $275 added to the mortgage payments reduces Joe’s cash flow, while the same amount deployed to the debt service will attract a tax refund.”

    Actually, the $275 per month added to the mortgage also has tax advantages, especially if applied in the early years of the mortgage. Since this amount is applied to reducing the principal, the savings on the future interest (every year) that is never paid is equal to the interest rate / ABS(1-marginal tax rate). Thus the $3300 per annum at 6% ($198) actually has a value closer to a 10% return, as “Joe” does not have to earn some $331 and pay the tax on it to pay his interest.

    Sandor: “Surely, if he stopped here the $4,949 yearly tax refund would soon make up for the difference of $10,000 in his net worth. But if he continues the program, the tax refunds will increase about $400 progressively every year, reaching $7,000 in year 21. If he sticks with it, chances are that he never pays taxes again as long as he lives.”

    Of course to obtain this $7000 refund, Joe must have earned and paid some $17,370 in interest costs to the bank.

    CC: “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.”

    Sandor: “So, Joe made a modest profit, $25,000, just for doing the “right” thing. The main difference therefore, is, that the accelerated mortgage payments would bring him to the same place, at the same time, but without the portfolio, without the profit, and without the perpetual tax refunds.”

    Joe’s $25,000 profit should be eroded by the $11,498 (net) annual interest costs he pays the bank on his $321,000 loan, or have I missed a step? It strikes me that if I do not need to service the loan, I do not need to generate the income to pay that interest, and earning $17,000 less per year would also lower my taxes.


  15. CC,

    Ah, i see your point. My point is that bear market or not, it doesn’t matter if the dividends keep coming in (and increasing). I agree that people have to analyze their risk profile very carefully before considering ANY sort of leveraging.


  16. My ardor is flagging, but I valiantly march on, addressing this time David’s arguments.

    David: That may be, however, usually mortgages are available for prime -0.75%, while LOC are at bank prime. In the early years of the mortgage this would make a considerable difference in monthly payments. Also, the semi-annual compounding of a mortgage saves interest costs over holding the same amount at the same interest rate in a loan.

    Sandor: a $100,000 conventional mortgage at 5.25% interest will have a cost of the borrowing $79,774, that in a case of 30% tax rate will require $233,706 pre-tax income.
    The same amount of investment loan will cost $150,000 in interest, but will bring about $50,000 in tax saving. However, this tax saving invested for the same 25 years, at 8% average return, will grow to $330,755.99. Now we deduct from this the difference of the two different interest costs; 100000-79774=20226. (The extra cost in order to get the tax refund.) This we deduct from the total investments: 330756-20226=$310,530 This is the benefit of the investment loan over the mortgage under the given circumstances.
    But even if we take the more realistic scenario of investing only the tax refunds, (6000×30%=1800), then the result in 25 years at 8% will be $137,275. He is still better off.

    David: Thus the $3300 per annum at 6% ($198) actually has a value closer to a 10% return, as “Joe” does not have to earn some $331 and pay the tax on it to pay his interest.

    Sandor: Surely, my dear David, you would agree that he will still have to earn the same $331 in order to make the extra $275 payment on the mortgage. The two are a wash.

    David: Of course to obtain this $7000 refund, Joe must have earned and paid some $17,370 in interest costs to the bank.

    Sandor: Herein lyes the rub! No, he doesnt, no matter what his interest costs are, he can carry forward the accumulated tax write-offs indefinitely. So, even if he has long paid the loan back, as long as he has taxes to pay he can always write off the a portion of the accumulated interest payments incurred perhaps several years before.


  17. Canadian Capitalist

    Sandor: We’ll agree to disagree. My point from my first review is that SM will work under most circumstances. I just question whether most people have the discipline to make it work.

  18. Dear CC:

    Since you compressed your opinion in such egreeable manner I no longer feel I disagree with you. In fact I do agree completely.
    The only thing is to add that I, the financial advisor, am supposed to help to practice the discipline necessary.

    I enjoyed our exchange and we shall talk again, I hope.
    See you


  19. This is why I’m scared to implement this when I move into my new home in a couple months. Not even people in the financial industry can agree on it and it just gets too confusing for us simpletons…

  20. Duncan:

    It is too early for you to worry about it.
    This strategy is for people who have free equity in their home. As a newly minted home owner (congratulations, by the way) you probably don’t have it yet.
    You could start it in a small way though, or put every available dollar you have towards reducing your mortgage principal. If you manage to do that for 2-3 years you will acquire the free equity and will be a suitable candidate for the Smith Maneouvre.
    Good luck, and as CC would say, good discipline!


  21. Thanks for your reply(and patience), Sandor.


  22. Please help clarifying this for me. Isn’t SM a tax strategy, not an investment strategy?

    Whether someone has the tolerance for the stock market/businesses is a question that needs to be answered *before* SM even comes into the picture.

    To test SM, you need 2 person which both have a mortgage and investments. Not between a person with mortgage and another with mortgage & investments.

  23. Sander:

    I will have about 200,000 equity in a 500,000 home. So I shouldn’t try the Smith Manouvre then?

  24. Duncan:

    No, I am sorry, I assumed mistakenly, that you are at an early stage (as a firs home buyer normally is,) and it didn’t occur to me that you may be in a better position.
    As you describe your situation, I think you should examine your prospects with a view to the SM, because as it appears, you are an exemplary candidate to do it. So much so, that if other characteristics of your finances permit, (such as your income for example,) you may be able to pay off your house in 4-6 years.
    This however, needs more work.
    Good luck and congrats to the new house.


  25. Our condo is closing on Feb 20 (Yeah! First home!), and I have been looking at SM for the past two weeks, and after some thoughts and number crunching, my husband and I decided against it.

    The decision was mostly emotional — yes, number crunching tells us SM works out better, but not significantly enough to justify the risk and the hassle.

    Mostly the hassle. We don’t have a financial planner and have no plans for one. Implementing SM at our stage pretty much requires a good financial planner and getting a HELOC. Both requires additional research, especially the former.

    Pardon me for being skeptical, but I just finished reading “The Naked Investor”. It doesn’t exactly increase my confidence in financial planners.

    (Side note: Engineers and software people always believe they can do better without the middleman, and we are no different. As I was just telling my accountant friend, “Unless the ROI of using a financial advisor – the fees beats that of investing on our own, I prefer to do it myself.”)

    Our current situation is simple. We have good income, insignificant investment outside RRSP, and no debt. We bought a small place, put 35% down (a portion is through HBP), with about $30k liquid assets left in high interest savings (PC Interest Plus). With our current income, we can pay it off in 5 years if we really really want to, without touching the money going into our maxed out RRSP. (No, we don’t really really want to.)

  26. Hi, CC,

    Very interesting blog, CC. There seems to be a misunderstanding here, however. Your initial example is not really an example of the Smith Manoeuvre – it is an ordinary leverage strategy. The SM requires no cash outlay, so there is no scenario where your mortgage is paid down more quickly without doing the SM.

    The SM is essentially “leverage by dollar cost averaging” – you reborrow the principal from each mortgage payment to invest. If you start by using your freeboard equity or an investment loan ($55,000 in your example), the interest payment is reborrowed from your credit line, not paid from your cash flow.

    Without knowing your interest rate and amortization in your example, with the SM, you would only make your regular mortgage payment, have the investment loan paid from your readvancing credit line, and you should also get about $350/month additional to invest (and increasing each year). Alternatively, if you did the “Rempel Maximum” (maximum leverage that can be financed completely from the SM), you could finance an investment of about $110-125,000 completely from the SM.

    Therefore, the comparison to see the benefit of the SM would be whether a leverage investment of $55,000 plus $350/month (and increasing each year), plus using the tax refunds to pay down the mortgage more quickly would be better than not doing it. Alternatively, would a $110,000 leverage investment (financed completely from the SM), plus using the tax refunds to pay down the mortgage more quickly be better than not doing it.

    Therefore, any comparison of the SM to paying down your mortgage are irrelevant, since the SM uses no cash flow (as you mentioned Silverm). So, the comments by David Trahair in the Star article are not relevant to the SM.

    In answer to your question, CC, the breakeven on leverage strategies based on studies generally is that you need to make 2/3 of the interest rate after 5 years and 1/2 the interest rate after 15 years. If we reborrow at prime (6%), we need to average 4%/year on our investments for 5 years to breakeven and only 3%/year after 15 years to break even. This is because of the different tax treatments and because the investment growth is compounded, while the loan interest is simple interest.

    This assumes there is no tax on the investments. Therefore, if the investments pay out distributions or dividends, the breakeven point will be a bit higher.

    Your “worst case scenario” of 0% for 20 years is unrealistic. The longest period of time the major markets have had a negative return in the last 70 years is 7 years (when you include reinvested dividends). I concur with you again, CC, about not using seg funds because of the higher MER. For the average person, the higher MER is for nothing, since no diversified equity fund would be down over a 10-year period. And even if it did, who would continue to hold it for the entire 10 years?

    Your concern about whether people will be able to stomach a bear market is very valid. The risks of the SM are only related to the investments – and the main risk of investments is the behaviour of the investor. If you sell out or become more conservative as soon as your investments go down, your return will not be there and probably the SM is not for you – unless you are working with a trusted advisor that can keep you invested. In fact, studies show the average investor only makes 1/3 of the return of the investments they own, due to bad investor behaviour and continuously “buying high” and “selling low”. (Dalbar study)

    So you’re right – the SM is only for long term investors.

    This is one of the advantages of the SM (done properly), however, since the regular bi-weekly investments with the dollar cost averaging tend to reduce market concerns – both psychologically and technically (because of the benefits of dollar cost averaging). Just like you mentioned, CC, you keep on investing right through the bear market and you will be okay.

    Also, since the SM is “leverage by dollar cost averaging”, all you actually need to start is 10% equity in your home – although 25% is better because you avoid CMHC fees and because of the better readvanceable mortgage products available.

    Good luck and good discipline (I like that)…


  27. David: “That may be, however, usually mortgages are available for prime -0.75%, while LOC are at bank prime. ”

    According to Bank of Canada’s figures, prime rate is usually lower than 5-year mortgage rate. This is the average interest rate I get from Bank of Canada’s website (http://www.bankofcanada.ca/en/rates/sel_hist.html):

    1992-2006: Prime was averaging 4.63%, 5-year mortgage was averaging 6.46%
    1997-2006: Prime was averaging 5.81%, 5-year mortgage was averaging 6.96%
    1987-2006: Prime was averaging 7.34%, 5-year mortgage was averaging 8.69%
    1977-2006: Prime was averaging 9.06%, 5-year mortgage was averaging 10.27%

    I believe what you say might be right for those who shops around and have very good credit rating, they can usually get mortgage rate way better than what Bank of Canada tallied.


  28. Canadian Capitalist

    Ed: Thank you for your comment. I should point out the SM example isn’t mine but was provided by a financial planner.

    I’ll concur with you that a 0% return over 10 years with regular investments is unlikely and the SM might make sense for a disciplined investor.

    ezboy: David is not comparing prime with 5-year mortgages. He is pointing out that you can borrow below prime for a mortgage but investment loans are at prime.

  29. CC,

    Thanks for you comment. I thought it was your example. The SM has a few implementation details to do successfully and requires getting the right mortgage. The benefits on it are huge over the long run, though, so I think it is worth the effort (plus we’ve done hundreds, so we have it down to a fine art).

    There are a relatively small number of SM advisors (many on Fraser’s site will try to talk you out of it if you call them) and we all know each other. So, I have seen a few shortcuts being marketed, such as simple leverage – and calling it SM, even though there is no regular readvancing from the mortgage payments.

    I’ve also seen several versions involving leveraging into an income fund that pays a high regular distribution. One even has a 12% payout that is almost completely return of capital(that I highly doubt is sustainable, since it is really only an average balanced fund). The problem with taking the distribution, is that if it is return of capital and you don’t pay it down on the investment loan, then the investment loan becomes non-deductible. For example, with the fund with the 12% distribution, the investment loan becomes completely non-deductible after 8 years.

    I guess a straight leverage strategy or leverage financed by a distribution are just much easier to sell and set up. However, the SM is clearly worth the extra effort to set up vs. simple leverage, because the automatic regular investment provides a huge benefit over time.


  30. CC: “David is not comparing prime with 5-year mortgages. He is pointing out that you can borrow below prime for a mortgage but investment loans are at prime.”

    David: “That may be, however, usually mortgages are available for prime -0.75%, while LOC are at bank prime. In the early years of the mortgage this would make a considerable difference in monthly payments. Also, the semi-annual compounding of a mortgage saves interest costs over holding the same amount at the same interest rate in a loan.”


    Am I missing something? David stated that the interest rate for a mortgage is usually lower than LOC which is at prime. As a result, the cost of borrowing through a mortgage is lower than the investment loan. Isn’t that conclusion base on a comparison between mortgage rate and prime rate?

    As I pointed out with the historical figures tallied by the Bank Of Canada, the average mortgage rate is usually higher than the prime rate. So, the cost of borrowing from mortgage is quite likely to be higher than LOC even before tax consideration for a lot of people.

    Again, I am not totally discounting David’s statement because a good number of people can get a below prime mortgage if he/she has good credit rating and take the time to shop around.

  31. Canadian Capitalist

    ez: The figures you quote show compare 5-year fixed rate mortgages with prime. So, yes if you take a fixed rate mortgage and an investment loan at prime, you are right.

    But, if you take a variable rate mortgage, the interest rate will be better than the investment loan before taking into account tax benefits. That is what David is comparing.

  32. Thanks for filling in during my absence CC! My comments echo yours. ezboy, I believe that anyone who would consider (or be considered for) the SM would have a good credit rating, and would be financially savvy enough to have determined that a short-term, or variable-rate, or virtual-bank mortgage would net them the most cost efficient mortgage. I would also expect that they would have shortened their amortization period from 25 to 21 years simply by adopting an “accelerated bi-weekly” payment option, and would be considering further reductions of their principal through additional privilige payments.


  33. If I interpret Ed Rempel’s comments correctly, you have to be sure that you choose the right Investment Advisor, or you won’t see benefit from applying the strategies espoused by Fraser Smith. He further states that even some of the Advisors listed on the Smith Manoeuvre website will either discourage potential applicants, or provide poor investment options.

    Since Fraser Smith repeatedly states in his book words to the effect of “if you don’t understand the manoeuvre, just see your financial advisor, and he’ll (or she’ll)make it work”, I can understand many folks trepidation.

    I want to know where my money is going, and need to understand the mechanics of any investment. I’ve been cautious about such things ever since we bought a “no down-payment, no interest for 12 months” freezer that had a financing fee greater than the interest payment for 12 months would have been. BTW, that transaction is still reflected in my Credit Bureau report some 16 years later.

    I admit to having a poor understanding of all the ramifications of tax law, but when someone smiles and says “trust me”, common sense tells me to run, not walk in the other direction.


  34. I welcome Ed Rempel to this discussion with regard to the fact that I gethered some of my selfconfidence with the help of his articles about the Smith Maneouvre.


  35. CC: “But, if you take a variable rate mortgage, the interest rate will be better than the investment loan before taking into account tax benefits. That is what David is comparing.”


    Thanks for the clarification. Now I understand he was comparing an Adjustable Rate Mortgage with the investment loan, not mortgage rate in general.

  36. David: “I would also expect that they would have shortened their amortization period from 25 to 21 years simply by adopting an “accelerated bi-weekly” payment option,…”


    Yes, bi-weekly payment plan definitely shortens the amortization period. The plan speed up the mortgage payoff significantly because it increases the total yearly payment by about 8.7%, not so much by changing the time interval between payment. This is one of the biggest illusion in the mortgage industry. Many mortgage brokers never mention the fact the the home owner has to make more yearly payment to shorten mortization period. Anyhow, this illusion helps the mortgage payer.

    Like the bi-weekly payment, the Smith Manoeuvre is somewhat another illusion. In contrary to Fraser Smith’s presentation, the manoeuvre does not reduce the interest cost of the mortgage. But, it definitely helps the payer to get a very cost efficient investment loan which is often overlooked by many home owners.

    David, you are right, for the investment part, you need a good investment advisor to make the investment successful. Since the Smith Manoeuvre makes the investment fund available periodically, this makes it a perfect fit for one of the best investment strategy — the dollar cost averaging strategy.

    This strategy eliminates the trouble and risk of market timing. As long as the investment appreciate in value faster than the cost of the investment fund (in this case, the long term after tax interest rate of your HELOC) in the long run, you will definitely win. The up and down of the market price of the investment won’t hurt your investment.

    As you pointed out, one has to understand the mechanics of his/her investment before jumping in. This is particularly important in market slump. Most investors lose money only because they sell low in a crashing market, not because they buy high in a booming market.

    If an investor truely understand how well dollar cost averaging works with his/her investment vehicle, the Smith Manoeuvre will give them the mechanism to get the investment fund available. Thanks to Fraser Smith.


  37. ezboy said: “The plan speed up the mortgage payoff significantly because it increases the total yearly payment by about 8.7%, not so much by changing the time interval between payment. This is one of the biggest illusion in the mortgage industry. Many mortgage brokers never mention the fact the the home owner has to make more yearly payment to shorten mortization period. Anyhow, this illusion helps the mortgage payer.”

    Yes, and while some mortgage retailers don’t explain the mechanics of the process, for most mortgagees, it is a painless means to an end.

    Now if I could wrap my head around the SM as easily….


  38. David, send me your email address and I shall send you a sample case. That will immediately help you to understand the SM.


  39. David,

    The SM is really not that comlicated. You just reborrow the principal from each mortgage payment in a credit line linked to the mortgage to invest. Then you have the credit line pay its own interest. Those are the basics. What part do you find hard to understand?

    I realize that implementation is not that simple. It requires getting the right mortgage product, following the tax rules, investing effectively, and figuring out which variations or enhancements are appropriate for you. The main thing is to be comfortable with the concept of borrowing to invest in general and investing so that you are confident in the investments.

    You’re right about the bi-weekly payments. Banks and mortgage brokers tend to tell you that you are paying it off faster, but that is almost entirely because you effectively make 13 monthly payments, instead of 12.

    In actual fact, the most efficient mortgage payment is also the simplest – match it up to your paycheques. If you are paid monthly, then monthly mortgage payments will save you money over bi-weekly. This is because you get paid, then leave money sitting in your chequing account until the mortgage payments are made.

    Banks and mortgage brokers will tell you paying more often is more efficient, but they are only looking at the mortgage, not at the money sitting in your chequing account doing nothing until the mortgage payment. When you take that into account, matching your mortgage payment to your paycheques will always be the most effective – and the simplest.


  40. EZ,

    Your comments on the investment strategy are right on. Great comments, EZ.


  41. We just paid off our mortgage and have maximized our RRSP contributions. The issue we face now is that we have virtually no savings outside our RRSP. The SM isn’t 100% applicable to us, any suggestions on strategies to set up an investment loan once the mortgage has been paid off?

  42. Don,

    I would cautiously mention the possibility of reborrowing some of the paid-down mortgage.
    Without some important details it wouldn’t be responsible to suggest any amount, or percentage however, if you leverage a minority of your equity and place it into a conservative, long term investment you will almost certainly gain.
    You probably know that the leveraging does magnify the effect of investment fluctuations. But there are loan products that contractually exclude the danger of margine calls, (that is, if your collateral looses value you don’t have to rebalance the loan with the collateral,) and the resulting tax advantage is also helpful to improve your prospects.
    The other thing you may consider is either redirect your RRSP contributions to a nonregistered investment based on the above, tax-efficient portfolio, or a so-called RRSP melt down.
    This latter strategy assumes that you establish a portfolio with borrowed money (the portfolio is the collateral,) and the cost of borrowing will be paid by your former RRSP contributions. (Redirected from the RRSP, of course.)
    This method however, is more suitable to people of higher income, who can afford to take the higher risk and at the same time can benefit from the tax reductions.
    There are suitable bank products for this purpose that also refrain from margine calls.

  43. Hi, Don,


    Having everything in RRSP is an issue when you come to retire, though. Some of our retired clients have that issue. Larger expenses become an issue. They would have to withdraw $50,000 to be able to buy a $30,000 car.

    One of the big benefits of the SM is that you build up a large non-RRSP portfolio. If you have both a large RRSP and non-RRSP portfolio when you retire, then you can easily plan your tax effectively.

    In your situation, you can basically jump to the finish line of the SM. Just borrow 75% of the value of your home to invest. Or leverage enough so that the interest payment is the same as your mortgage was.

    Now that your mortgage payments are done, you can use that same cash flow for leverage payments. This is just simple leverage, but if you invest effectively, you’ll find that leverage grows your net worth much faster than RRSP’s or paying down your mortgage.


  44. Hi, David,

    Your story of the Whites is interesting, but essentially shows the “Sacred Cow” – the way Canadians normally do it. A fair comparison is not the Blacks to the Whites, but the Whites to the Whites with the SM. I put your numbers into the SM Calculator and the benefit over the first 7 years until the mortgage is paid off is $43,428. The investments are up to $193,428 from $150,000 borrowed over 7 years.

    From that point, the $193,428 would grow to $977,676 over the next 17 years at 10%. The interest cost over the 17 years would be $102,000 (your example assumes prime is 4%) and the tax refunds would be $31,620. The net benefit of adding the SM to the Whites plan over 26years would be $757,296. Of course, the expected benefit will be far higher when you include the benefit during 25 years of retirement.

    You may be right that they might have enough for retirement without the SM. You did not mention their retirement goal, but if it would be the equivalent of 75% of their present income, then they would need $1.5 million at age 65 (assuming they both get maximum OAS and CPP and that they continue to be fully indexed). Since they would only have $1,150,000, they would be somewhat short.

    So, but why not get an extra $757,296 from doing the SM, since it requires no extra cash flow?


  45. Ed’s comments above refer to my comments in the Book Review post: http://www.canadiancapitalist.com/2006/04/03/book-review-the-smith-manoeuvre

    I believe that if the Whites treat their portfolio in the same fashion as a RRIF (i.e. consume it to zero in their lifetimes) they would only need $725,000 in the portfolio to maintian their income at 75% of their current income until age 100.

    I came into the world without a dollar in my pocket. I’d like to leave having paid the undertaker with my last dollar.


  46. Hi, David,

    I did assume the last dollar is used. Inflation is what makes the big difference. If the Whites would want to retire on $75,000 in today’s dollars, they would need $139,522 in 21 years (3% inflation). This number keeps climbing to over $450,000/year at age 100 (same as $75,000 today).

    I assumed an extremely generous $53,000 from CPP & OAS. They still need almost $1.5 million to maintain their lifestyle to age 100.

    Inflation of only 3% means the cost of living is more than 6 times higher during their life.

    A lot of people do a quick calculation of what they would need to retire comfortably, but forget about 60 years of inflation.


  47. hi guys,
    just finished reading all posts and still confused
    Here is my story.
    We still have about $300,000 mortgage on our house and
    about $300,000 mortgage on rental property that is worth now about $ 600,000 and bringing us rental income of $2,800/mo.
    Should I sell my rental property, pay off mortgage on my house and borrow another $600,000 to by another rental property or to invest?
    Or should I use SM?
    Will appreciate any suggestions.
    Thank you.

  48. Hello,

    I have read all of the preceeding comments as per the SM. There appears to be a great wealth of knowledge within this forum and I was hoping to seek any advice w.r.t my situation.
    We are planning to build a house (closing October) value $450000. Our current residence has an equity of $80000, and our rental property has $110000 equity. We wish to sell both homes so we can put at least $150000 down(after paying off all other debts) leaving us with a $300000 mortgage. It appears that the SM may be an option to us? Any thoughts, or advice would be greatly apprecaited.


  49. Bill,

    Selling and re-buying a rental property will be quite costly. In your situation, you can do 2 things.

    First, you can do 2 SM’s and top them up to 75%. This will double the SM benefit and give you larger tax deductions now to pay down on your home mortgage. While your rental mortgage is deductible against rent, you still create dead equity unused in the rental property that the SM can use.

    We have a client with 5 rental properties that finally realized they would need at least 20 rental properties to be able to support their desired retirement lifestyle. Now they are doing 7 SM’s – home, 5 rentals and a cottage. The results of 7 SM’s can be amazing!

    Second, you can use the “Cash Dam” to make your home mortgage tax deductible more quickly. It is in the SM book. You probably have $20-25,000/year of rental expenses. With the Cash Dam, you can convert $20-25,000 of your home mortgage to tax deductible, in addition to the SM.

    You can pay your gross rent directly onto your home mortgage, and then pay all your rental expenses from a separate credit line. You need a readvanceable mortgage with muliple credit lines for your home mortgage, since the interest for the Cash Dam and SM are claimed on different lines on your tax return.


  50. Hi, Tim,

    Your idea is sound, but what are you really asking? Of course the SM is a good option for you, whether or not you build and whether or not you sell the rental.

    Selling both will give you at least 25% down, which will allow you to both avoid CMHC and give you access to the best SM mortgages.

    Your other option is to keep the rental and put less down on your home. This will of course cost you CMHC fees and limit your SM mortgage options, but would allow you to do 2 SM’s and the Cash Dam.

    The other disadvantage of keeping the rental is that you can limit your borrowing potential for higher leverage in various SM enhancement strategies, which can give you much higher growth than the rental can (without the PITA factor).

    Your idea is probably the best strategy, but I’d have to know all the details of your situation to say for sure.

    Is this what you are really asking, Tim? Or are you doubting the benefits of the SM?


  51. I am 2 years into a 5 year mortgage, so a special “SM friendly” mortgage is not in the cards. But my take on this so far (please correct me where I’m wrong) is that the SM-ness seems to be just a layer of discipline around a continuous re-leveraging strategy. If so, I should be able to reap most of the benefits of a SM by taking the money I had earmarked for an RRSP contribution this year and instead paying down the mortgage and establishing a HELOC for investment purposes. The readvanceble mortgage appears to be merely a convenient way to continuously extend my credit as the equity in my home grows. Could I not accomplish the same thing by nagging my bank every month and asking them to extend my HELOC manually? And even given that I would never go to that troublet, it seems the readvancing bit is similar to the bi-weekly mortgage payment in that its effect is simply because you are leveraging more. Looking at it another way, given the same investment vehicle and the same cost of borrowing, the readvancing bit can never make the difference between making money and losing money – it will just be more of either.

    Looking forward to being straightened out on this stuff.


  52. Ed Macdonald,
    Some banks will allow you to switch to a suitable product with minimal charges and NO penalties. If I understand correctly, the readvancable mortgage forces you to participate in dollar cost averaging, helping to level the ups & downs in the market.

    You might wish to discuss this further on the Red Flag Deals site, which seems to be more of a Q&A space. Ed Rempel mentioned it in the CC Smith Manoeuvre Book review entry on this blog.



  53. Hi all,

    I am currently considering TSM on my current mortage (in which I have 50% equity) and so this blog has been extremely useful. However, I would like more information on how effective TSM is if you use the mortgage principal re-advancement to invest in rental property rather than a portfolio. I am considering purchasing a rental property and wonder if it would be better to use TSM on my existing home mortgage to put the 50% equity towards the purchase of the rental property (and thus tax deductible interest) or carry out TSM in the normal way to get tax deductible financing for an investment portfolio and then just take out a separate mortgage for the rental property (which will have tax deductible interest anyway). Also, is the interest on a rental mortgage immediately tax deductible from the date of purchasing the property or only from the date you start renting out the property?

    The cost of the current and rental properties are around $300k each.

    Many thanks,


  54. Hi KEH!

    It would not be really any use to say anything about your options unless there are some numbers to support the suggestion. Nobody can responsibly say which would be better whithout the numbers. In fact, you should not even consider anything that is not based on sound calculations. So, why don’t you just calculate the whole thing and make your decision based on that?
    If you have doubts, I will be happy to help.
    Send me a private email and we can discuss it.


  55. Hi all,

    I just read the book over the weekend and the SM with a Cash Dam seems like it could be a real good fit for me. My wife and I are looking at buying our first home later this year and we were thinking about getting a house with a basement appartment to help with the mortgage payments.
    Can you apply the Cash Dam to a basement rental?
    Does having a basement rental mean you will need to pay capital gains when you sell the house later?

    For example, we would be looking at a mortgage of around $2500/ month and could probably get $1100/ month for the basement.

    Thanks for the comments.

  56. Hi, Colin,

    No reason that Cash Dam won’t work on your basement rental (although it will take some record-keeping, since your expenses are mainly a portion of personal expenses).

    Also, you won’t have to pay capital gains later as long as the portion being rented is a smaller portion of the total and as long as your never claim any depreciation (on the building or improvements).


  57. Hi Ed.

    I will refinance 75% of our house under my wife’s name only and she has no income. Will she get the tax refund using SM?

    Can I add my name to the mortgage later after I clear my debt?


  58. I’ve read a little about the Cash Dam method but it seems a bit shady for me. I’d like to know if anyone has been doing this and how they go about preparing their tax forms using this method. It seems to me the CRA would have a problem with this ‘manoeuvre’. I’d like to know if anyone has been questioned on this.

  59. Hi Colin,I try to explain you.
    You have in your monthly payment principal roughly $700 which you send to Mutual Fund.That will give You (if you’ll add tax refund every year) about $890,000.00 through Smith manouvre calculator.If You add your $1100 every month You’ll have about $2,750,000.00 in your investment portofolio in 25 years.
    Best regards,try.

  60. Hi, Paul,

    Even though the house and therefore the mortgage are only in your wife’s name, you can still borrow to invest and claim the interest deduction. Legal ownership and tax ownership can be different. If you borrow and invest from a credit line in your wife’s name, the interest deduction (and any tax on investment gains) is yours.


  61. Hi, Telly,

    The Cash Dam is specifically allowed by CRA in an IT Bulletin, but is often misunderstood. It is NOT an investment strategy. Therefore, the benefits are only tax savings, which means the projected benefits are a lot less than with the Smith Manoeuvre.

    Here is how the Cash Dam works. You have a non-incorporated business or rental property. You use a separate credit line against your home to borrow all the money to pay all the expenses for your business or rental property. Meanwhile, you take the gross income or rent and pay it all down on your mortgage. By doing this, you pay enough principal down on your mortgage so that you can readvance enough in the credit line to pay all the expenses.

    For example, say you are collecting $1,000/month rent on a property and paying $1,000/month in rental expenses. Usually, you use the rent to pay the expenses, but you don’t have to. You can borrow to pay the expenses and that interest will be tax deductible.

    So, you take the $1,000/month rent and pay it down on your mortgage. You then gain $1,000 credit in a credit line that you use to pay the expenses. In doing this, you have converted $1,000 of your mortgage to tax deductible each month. Note this is deductible against the rent, so if you sell the rental property (or close down your business) some day, then that loan is no longer deductible.

    So you see, no investments are involved. It is a simple debt conversion.

    You should use a 2nd credit line for this if you are also doing the Smith Manoeuvre, since the SM interest and the Cash Dam interest are claimed on different lines on your tax return. The Cash Dam does take a bit of work to do properly.

    Remember that the benefits of the Smith Manoeuvre are much greater than the Cash Dam, since they include investment growth and leverage benefits, not just tax benefits. So, if it ever becomes an either/or, go with the SM.

    The really cool thing when you have a rental property is to do 2 Smith Manoeuvres (home and rental) plus the Cash Dam. It’s amazing how quickly your mortgage becomes tax deductible. And 2 SM’s can grow your investments quickly. Our record here is 7 Smith Manoeuvres and 5 Cash Dams with one client! The setup and maintenance of this is quite a bit of work, though.


  62. So in the case where “Joe” has a portfolio of $346K and an investment loan (HELOC) of $321K and Joe decides to sell is portfolio to pay off his HELOC what is Joe’s tax situtation then?

    Also, how does Capital Gains figure into the equation versus regular income tax?


  63. After investigating this method, I came to this conclusion (I know that the complete calculations are more intrincated than this, but I think this is a very good starting point):

    This is a nice system for you, if:

    The interest paid for your loan minus your tax income % should be less than your ROI.

    For example if the HELOC interest rate is 6% and you are being taxed at 30%, then:

    The break-even is 4.2%

    Based on that example if you are confident that you can achieve 4.2% in the long run (assuming your HELOC rate will remain the same) then this method would be beneficial for you. Am I missing anything?

    Personally, I think that the potencial earnings do not compensate at all the risk incurred.

  64. Canadian Capitalist

    Wayne: In this example, there is no capital gains tax because there are no gains to tax. We’ve assumed 0% gains.

    Alex: The break-even calculation is a bit more complicated because you have to pay tax on any capital gains and dividends generated by your portfolio.

  65. Hi Ed
    Thanks for your informative views on
    the Smith Manoeuvre,and leveraging.
    We have a small mortage on our home
    which will be payed off in a couple
    years,would the SM still be useful
    for us.
    We were also shown a strategy in which
    we would borrow up to 75 percent of
    our home equity example 100,000 from
    BANK A and then BANK B would double
    this amount so now we could invest
    300,000 in a income fund which was
    paying 12 percent return of capital.
    We would take those return of capital
    payments an reinvest those back in the
    fund,the bank would now lend you
    double those amounts again,also
    because this is borrowed money to
    invest,we can use the interest amount
    as a tax deduction,he also called this
    The Smith Manoeuvre,is this true an do
    you think this stategy would be wise.
    Thanks D.K.

  66. Canadian Capitalist

    DK: In my opinion, you should avoid the financial planner who showed this strategy to you like the plague. Think for a moment what he is suggesting: you leverage your equity three to one and invest in some rinky-dink income trust. If the trust falls 33%, your equity would be wiped out. That’s not even the worst case scenario! What is the fund falls 50% or 75%? Are you willing to bet your house on it? I hope not.

  67. Thanks CC
    For your advice.We have since spoken
    to our regular financial advisor
    an he has also advised us to walk
    away from this so called tax stategy.
    He told us if we wanted to use some
    of our equity we could borrow from
    our bank at prime,use the fund that
    we invest this money in as our security
    which pays out on a tax preferred
    basis percentage of 5%,so for example
    on 150,000 the return of capitial
    would be 7500.00 the cost of the loan
    would be 12,819 of which 8,556 would
    be interest payed at 6%prime,which is
    tax deductible.So take the return of
    capital of 7500.00 plus the tax refund
    of 3250.00 an pay these on the loan,
    thus leaving us with a after tax
    payment per month of 172.00 leave it
    invested in the fund for the long term.
    CC or Ed does this sound like a good
    investment stategy.D.K.

  68. CC, you were right, I failed to calculate the tax on capital gains and dividends.
    So as a result, wouldn’t the break even be equal to the loan interest rate?
    If this is true, then your investment rate would have to outperform your loan interest rate throughout the years…wow…

  69. Hi D.K.

    Interesting questions. First a couple of questions:

    1. Do you have a readvanceable mortgage?
    2. Is your day to day cash flow okay (sounds like it is)?
    3. What do you plan to do with the amounts you are paying for your mortgage payments once your mortgage is paid off?

    Why not do the Smith Manoeuvre, instead of just leveraging into a ROC fund in either of these options mentioned to you? Your mortgage is small, so you are likely paying down a lot of principal with each payment. If you use this principal payment and readvance them in a readvanceable credit line, you should be able to cover the interest cost on quite a large leverage. Likely, you can cover borrow up to 75% of your home value in the secured credit line with a readvanceable mortgage, plus more from an investment loan and make all the payments by readvancing your principal payment.

    The maximum you can get from this is what we call the “Rempel Maximum”, in which you would leverage the maximum amount that can be paid entirely by readvancing your mortgage principal payment.

    The main problem with these strategies (mainly the first one you mentioned), is that the focus is on the distribution of the fund, instead of the return and risk of the fund. I’ve seen quite a lot of advisors selling this version, which includes a fund from Stone or IA Clarington that I think are crappy funds being sold only because they pay a stupidly high distribution that they can’t possibly maintain.

    The funny thing is that the distribution is often presented as if it is the return of the fund. Note in the fist example you gave, the fund pays a 12% distribution that is reinvested in the fund (this does absolutely nothing) and then then the amount of the distribution is used as collateral to borrow more. At 12% of $300,000, you take $36,000 out of the fund and then put it right back in. If the fund didn’t go up, then your investment is still only worth $300,000. The only thing that matters is the growth of the fund – the distribution is irrelevant. I get a real kick out of these presentations.

    Remember, we need to make a decent return on the investments over time, so you should reject any strategy where the main reason for choosing the investment is because it pays out a high distribution.

    There is a tax risk with ROC funds, since the amount of the investment loan that is deductible is reduced by every dollar of distribution received that is considered ROC – unless all of the distribution is paid on the loan.

    There are some details involved in setting up the Smith Manoeuvre, and I find most advisors don’t want to go to the effort of figuring it out, so they take this shortcut and just do a loan into a fund with a distribution that pays the loan.

    We have set up more than 200 Smith Manoeuvres and we find there are only 2 scenarios where you may want to consider a ROC fund:

    1. You are retired and living off the income from the investment now.
    2. You want to leverage more highly than the SM can do, even with the Rempel Maximum.

    For example, if your mortgage payment pays down $500/month of principal, you can use this to pay the interest on $100,000 (which would be the Rempel Maximum). If for some reason you want to leverage more highly, then you may want to consider a ROC fund.

    If your situation is anything other than these 2 options (which it sounds like it is), then you are better off with the Smith Manoeuvre and choosing investments that are both exceptional based on risk/return and tax-efficient.

    In your situation, D.K., without knowing the numbers, the Smith Manoeuvre or Rempel Maximum should work very well, since you are probably paying a lot of prinicipal with each payment. Once your mortgage is gone in a few years, you can use the same cash flow to pay the investment loan interest, which will be less than your current mortgage and fully deductible. If you invest effectively, tax-efficiently and for the long term, this will build serious wealth for you.


  70. Hi Alex,

    There are 2 other factors you are missing in your break even analysis:

    1. The different tax treatments – the interest deduction is fully tax deductible each year, while the capital gains are only taxed at 50% and this can be deferred by decades if you have a very tax-efficient investment.

    2. Compounding – If you graph the interest, it is a flat line, since it is the same amount every year. However, the investment growth is compounding.

    When you take all the factors into account, based on a study by Talbot Stevens, the breakeven point after tax is at 2/3 of the loan interest rate after 5 years and 1/2 the interest rate after 15 years. For example, if you borrow at 6%, you need to average 4%/year to break even after 5 years or 3% after 15 years to break even.

    This assumes you have a 100% tax-efficient investment, of which there are quite a few good choices. If you pay any tax on distributions or transactions over the years, you would need a somewhat higher return to cover the extra tax.


  71. can anyone explain how the investment return or dividend completely pays the interest on loan,also how much interest the borrower has to pay,is it below prime or prime,I heard that they are giving prime minus o.8% with out any margin call.If anyone knows the good mutual funds which pay good dividend with out the return of capital,please suggest.Many thanks for the people contributed immensely and the wealth of their knowledge,

  72. Thanks Ed for all your insight into
    all my questions on leveraging,Ed is
    there a list of advisors in different
    provinces who can set-up the S.M.
    Thanks D.K.

  73. D.K. asks: “Ed is there a list of advisors in different provinces who can set-up the S.M.”

    Have a look at http://www.smithman.net. There is a list there, and a link to another list at http://www.smfc.com as well. As always, choose well referenced advisors.


  74. Hi D.K.,

    There is a long list of “advisors” on the smithman site, but you need to be careful. Fraser does not screen the list in any way. Here are a few things to be careful of:

    1. Many are not advisors, but mortgage brokers or real estate agents looking for leads. A mortgage broker may be able to get the mortgage for you (although the best SM mortgages are not available to them), but you need a financial advisor to set up the implementation and the best investments.

    2. Quite a few of our clients told us they contacted someone else from the site that tried to talk them out of it or didn’t seem to know exactly how to implement it. Many of done little or no implementations.

    3. There are also a bunch of advisors recommending ordinary leverage with an investment loan and calling it the SM. The SM involves automatic bi-weekly investmenting from a line of credit linked to the mortgage.

    4. There are also a bunch recommending to have the mutual fund pay out distributions that are paid down on the mortgage. This is what I call the “Reverse Smith Manoeuvre” since it is a process of converting a tax deductible investment loan into a non-deductible loan. There is a tax issue, in that if you take a distribution from the fund and don’t pay 100% of it down on the loan, then part of the loan interest becomes non-deductible. Virtually none of these advisors will do your tax returns and put their name on it, but they still recommend this usually without advising their clients of the tax issue. Ask any advisor to do your tax returns for you. If an advisor is also an accountant, that is a big plus.

    5. Unfortunately for our industry, most of the “financial advisors” are really just mutual fund salespeople or insurance salespeople. We’ve found the SM is best implemented as part of a comprehensive financial plan. When you buy mutual funds from anywhere, you have already paid the full cost of comprehensive financial planning, whether or not you receive it. Insist on the full service and look for a CFP.


  75. Hi there — I have only recently came across the SM, and have been reading about it and the ensuing debate over the last few weeks. Unfortunately, I am running out of time for research, as just last night I put down an offer for my first house (which was counter-offered this morning, and now I’m waiting nervously…) And unfortunately the mortgage specialist at my bank has only been on the job for 3 months and is not aware of SM.

    I have been trying unsuccessfully to find a scenario which reflects my current situation, and would appreciate some advice on whether the complexity of implementing the SM is worthwhile in my case.

    I currently have maxed-out RRSPs at 40K, another 30K total in CDN and USD savings accounts and GICs, and no debt. I have been pre-approved for a mortgage of 101K (@5.04%) with 28K down on the 129K property. I am graduating this year with my undergraduate degree and will be continuing with graduate work for the next 2 years. My current savings have come from previous employment, but while at school my income is only ~36K (though I earned 60K while employed full-time), and while I am good at saving money, I am also a novice investor. I expect rental of some rooms of my house to other students will bring in $900 monthly.

    I have read that SM applies primarily to people with a higher income and established equity, so I am unsure if SM would benefit me at this time or if I should wait till I am again employed full-time. If the latter case, what is the best way to approach the mortgage to ensure I can convert to SM in the future.

    Any timely advice is appreciated.

  76. 2007Graduate:
    At the moment, your mortgage is going to be insured (CMHC or other), and most lenders want you to have 75% equity in your home, before offering a secured HELOC. My suggestion is that you take a short term on your mortgage of a year, to build the equity. Within a year, the combination of decreasing principal and increasing home value should put you in position to apply the SM. In the interim, stick to your current plan of maximizing your mortgage payout, possibly by adding some or all of the income from room rentals to your payment. Just don’t forget to allow for lulls in the rental demand during summer, etc.

    The SM will best be applied once you are full-time in the labour force — you will have a number of deductions while you are a student, that will replace the SM. You can apply the SM at this later date without difficulty, as long as you have a suitable mortgage product at the time.

    While waiting, find a suitable banking product, read the book, and select a financial planner, so that you are ready to implement the SM when you are finished your degree.


  77. 2007Graduate:

    Also, have a look at http://www.milliondollarjourney.com for other discussion on this topic.


  78. If anyone contributing to this SM discussion ,wants to get the benefit of SM and if you can pay the interest for the borrowing amount,you can do it with a lumpsum amount.You can borrow from $10000 to $250000.The only problem is that the interest rate is prime plus1.25%.you can invest in segregated funds with an average return of 10%plus since 1998.The MER is between 2.5 to 3.75. The return of the growth is calulated after substracting the MER.75 % of the principal is guarenteed at maturity.You can also withdraw 10% without any penality in every year from the segregated funds.You can also do SM through Manuone.If you can put 10% with CMHC insurance,either borrow a lumpsum from the subaccount, if you have the equity,or can use dollar cost averaging.In this case you pay only prime rate for the mortgage aswell as for the subaccount just like a credit line.The beauty of the mauone is that you can pay of the mortgage at any time if you have the money.Any money goes into your account will reduce your principal amount,and you pay only the simple interest at prime for the remaining principal.With a good decipline and by putting the tax returnfrom the investment in to the principal will reduce the principal subsatntially.If you don’t have the decipline don’t even think of this idea.I am an insurance agent,recently I read this SM program while surfing the net,I made my own research and doing it for my clients.I believe now 20% downpayment can get a mortgage without cmhc insurance.Fora long term investment plan,Manuone with a combination of Segregated fund investment I believe is the best way to pay off the mortgage quickly and investment for the retirement.

  79. Canadian Capitalist

    joy: It’s hard to invest successfully while paying MER of 2.5% to 3.75%. Many experts think future equity returns will be in the 6%-8% range. Again, 75% principal protection after 10 years is a very poor deal for your money. If I were to do a SM, I would invest in a very low-cost equity fund.

  80. Hello CC and Joy!

    I spent the evening listening to Fraser Smith tonight, as he gave a seminar to advisors and their clients.
    I must say, the concept is still as good as ever.
    CC, you are an incorrigible skeptic and I shall not even attempt to persuade you. Joy however, is exactly correct and I can only congratulate you Joy for your summary.
    The problem with you CC is that you are so hung up on the investment side of the matter, that you can’t see the forest for the trees.
    I assure you, that the investment doesn’t matter at all, because you can invest the proceeds in anything you like, including your own business. But no matter how low MER you may have, the risk in equity is still there. The best port folio is a diversified port folio, MER be damned.
    As to what the experts think of future returns that is also immaterial, partly, because those experts had been wrong before and partly because we already calculate the SM at an 8% projected return and it still works beautifully.
    Just as your expert go out on any limb, so will I risk the prediction that in 5-6 years the SM will be just as ordinary method to finance a house as a conventional mortgage is today.
    See you

    Sandor, falconaire@sympatico.ca

  81. Canadian Capitalist

    Sandor: It is easy for you to say “MER be damned”. Returns are uncertain but costs are. Every basis point that investors pay in fees comes out of their pocket. Here’s my prediction for your clients who are using seg funds to implement their SM. They will be lucky to make 5% overall. Hardly worth the risk in my opinion.

  82. CC and Sandor,

    I think you’re both right. MERs do play a big role in the return that you can expect to get over the LONG run. The fund managers that can produce returns CONSISTENTLY better than the index average are few and far between. I think Sandor had mentioned in earlier posts that Seg funds only charge around 0.2% more in fees than other funds. I have yet to find one (not saying they’re not out there, though).

    I think Sandor is right, though, that the SM isn’t THAT risky of a proposition, as long as you invest half-intelligently. For me, that means a thoughtful approach to tax-efficient index funds and proper asset allocation. “The Intelligent Asset Allocator” by W. Berstein is a good read if you’re so inclined.

    No matter how you package it, the SM is still leveraged investing, albeit at a lower interest cost than most other plans.

  83. A most interesting discussion. Many valid points on both sides of the argument.

    I am convinced of the value of the strategy as a whole and especially when considering the mathematics. Investor behavior, the other part of the equation has been touched on briefly and is as important as the numbers. That said, I would encourage everyone who insists on implementing this strategy, to utilize a full service independent planner. I have no problems with the DIY investor, but when you start delving into true financial planning that relies on working knowledge of tax law, it is always best to get professional help. The value of using an advisor also extends to having a detached point of view when decisions are being contemplated out of emotion and not logic (human beings being often irrational and emotion-driven). Disclosure:
    I am a dual licensed CFP.

    I think any discussion of risk needs to include both long-term and short-term. Short-term has been addressed (voliatility) but what about long-term? I would argue, that unless people are really prepared to save 10% annually for retirement, then the greater risk of NOT using a strategy such as this is running out of money during your retirment.

    You can’t have it both ways. You must chose short term-risk or long-term risk (unless as mentioned you will save 10%, then even investments such gold old GICs will get you there).
    The problem is with peoples saving/spending habits, not investment strategies. I would recommend The Richest Man in Babylon (Clason) to all.


  84. Many thanks for the people contributing to SM discussion,some one mentioned that the return of seg fund is only less than 5%for segreagated funds,let me assure you I have invested 25K in segregated fund and the return of that fund since 1998 is above 13%,I invested my client’s RRSP money in segregated funds most of them have a return of above 1o% and the MER is 2.5% ,when I invest my clients money I made sure that it is my money,if any one is planing SM and if you invest in Seg fund ,it is almost 100% guarentied at the same time based on the past performance ,the reurn is above 10% since 1998,I cannot predict the future performance but the past performace is above 10%,if you are skeptical please email I will send the details ‘, my email ID is joyjos@gmail.com,this is not a business pitch just an expression and exchange of details based on my experience and research

  85. Hi,
    I am new to this disscussion here . It is indeed a very interesting one on both sides. but one thing that i cannot seem to understand is where thet heck do ppl get a mortgage higher than prime?? ( what prime are we talking about ??? bank of canada prime or our local bank prime rates??) working in the industry i have disected this strategy but i cannot seem to figure out how some ppl can say this will work for sure.
    mortgage rates are derived of the bond market which is in turn tied to the short term interest rates set by the bank of canada.
    why would someone take a loan @ prime and pay the interest ??if they have the money to pay the interest just accelerate your mortgage payment. or accumulate funds for a downpayment. the money you put towards the principle will save you a ton for the term.
    also why is everyone in the conversation talking in terms of 25 years????? i dont know any bank offering a steady rate for 25 years with a term of 25years.
    i think ppl need to sit down and speak to their financial service representatives before they try risky stuff.
    what if one year your portfolio did not make any return but instead lost money ?????? if you have the capital and the capacity to borrow more..why not just put the money towards accelerating your payments?
    ppl with a house should not contribute to rrsp’s put that money on the house. the faster you are mortgage free the faster you can max out the accumulated rrsp contribution limit.

  86. “I am new to this discusssion here . It is indeed a very interesting one on both sides. but one thing that i cannot seem to understand is where thet heck do ppl get a mortgage higher than prime?? ( what prime are we talking about ??? bank of canada prime or our local bank prime rates??)”

    Bank of Canada Prime is not available to consumers, so we must be speaking about Bank Prime (currently 6%). Lots of mortgages are higher than prime, and many people choose them because they feel more secure with the fixed rates over a term, or, on insured mortgages, the lender requires a fixed term.

    “working in the industry i have disected this strategy but i cannot seem to figure out how some ppl can say this will work for sure. mortgage rates are derived of the bond market which is in turn tied to the short term interest rates set by the bank of canada.why would someone take a loan @ prime and pay the interest ??if they have the money to pay the interest just accelerate your mortgage payment. or accumulate funds for a downpayment. the money you put towards the principle will save you a ton for the term.”

    If you read the book, you will learn how the strategy is proposed to work. The purpose is not to accelerate the mortgage payment, it is to convert the debt of the mortgage to deductible debt. The shortened amortization is a secondary benefit.

    “also why is everyone in the conversation talking in terms of 25 years????? ”

    Because that is the surmise that Smith makes in his postulate. About 30% of Canadians use prepayments. Many ride their 25 year mortgage to it’s end, or even get new 25 year mortgages as they increase their house size.

    “i dont know any bank offering a steady rate for 25 years with a term of 25years.


    “i think ppl need to sit down and speak to their financial service representatives before they try risky stuff.”

    That is implicit in the discussions, and has not been dissuaded here.

    “what if one year your portfolio did not make any return but instead lost money ?????? if you have the capital and the capacity to borrow more..why not just put the money towards accelerating your payments?”

    Your portfolio is for future, not current expenditures. Since you are in it for the long term, you just buy more investments while the market is low.

    “ppl with a house should not contribute to rrsp’s put that money on the house. the faster you are mortgage free the faster you can max out the accumulated rrsp contribution limit.”

    This topic is not discussing RRSP contributions. It is about a different investment plan. The point is that the earlier you begin investing, the longer your pool of capital has to increase.

    Have a look at the book.

  87. Pingback: The Importance of Mutual Fund MERs

  88. I can’t believe this discussion is still going.

    Sandor – with all due respect if my FA said “MERs be damned” I would fire him for incompetence. How could the costs applied to the fund returns not matter?

    It really appears to me (and I’m not an expert) that the “SM” is a play on leveraged investing with the main goal being that a FA that can sell someone on the concept will get compensation from both the lending side as well as the investment side.

    I really like the idea of leveraged investing using a HELOC but as far as I’m concerned it has nothing to do with my mortgage. If I were to borrow $x from my heloc and make $1000/yr in dividends for example – I can put that $1000 into my mortgage, my rrsp, reinvest in the taxable account, buy a tv etc. Whatever I choose for those dividends is entirely independent of the mortgage.

    The other thing is that in my mind you should be able to manage the risk of your leveraged investments by choosing conservative stocks or funds but most of all by limiting how much you borrow. One of the biggest risks of leveraged investing is the interest rate risk so it’s up to the investor as to how much risk they can handle.

    Maybe I’m wrong but it seems that the SM demands that you leverage up to the amount the bank will approve you for. This seems designed so that over the life of the SM, the investor is either fully borrowed up to the HELOC limit they are approved for or fully leveraged on investments up to that limit (once the mortgage is paid off) or more likely somewhere in between with the mortgage amount owing + leveraged investment loan = HELOC limit which will maximize the compensation for the FA.

    My advice to anyone doing the “SM” is to skip the advisor portion and just do it yourself. Before you borrow anything to buy investments, do some analysis of different interest rate scenarios (including ALL your debt) and make sure that you can handle higher interest rates. If you can’t handle it then don’t borrow so much. Long term equity returns (in the US) were just under 10% in the last century – this was not counting fees so if you are being ripped off by your FA and have 3-4% mer seg funds then you can do the math to figure out your potential return.

  89. While surfing this weekend, I found yet another commentator on the Smith Manoeuvre: http://www.thefinancialblogger.com/?cat=11

    “The FinancialBlogger.com is a webpage that was created by M35, a company owned by Mikael Heroux and Pierre Cantin. Both have graduated in finance and are now working in two separate fields. While Pierre is working in the investment field, Mikael has more specialised in the debt sector as well as the area of personal finances.”

  90. If I am to impliment the SM, How would a rental unit in my basement factor in? Seeing as how a portion of my mortgage interest is already deductable but this only applies to the rental income, I cant classify this as a loss to my personal income (even though it is after depreciation). I use the rental income to max. RRSP and pay down mortgage principle. Will SM benefit me further or be a waste of time… and how? Thanks

  91. It strikes me that you would handle the two seperately. The deduction of expenses against income for the rental is one process, and the additional steps you take with the Smith Manoeuvre are in addition. If you look at your rental as a business, and the SM as a personal finance option, you may be better able to separate the two ideas.

  92. falconaire@sympatico.ca: Sandor

    Hello and let me direct my answer to Mike, the author of #89.

    “Sandor – with all due respect if my FA said “MERs be damned” I would fire him for incompetence. How could the costs applied to the fund returns not matter?”

    You see, the MER has little to do with returns. There are funds with high MERs and low returns as well as funds with high returns and low MERs. Since the results of the funds are net of the MER, you may do very well while paying high MER.
    Would I pay high MER by choice? Of course not. As long as two funds are bringing the same results, I would choose the lower MER however, wouldn’t hesitate to pay the higher for a spectacular performance. So, don’t fire me just yet, my funds are around 20%, my MER is 2.45, that is not bad. Is it?


    ” If I were to borrow $x from my heloc and make $1000/yr in dividends for example – I can put that $1000 into my mortgage, my rrsp, reinvest in the taxable account, buy a tv etc. Whatever I choose for those dividends is entirely independent of the mortgage.”

    Well, this is what that would do to you:
    If you put it into RRSP you will pay tax on it later, and pay the interest now as well.
    If you invest it in a taxable investment then you again pay both interest and tax on the gains.
    If you buy a TV you pay tax, you will pay interest and get no return, except the lousy Tv programs.
    Although all those would be indeed independent of the mortgage. Big deal.
    If however you put it into the SM while you will pay interest, your mortgage will diminish rapidly, so you will save interest cost. Your investments will grow as rapidly as your mortgage will decrease. You will also be able to deduct from your taxes the interest and the resulting tax refund can also go into your investments, further boosting the results.
    By the time your house is paid off you will also make a profit.


    “My advice to anyone doing the “SM” is to skip the advisor portion and just do it yourself. Before you borrow anything to buy investments, do some analysis of different interest rate scenarios (including ALL your debt) and make sure that you can handle higher interest rates. If you can’t handle it then don’t borrow so much. Long term equity returns (in the US) were just under 10% in the last century – this was not counting fees so if you are being ripped off by your FA and have 3-4% mer seg funds then you can do the math to figure out your potential return.”

    This is really bad advise for those who, like you, don’t understand the concept and are too lazy to read the book. When an advisor is paid, in return he takes responsibility for the whole thing and doesn’t let you do silly things, like borrowing up to your limit.
    Those historical returns were net of MERs, therefore, your advisor cannot rip you off. Particularly not since the trailer fees are 0.5% of the portfolio yearly, which also comes out of the MER, so you really are not paying it.

    Mike, I don’t know whether you have an advisor, or not, but it seems you don’t and it is obvious that you badly need one.
    But please, do not ask me, because I wouldn’t like to work for someone who not only knows everything, but knows everything better.


  93. Canadian Capitalist

    Sandor: Do you have any studies backing up your claim that “the MER has little to do with returns”. Plenty of research I’ve seen shows that there are two factors that correlate highly with good future returns (compared to a benchmark): low MER and low turnover. You are right in saying that some high-MER funds have high returns and some high-MER funds have have low returns. The trick, of course, is that there is no way of knowing ahead of time, which fund is going to be high return. I don’t care that your funds are 20%. The more relevant question is how are your funds doing relative to the benchmark.

    And I definitely take issue with your comment that trailer fees come out of the MER, so you really are not paying it. Of course, the client is paying the MER and hence your trailer fees. I really hope you are making the same claim to your clients.

  94. I believe Sandor’s point is that the decision to buy a fund should not be based solely on MERs.
    My second point is that if you mention a HELOC in your post you are not talking about the SM, you are just simply using leverage to invest. The SM does not advocate increasing your debt load. It only talks about the current mortgage debt you have. For example, you have a mortgage for $200000. It doesn’t matter what your house is worth. You get a readvancable mortgage for $200 000, as you pay down the principle you automatically have that dollar amount withdrawn to make an investment. If in month one you pay down your mortgage (principle not the interest portion) by $1000, then you invest $1000. so at the end of the month you have a mortgage worth $199 000 and an investment of $1000 for a total debt of $200 000. In the end you have $0 in mortgage and a $200000 investment loan. As well you have a portfolio of investments presumably worth considerably more than the loan.
    The very first premise of this blog is incorrect, you are not comparing apples to apples you are comparing apples to oranges.

  95. Canadian Capitalist

    Rob: I am sorry but a MER is a very important consideration (the other is portfolio turnover). What else should you base your decision on?

    I’ve pointed out that the example cited in the post is not mine. It is Sandor’s. While it is true that the debt is being increased in the first step, thereafter it is a SM.

  96. falconaire@sympatico.ca: Sandor


    I wanted to come back to the subject again and find encouragement in CC’s comments to do so.
    But before I come to my point, let me invite you to look up, (just for example) today’s Star, Business Section page 5. (D5)
    On the list of best funds first is Front Street Special Opportunities. 5 year returns 39.4%, the fund is quite consistent and the MER 5.56%. Outrageosly high.
    The last of the worst-list is Quadrus Mac Univ. Growth, lost 3.3% over 5 years and the MER is 2.75.

    In light of this comparison, can there be any doubt that investing in the Front Street fund would be a better proposition despite the high MER? In fact the fund brought the results after the MER was already discounted from the actual returns. So why should you worry too much about the MER as long as you made 39.4%? Or would you be happier if you paid only 0.5% MER for a 4-5% yearly return, while other fonds returned 2-3 times as much?
    I consider the exessive preoccupation with the MER silly and selfdefeating. It is the fundamentals and the actual performance that matters the most and the MER is a secondary consideration only. I also measure up the investor’s personal understanding of investments on the basis of the MER: if that is his main concern I immediately see that his understanding is somewhat superficial. That is all that he understands and the actual, more relevant aspects of the market is not quite yet open to him.

    To CCs letter:
    “Do you have any studies backing up your claim that “the MER has little to do with returns”.”
    No CC I have no research to offer to you. I have only simple plain logic: the MER is a contractual provision, wether the fund does well or not, you agreed in advance to pay it. So, how can it have any effect on the performance?
    ” The more relevant question is how are your funds doing relative to the benchmark.”

    This an other somewhat mistified approach. If you are concerned with the bench mark you may miss great opportunities. I suggest an example of a fund that has never came close to the benchmark, in fact moves in tandem with it. So you bought it lower than the bench mark, but if it rises and falls together, you are making the same gains and losses as the BM. at a lower cost.
    “And I definitely take issue with your comment that trailer fees come out of the MER, so you really are not paying it. Of course, the client is paying the MER and hence your trailer fees. I really hope you are making the same claim to your clients.”

    No, my dear CC, the client doesn’t pay the trailer. The abovementioned contractual MER includes the trailer and if the advisor would agree to have 0% trailer (I have done this,) the MER remains the same anyway.
    You are only correct to the extent that the client’s portfolio is the basis of the trailer as well as the MER and the gross gains of the portfolio pays for both. Therefore, I am not only justified but outright obligated to explain this to my clients and I do.


  97. Sandor – we will never agree on the importance of the MER because we have a different philosophical approach to investing. I am a believer in the idea that the markets are efficient and active management has no benefit, therefore the
    only variable I can control in investment is the cost which is why I think the MER is the most important aspect of mutual funds.

    You sound like you’re in the non-efficientmarket camp and you believe that you can choose superior mutual funds which would mean that the MER is not relevant (within reason) because the superior mutual funds will have a higher return and will make up for the MER, large or small.

    I’m not going to try to convert you but “A Random Walk Down Wall Street” – Malkiel and “Four Pillars of Investing” – Bernstein have tons of studies which have convinced me that the markets are quite efficient.
    This is really bad advise for those who,
    like you, don’t understand the concept and
    are too lazy to read the book.

    I’ll agree that I am too lazy to read the book and probably don’t understand the concept as well as you do.

    When an advisor is paid, in return he takes responsibility for the whole thing and doesn’t let you do silly things, like borrowing up to your limit.

    I’m glad to hear that the advisor helps out with risk management ie not letting people borrow too much, but how does he take responsibility if things go wrong? The client is the one who takes responsibility because it’s their money.

    Those historical returns were net of MERs, therefore, your advisor cannot rip you off. Particularly not since the trailer fees are 0.5% of the portfolio yearly, which also comes out of the MER, so you really are not paying it.

    Two errors here – the 10% historical return figure is completely gross – no trading fees, no MERs, no nothing. This is from a study done by Roger Ibbotson.
    Second thing which CC already pointed out is that the client definitely pays the trailer, to suggest otherwise is untrue.
    The MER comes out of the fund, which is owned by the unitholders otherwise known as Joe investor.

    But please, do not ask me, because I wouldn’t like to work for someone who not only knows everything, but knows everything better.

    Good point. Trust me, I wouldn’t want to work for me either!!

    As far as the Front Street Special Opportunities fund – yes, had I owned that fund for the last five years I would have
    been a happy investor. However, I didn’t own it (did you?). One other thing is that according to GlobeFund.com – the MER is 2.59% not 5.56% so that might not be the greatest example.
    I notice this fund has only $190 million in assets, this is pretty surprising considering I would have thought that more investors would have bought units if it was so great.

    No CC I have no research to offer to you. I have only simple plain logic: the MER is a contractual provision, wether the fund does well or not, you agreed in advance to pay it. So, how can it have any effect on the performance?

    This makes no sense at all, the net performance is the gross performance minus the MER, so of course it’s part of the equation.

    No, my dear CC, the client doesn’t pay the trailer. The abovementioned contractual MER includes the trailer and if the advisor would agree to have 0% trailer (I have done this,) the MER remains the same anyway.

    Still wrong. Plus all the major mutual companies have management fee rebate & advisor fee rebate programs where the rebate goes into the client’s account, thereby reducing their MER.

    You are only correct to the extent that the client’s portfolio is the basis of the trailer as well as the MER and the gross gains of the portfolio pays for both

    The gross gains of the portfolio don’t pay for anything, the MER is taken out of the daily assets of the fund regardless of performance.

  98. Canadian Capitalist

    Sandor: I can point you to many studies that show why low-costs (and low MERs) are important and all you can offer in response is one data point and faulty logic? Yes, your logic is faulty because if your fund grosses X% and has expenses of Y%, the investor makes X%-Y%. So the smaller Y is the more an investor keeps.

  99. falconaire@sympatico.ca: Sandor


    I asked for this deluge of disapproval, so I have no excuse, I must answer wherever I can. I also admit that in some cases I have no answer to offer. I also must apologise to Mike for letting loose on him. Mike, your self-mocking answer is very endearing to me, so sorry (dude).
    But let’s see “them” answers!

    “Sandor – we will never agree on the importance of the MER because we have a different philosophical approach to investing. I am a believer in the idea that the markets are efficient and active management has no benefit, therefore the
    only variable I can control in investment is the cost which is why I think the MER is the most important aspect of mutual funds.”

    First let me disclose that although I am licenced broker of mutual funds, my preference is segfunds and neither do I sell, nor do I own any mutual funds. But that out of the way, I must take issue with the so-called philosophy you mentioned. Yes, you can choose based on the MER, but markets, efficient as they may be, also change all the time. The managment and the evaluations of the fundamentals have a greater effect then the MER.
    It is also relevant here that the mutual fund companies tacitly admitting lately that the MERs are unreasonably high and are in the process of reducing them, following the lead of Fidelity.


    “You sound like you’re in the non-efficientmarket camp and you believe that you can choose superior mutual funds which would mean that the MER is not relevant (within reason) because the superior mutual funds will have a higher return and will make up for the MER, large or small.”

    No, this wouldn’t be reasonable. The MER is simply what it is, you know what to expect to pay and agree to pay it in advance. But just because you picked a low costing fund are you assured that it will do well? What about the prospects of the particular asset class? The sector, liquidity, all the other factors that make the menagement so necessary? Just to mention the simplest: your age. At age 25 you can take higher risks then at age 55. Not to mention the tax treatment, etc.


    “the MER is 2.59% not 5.56% so that might not be the greatest example.
    I notice this fund has only $190 million in assets, this is pretty surprising considering I would have thought that more investors would have bought units if it was so great.”

    I do not feel responsible for what the Star prints. But it was a good case in point.
    My suspicion about the relatively small asset base is that this is a small cap fund, which if accepts too much money seases to be “small” so they close it at a certain level and start a new one under a different name but same management. Also possibly it may be a closed fund of some wealthy individuals, who started up a “private” fund, but due to regulatory requirements they must publicise the performance. I follow with interest an other fund of similar ilk: Resolute Funds. In fact I did try to buy into it a year or so ago, but they refused to take the money. Soon after that it went up to some 450%.

    I want to refer here to CC’s gripe too that I only mention one data point. Well, you were supposed to see the rest in the Star.


    I decided that there is absolutely no point arguing about the source of the MER. It is mandated by law, every prospectus, every information folder gives detailed explanation. You read them, I read them, there is nothing to argue. Except perhaps the point that the performance is influenced by the MER. I take exception for the criticism of my logic, because I consider myself eminently logical. (Perhaps I am a minority in this.) The MER is neither a cause nor is it an effect of the performance. Otherwise the simple equasion is correct, but it applies to good and bad performance equally. Does it not?


  100. falconaire@sympatico.ca: Sandor

    A minor cause for jubilation: my last posting became the number 100. Congratulation to those who beat it out of me.


  101. Sandor, I think we should just agree to disagree. Given that both of us have fairly firm opinions on where we stand, right or wrong, I don’t see any point in continuing a debate that has no end.

    I’m sure both of us have more productive uses for our time.

  102. falconaire@sympatico.ca: Sandor

    Well my dear Pillars, I consider the exchange of ideas between like-minded people as useful.
    Even if we disagree about some things, there is always something I learn from the postings. Not to mention that sometimes the process of formulating an argument also helps me to clarify my own thinking about the subject.
    So, taking your advise, I agreably agree to disagree.


  103. Pingback: Editor's Blog : Making Your Mortgage Work For You: The Smith Maneuver

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  105. falconaire@sympatico.ca: Sandor

    I did look it up.

    I have doubths that Michael, the author of that article has a grasp of the concept. I also think that he is writing from the US and doesn’t quite understands our (Canadian) tax environment.
    By the way, the quote you have chosen actually is accomplished better by the SM than anything else.



  106. Has anyone mentioned what would happen to SM if interests rates were to rise again to double digits? Or if, as the experts say, the real estate market takes a downturn due to the baby boomers downsizing etc. I have just finished reading the SM and find it very interesting but no answers to these questions?


  107. Why would you get a secured loan and put it straight into an investment? Why wouldnt you get a secured loan and pay down the mortgage. SM is basically swapping ure mortgage into a dedutable mortgage. Swapping a 200,000 mortgage would be amazing cause you have a house paid off and starting to take some equity and putting it into investments.
    It doesnt matter if you have debit.. Rich people carry debit you get some money every year depends on ure tax bracket. The SM is amazing. Its for everyone

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  109. falconaire@sympatico.ca: Sandor


    The last few contributoions, (107,8,9) are attesting to the complete inability to understand the SM concept and ignorance of the tax system. This just won’t do, not to mention that the quality of discussion is plumetting.


  110. falconaire@sympatico.ca: Sandor


    Let me try an answer to #107 Bish:
    “Has anyone mentioned what would happen to SM if interests rates were to rise again to double digits? Or if, as the experts say, the real estate market takes a downturn due to the baby boomers downsizing etc. I have just finished reading the SM and find it very interesting but no answers to these questions?”

    The unbeareable rise of interest rates in the early eighties was an aberration, caused by partly political upheaval in Iran and partly the high inflation, high national debt and budget defficit at the time. Although it cannot be excluded from the realm of possibility, its recurrence is very unlikely. Our economy is one of the best run in the world, our national budget is “struggling” with large surplusses year after year, and our national debt is declining. Our Current account and trade balance is positive consistently. The last and also very important possible cause, high inflation, is also prevented by the good general climate. (Althoug I must say, the 2.8% inflation is still a bit too much for my taste.)
    So, for the reasons listed above, I don’t think that we have much to worry about runaway interest rates. It isn’t impossible, but nor is it likely.
    The collapse of the real estate market is more cause for concern, because it is not a national fenomenon, but local. While the market may be booming in Vancouver, or Toronto, it may be collapsing in Moosjaw at the same time.
    In a case of collapse the only thing that can tie you over until the recovery is if your LOC is a kind that does exclude the risk of margin calls. There is such loan.
    However, if the property is in any of the great urban centers the downturn, unpleseant as it may be, is doubless just temporary, so it isn’t a great risk.
    Nevertheless, financial regulators lately warn the public in general that borrowing money for the purpose of investing (Leverage) is inherently risky. In the case of the SM that risk is not very much, but it is there and every person contemplating the SM should consider that fact.
    The book doesn’t dwell on the risk, because the historical performance of real este and equity investments in the last 50 years are so reassuring that there is very little to worry about. Also, the author has his own theory about the risk, saying that it was a greater risk to buy the house with a low down payment then have a double back-up for the loan; the equity in the house and the port folio at the same time.
    Of course, those post-war years and the last few years’ boom is reassuring indeed. But I don’t know what would be the outcome if the sample 50 years would include the Great Depression years. After all, it took the Dow until 1956 to rise to the same level where it was in 1928. So that recovery took 28 years. But the skilled investors still made money in those yeras!
    My personal opinion is that you should be ready for the worst scenario, but courageously plunge in, because if you are not doing the SM and have a tight financial situation, in a Great Depression you would probably loose your house anyway. So try to make as much money as possible as long as the going is as good as it is nowdays. That will help a lot when the Great Depression comes. If it comes! And if it wont come you will be much much better off for ever.


  111. Wow, it was quite a task reading through all of the comments. I sense a lot of resistance from those who (like me) were raised on the almost religious belief that the “right thing to do” is invest in RRSPs. As someone who is just a few months from paying off in full a mortgage on a $750,000 home (purchase price, not current value), I have tried helping friends of mine understand it, but with little success, even when I show them that (in some cases) that we’ve led remarkably similar lives in terms of our income and expenses (including home) and yet their financial situation is unquestionably horribly inferior to where I (and my wife) are at. They do not argue that, but they resist, using most of the same arguments that I see here. For some it is fear, and for others they just don’t want to deal with the idea that maybe what they have been doing was not as brilliant as they thought it was, that is, an ego thing. Which I understand, I’ve been there when it comes to investing and I am still far from even an amateur expert. But despite that, I am doing better than virtually anyone I know, even people who bring in a lot more income.

    I am not a financial or investment expert, which means those who want to resist will easily find a way to continue doing that, since I am not going to be able to come back with fancy sounding rebuttals, but heck, if even one person listens to what I have to say and ends up where I am today – a middle class guy with a middle class job but a rich man’s house (where I live anyway, maybe not in Toronto!) and a bright financial future then it’s worth it 🙂

    It’s kind of unfortunate that the entire thing has become known as the Smith Manoeuvre when it should have been called “Investing More Intelligently” or something less goofy and suspicious sounding. And the book of course is appallingly badly written. There are people in this forum who could do a better job of it judging by what I have read.

    Anyway, my “SM” was boring, boring, boring and very very very effective.

    Here’s how it worked according to my Joe Sixpack level of understanding.

    I was doing what a lot of people do – paying off my mortgage as best I could but at the same time maxing my RRSP, because it was my heartfelt fight to the death belief that maxing my RRSP was the most important thing I could do. I made a lot of the usual investing mistakes that young people make within my RRSP and eventually settled into a more sensible (for me) strategy of buying and holding “quality” with some boring ETFs thrown in as well. Some of these investments were generating Canadian dividends (or I should say dividends that are counted as Canadian), which of course were staying in the RRSP. Fine. Good.

    Then a few things started to occur to me.

    The tax treatment of Canadian dividends is really great…some smarter person will provide the exact figure, but basically you end up keeping something like 80 cents (probably more) on the dollar depending on your income/tax situation. Verrrry niiiiiiiiiiice.

    But I wasn’t getting any of those benefits because my investments are in the RRSP, which means that whenever I would take them out, at retirment or otherwise, everything in there would be treated the same – taxed at my marginal tax rate of the time, and with government and possibly private pension to consider, it would certainly be in the area of 20% or maybe more. Not so great. I realized I had been operating with the goofy thought process that when I pulled the money out at the end I wouldn’t need to worry about being taxed on it. Laugh if you like, but I’ve encountered all sorts of people that haven’t thought about that.

    So I started thinking that my dividend bearing investments in particular might be better held outside of an RRSP. This led to some other thoughts as well.

    To skip ahead, after lots of reading and discussions with my wife, we met with an experienced SM advisor and got hooked up with a a guy within our existing charter bank and started developing an SM strategy. As I said, kind of boring, but very neat if you will.

    It would have been 8 years to pay off our mortgage doing what we were doing at the time we started our SM. Our mortgage was our only debt and we were making payments much higher than the average couple (according to our bank guy).

    We will now be paying off our mortgage in 4 years. I wish I had it here with me, but do the math on 4 years of mortgage payments on a $750,000 home and well needless to see it is a lot of money! If only we hard started this sooner.

    How do you cut your mortgage time in half (that seems to be the normal SM experience by the way?). Well, it’s kind of easy. You attack the mortgage like it is a war…you keep paying as much as you can towards it from your regular source of income (work) but you borrow the maximum available equity from your home (which gets increased with every mortgage payment you make – have to find a bank/banker willing to do that for you) and with that borrowed money you purchase income-yielding investments. With that income you pay off the interest on the loan with part of it, and with the rest of it you direct it to the mortgage.

    So, you are now making your mortgage payment from your employment income, and additionally you are directing the income (minus the interest payments) from your investments (which you purchased with your home equity) to the mortgage.

    And that’s not all…those payments you are making on the interest (using income from the investments you purchased with borrowed money) come back to you from the government every year! All of it. Guess what you do with that money? That’s right, pay off even more of the mortgage! So there’s your three-pronged attack…standard payments, investment income payments, and government tax refund, all attacking the mortgage. The mortgage doesn’t have a chance…!

    The benefits of this clobber the value of the RRSP tax deduction that seems to keep people hooked like junkies on a pipe.

    The investments used to accomplish this for us were incredibly boring income-yielding mutual funds with a very limited goal – to net 8% a year. We averaged more like 12% but the plan was based on 8%, so we are finished up in a bit less than the 4 years we had anticipated.

    In what is rapidly becoming a matter of weeks, we are going to own our $750,000 (which is now worth about $1 million) outright and have a mortgage-burning party. Our investments will likely continue to deliver about 10% annual income (a few dips and valleys are fine, with the nature of these investments it would take WWIII for a long term problem) which on a $560,000+ portfolio is obviously a huge amount of money…

    Once the mortgage is paid off, we’ll simply direct that income to purchasing additional investments (and buying stuff too!) further increasing our investment income.

    Think about it…people are hoping their RRSP is going to be enough to live off in retirement, and here I own my home and I already have enough investment income to live off…I could seriously considering retirement if I wanted to, but I like my job 🙂

    If it really bothers you to have an interest-free debt that gives you tens of thousands of dollars a year, you can obviously start paying it off when your mortgage is done. But not thanks…I’ll take the free money and keep taking it, from here to eternity.

    Well, I hope people here will at least appreciate that I tried, sorry if it is not very technical.

    I urge you to look into it. A lot of you here are obviously advanced enough in this area that you would not even need an SM advisor to do it, you’d just need a bank/banker willing to do a readvancable mortgage and go the extra mile with the various accounts that are required to make this all legal for the tax man. Our guy has done this with many people and it has been no trouble at all for us, so getting the right bank/banker to deal with is obviously a key, and although we too probably could have managed without an SM advisor, we would not have found our banker without him, so for that alone it was worthwhile.

    OK, that’s that. If something sounds screwy just ask me and I will try to answer, but be nice, I am just trying to help. All I know is my situation seems tremendously better than other people with my level of income and that you can’t argue with the results, even if I am not good at explaining how I got here.


  112. Canadian Capitalist

    Kevin: Thanks for the detailed comment. A couple of comments:

    1. Your investment loan isn’t interest-free. Depending on your tax bracket, you’ll get something like 40% back in tax savings on your interest payments.

    2. I wouldn’t call someone with a $1 million home average. Just the interest payments on a $750K mortgage will be $35K per year. Not many people can afford such a home.

    To be successful with SM, you need to be comfortable with the extra risk and invest successfully. I am not surprised that it worked out well for you because the last 4 years have been extremely good for equities (you may want to research your holdings because the average returns for Canadian equities in the past 4 years is more than 20% and you seem to indicate that you averaged 12%).

  113. Canadian Capitalist

    Sandor: What is the interest rate on the LOC that does not have a margin call? I’ll bet that it is more than prime.

  114. Thanks CC, I appreciate the opportunity to discuss this as I find “educated” people are the hardest ones to communicate with about SM, they can use their knowledge (consciously or subconsciously) to duck and dodge what seems to me is the inescapable logic of the superiority of SM in the case of most people who are in position to do it (this I know not from technical analysis or anything, just looking at people who have as much or more income than I do, with similar expenses, but they have half the house or less and are going nowhere fast with their debt to asset ratio and their retirement savings are going to be inadequate if they don’t change what they are doing).

    My 12% figure is what I actually ended up with in my pocket. Well, it wasn’t in my pocket for long because I put it on the mortgage, but you know what I mean. The return if I took the cumulative figures for the investments as they are reported on the internet would be higher, but obviously not as high as they would be had I purchased certain individual Canadian equities or more aggressive mutual funds, but that is the nature of an SM investing strategy as far as I know, you don’t have the highest of highs and you don’t have the lowest of lows…you are aiming for a tax-friendly income that you pump into your mortgage and an investment performance from the investment vehicles that is solid, not one that is shooting for the stars with the potential to crash like an old Chinook. I don’t really care if I got 10%, 12% or 18% or if I could have played the market better (of course I could have, then again, I might have decided the US was the place to be lol.

    I do not see that there is “extra risk” involved and if there are stories out there of SM clients (particularly those working with an experienced SM manager) who have gone sour, I can’t find any, and I’d like to see some evidence to support the idea that it happens with any greater frequency than other types of investing…

    I’d be willing to bet the first month of my mortgage-free cash flow that the evidence would show to a huge degree that the SM folk do much much better than others, if for no better reason than every SM plan I have ever heard of or talked about encourages a quite passive investing strategy. The average investor has a hard time not reacting emotionally to the market, but you take that average investor and put them into a typical SM plan, and they are going to see things differently and behave differently (worked for me!). When you see your mortgage melting away and realize that your cash flow is going to be out of this world once it is gone (because not only do you have no mortgage, you still have the income from the investments!) you tend to stop giving a damn about whether or not you are getting 16% or 20% in the market and you definitely don’t refresh your screen every five seconds to see how your latest brilliant stock picks are doing.

    During the time when you are paying off your mortgage with SM it would definitely be risky to fool around in the market, which any experienced SM manager knows, and that is why the investments tend to be very boring and predictable and with long track records. My own manager would not consider any mutual fund with less than 10 years and he prefers longer.

    I just don’t get this “risk” idea that is being thrown around. I never felt less “at risk” in my lifetime than I did with SM. It’s been the most relaxing investing experience of my life, and the most successful to boot.

    Sorry about the 100% free interest comment, what I meant was that the refund is 100% yours – after-tax dollars.

    This reminds me of how a lot of RRSP diehards think they are getting free money because they get a tax deduction with their contribution. But they are really just “buying” the deduction with their own hard-earned after-tax dollars and then waiting to get taxed on it at their max rate of the time when they pull it out.

    But back to risk…I am confused by this idea. I did not increase my debt load, and I in fact paid off my debts in half the time. This is good but not an unusual experience for SM folks.

    A lot of people may not be able to afford a 750k home but let me tell you a lot of people are living in them! Our house is far from the nicest in the neighbourhood. My wife and I have a combined income of less than 120k and we’re going to own the damned thing before the end of the year, so there ya go.

    So, to conclude, I think I have to challenge this notion of “extra risk” and further that the “investing successfully” is a bit of red herring. A mutual fund that pays distributions and has been operating for 20 years with a consistent return in markets good and bad isn’t all that hard to find, and if you go with a small selection of funds that meet that criteria but with different managers with different approaches, you can’t get much safer than that…especially since you aren’t in a rush. If the market goes down you just keep doing what you are doing. How is this wrong? And I am asking sincerely, that’s not rhetorical 🙂

    OK, now I have to work on being more concise.



  115. Canadian Capitalist

    “Extra risk” is not a red herring. You take extra risk with SM by investing in equities instead paying down your total debt. You also take the risk that you might get a margin call when both real estate and equities fall sharply and your mortgage is up for renewal.

    The argument is not that you shouldn’t take this extra risk. It is that you should make sure that the extra risk is appropriate for your financial situation and risk tolerance.

    “Investing successfully” isn’t a red herring either. Many studies have shown that investors on average lag the markets badly. Google for “dalbar study”, which shows that average investors badly trail the market indices and post returns that are less than bonds. Why would an average investor suddenly post good returns because they implemented the SM?

  116. As I pointed out, the beauty of SM for me has been NOT worrying about lagging the markets. I truly don’t care. I don’t have to try and beat the market.

    In fact, as you pointed out, I didn’t beat the market.

    But I beat the hell out of my mortgage with the income I generated from my investments anyway, reducing my bad debt at twice the rate. All with my boring mutual funds that I reviewed formally once a year. They did pretty much as expected, one or two percentage points either way each year.

    I still don’t get how this is “extra risk.” To me that infers an evaluation of all the risks of all possible strategies and that this one is more risky than a majority of others.

    The risk – or should I say guarantee – with the bank-popularized method of shoving money into RRSPs and chugging away at a mortgage forever is that you are not going to have a very secure retirement unless the markets are kind to you (because you will need to take a lot more risk on your investments than an SM strategist will) and secondly that the timing is kind to you (since RRSPs must be withdrawn at some point, and if it is the wrong point in terms of market conditions you could be screwed indeed, particularly if that has been your whole plan!).

    With SM not only did I get rid of my bad debt mortgage, but I have a healthy after-tax investment income from the dividends/distributions – I don’t have to worry about how to “manage my RRSP” so as not to screw up my retirement. My plan is already in place, and after my mortgage is gone, I’ll be adding equities that are not from borrowed money and further increasing that income. And yes, I’ll be putting some money in secure instruments as well.

    So if you are saying that it would be really nasty situation if someone’s SM portfolio crashed and the real estate market also crashed, yup, that’s true. But there are countless really nasty situations that are possible with investing (I’d say the .com bust was a bigger deal than any SM client will ever experience!) so it might make more sense to compare apples to apples (results to results) rather than what I continue to see as the red herring scare tactic of “extra risk” being thrown around with regard to Smith.

    A portfolio of conservative mutual funds with long-term track records ranks very very low on the risky scale, as does paying down your mortgage as quickly as possible. I can’t disagree more strongly with the idea that SM is for people with a high risk tolerance. I chose it because I was tired of riskier investments and the results they brought me. Paying down my mortgage with boring mutual funds is to me as conservative as can be – and smashingly effective too 🙂

    Risky? I say not 😀

  117. Just one more comment…my LOC does not have a margin call and the rate is prime. I believe that was one of the benefits/courtesies we received by working through our experienced SM manager vs going it alone, although anyone can negotiate. SM clients tend to be pretty attractive since they will (as I understand it) generally have little to no debt beyond their mortgage and obviously own 25% or more of their house. Our bank guy can see where our cash flow is heading at the end of this and I think that’s why he is quite happy to bend over backwards at this point…

  118. falconaire@sympatico.ca: Sandor

    Sorry CC, I neglected this list for some time that is why I didn’t notice your question.
    The answer is that Manu One charges always prime, (since it is a secured LOC,) and the contract spells out that there shall be no margine calls.


  119. Hi Kevin,

    Who is your financial planner, banker and mortgage person? Is there anyway you can provide some information. I am having difficulty finding people who

    1. have a solid grasp of SM
    2. and are knowledgeable of investment portfolios.

  120. please write to me I can explian to you about SM.,

  121. I hope one of you experts can help us to apply SM into our current situation. We have a principle residence worth about $500K and have a mortgage on it of $127K. We also owe a rental property generating regular income of $1200/mth and is mortgaged at $27K. This rental property has more than $200K equity to payoff our principle residence’s mortgage plus other investments. However of course for tax department’s point of view, we are not allowed to do that. Is there anyone knows if we can incorporate the theories behind SM into our scenerio? Thank you for anyone’s help and advice in advance!

  122. falconaire@sympatico.ca: Sandor

    Hi to A. Kazi and The Kennedys!

    If you wish, I would be a reasonably good candidate to do the SM for you, since it is a substantial part of my advisory practice and do it all the time.
    Having more than one property means you may have as many SMs as the number of the properties.
    However, more data is needed to make the calculations than what you mentined here. If you get in touch with me I’ll be happy to do some preliminary numbers for you.


  123. TheCausiousRiskTaker

    I have a question wich is somewhat related to the SM… I am in the process of implementing the strategy. I don’t feel like I understand all the angles, but I do know that I have the interest and patience to ride through market drops. I own a house with an appartement over the garage, an investment property, a business partnership with my wife (who owns 99%) because she is a homemaker with no income. I also have a reasonable sized portfolio in mutual funds (dividends converted into RRSPs & RESPs for tax refunds in Quebec) . Both properties are financed through Manulife ONE accounts with my residence property account having a Sub-account (from my credit line) to pay the business expenses and interst on the investment property. I have a credit care (wich I use for everything from groceries to certain bill payments) with points that I pay off in full ever month. The draw I get from my company and the rents pay down the mortgage wich then allows me to increase the size of the sub account… My question is this:

    Although this was a [place bad word here] to set up, with all the automation in banking today (and as long as you stay vigilent); I thought this was easy to do and maintain (checking stocks, changing the way I banked etc.) and the only thing that scars me is my own feelings of “ease” with this whole thing… am I subconsiously realising I’ve done something something wrong maybe?

  124. falconaire@sympatico.ca: Sandor

    My dear Cautious,

    You seem to be the savviest of us all.
    Your problem is not so much financial, but rather mental. It is not financial advice you need, but a good little vacation.
    I don’t see anything wrong with your plan, except the complications built into it, however, since you have this complex setup, perhaps you should explore the use of the Cash Flow Dam, to add a bit more “bite” to the strategy.
    Othervise, all you need is the occasional adjustment, as soon as you have returned from your vacation.
    Congrats and enjoy the proceeds.


  125. Canadian Capitalist

    Sandor: I am not familiar with the agreement wording of ManuONE account. I do have a secured LOC with Royal Bank and it clearly states that they can call in the loan at any time (in bold letters). Are you sure that ManuONE agreement has no such wording?

  126. falconaire@sympatico.ca: Sandor

    Hi CC!

    Yes, Manulife makes a particular point of this in their loan agreements. In fact they spell ot that there will be no calling of the loan on the ground of the reduction in the value of the collateral. This however the only time when they wouldn’t call it. All others of the usual causes, like default for instance, would be ground to call it. Not only the Manu One, but other products as well make this point. You can see it on their website.
    Of course, since the colateral is real estate, and since most Canadian real estate is constantly increasing in value, this commitment is not that hard to make.

  127. I am in the process of setting up a HELOC primarily for investment purposes.

    The house is owned jointly with my wife, all investments will be in my wife’s name and the interest deductions will be in her name.

    If we maintain the appropriate paper trail (with her income paying the payments), does anyone see any issues with this or will the joint ownership casue an issue.

    Thanks… cylong

  128. falconaire@sympatico.ca: Sandor

    Back to the previous CC, pelase hang on a bit longer.

    Az to callability of the HELOC, Manulife makes a particular stetement about the margincall in its loan-related literature, but when it comes to Manu One the case is not so clearcut.
    Precisely because of your question I looked into their loan contract, still looking, and based on what I’ll find, I shall get back to you about this soon.


  129. falconaire@sympatico.ca: Sandor

    Hi cylong!

    You probably have good reason to arrange the setup as you do.
    Perhaps you should also take into account that you both will probably sign for the HELOC,(due to the joint ownership of the house,) so, you are also eligible for the tax deduction, as long as you also have some investments.
    The guiding principle should be, who has the higher income and therefore the higher tax bracket. Because that person will be able to take maximum benefit from the strategy.
    The joint ownership of the house will cause no problem at all.
    You may want to consider however, the benefit of joint ownership of the investments! If your wife should die, the iheritance issues could be more complex in case of single ownership. (Also in case of divorce, but that is a tabu subject.) On the other hand the joint ownership of the investments has no disadvantage really.
    Why don’t you discuss this with your accountant?

  130. I’m sorry, I have just read the book and doing research on this myself and have read half of the commentary on the website here. I am currently looking for a bank or credit union that offers the strategy, does anyone know of one?

  131. falconaire@sympatico.ca: Sandor

    Even if it does sound self-serving, I must insist that you talk to a financial advisor, or planner.
    On the Smithman.net website you can find numerous qualified advisors.
    I suggest this simply because most banks don’t have any interest in doing this for you. They are better off with your mortgage business. They also refuse to personally engage with the clients, if you don’t look them up they wont talk to you. An advisor, if worthy of the name, will speak to you and review your progress with you, at leat once a year.
    In a bank, when you place an investment, nobody bothers to look at it until you request it and by that time it is usually too late. The bank will accept your money but will not work for you in return. The advisor is supposed to do that. Generally speaking, the banks work for themselves, advisors work for their clients.

  132. falconaire@sympatico.ca: Sandor

    Dear CC,

    As I promised, I am coming back to your question about the callability of the Manu One loan.
    I did ask for the contract and also for written explanation from them and indeed, there is no reference to callability in the contract. In fact, the closest to that are two clauses as the letter of my banking associate points out:

    “Section 6.12 (page 11) gives Manulife the right to appraise/re-appraise the property at any time (reappraisal however, does not change the original terms or lending amounts of the originally approved Manulife One)
    Section 7.1 (page 11, 12) outlines when Manulife can enforce the security (i.e. take it over). This occurs for the specified reasons (failure of payment obligation, misrepresentation at time of application, property ceases to comply, etc)”

    Therefore, indeed the Manulife One loan is not callable.

    I hope this reassurance is good enough and based on it I can soon arrange a Manu One loan for you.
    See you


  133. falconaire@sympatico.ca: Sandor

    But wait! There is more!

    CC, after posting my previous, I found an interesting site, very relevant to the subject.
    This lady, Melanie McLister, has a mortgage website and she accumulated a lovely comparison chart about most HELOCs, ther specific characteristics and differences.
    Anybody considering the plunge could take a very good use of this chart. You can find it here:


    She notes however, that some lenders were not quite correct when supplying their information, so I urge due diligence.


  134. Hey CC,

    I never got a reply on your comment on another web site mortgagetrends. Anyway please go to CRA’s web site type in IT533 (interest deductiblity) see section 31.

    I would like to get your thoughts. When I do my SM seminars I am the only one (I think) that has a CA (chartered accountant who answers tax questions). If you ever get to Burlington or Oakville let me know.

    Ps. Sandor I am still waiting for your thoughts on my comments about your idea of using a line of credit at 6.25% vs. my idea of prime -.5%!


    Brian Poncelet, CFP

  135. A. Kazi: buy the book for $10 at Costo and use the list of planners that is in the book, that’s where we found ours (closest to where we live as it turned out). It’s a pretty tight family and they all seem very diligent about making sure every client is happy and successful…and they work with people how have a similar approach. I never knew a chartered bank could be so respectful and helpful.

    To those fighting the good fight of trying to save people from themselves and get them to look at Smith, I feel your pain. People generally just don’t want to hear it, and the more they think they know about investing, the less capable they seem to be of opening their hearts and minds. So far the most receptive audience for me as been small business people, many of them grasp it in a matter of minutes (took me a helluva lot longer!) and are asking me for my advisor’s number and making an appointment within a day or two.

  136. falconaire@sympatico.ca: Sandor


    As it is, I do write too often here all ready.
    The other thing is that this site is becoming a bit sluggish, probably because I am sluggish.

    Onto your question!

    I don’t know what is the loan that costs prime-.5, although I would like to know it.
    If it is a secured loan then it is better then prime, of course, mind you, I would watch out for the callability. But if it is a mortgage I probably wouldn’t use it because of the double compounding and because of the principal payments.
    So, I cannot simply just accept, or reject it without learning first what it is and what are its features.
    Sorry, interest rate alone does not an SM make.

    ps: would you invite me for one of your seminars? Not as a presenter, just as an onlooker.

  137. Here is the scoop on the Smith Manoeuvre.
    Simply stated it is a process to convert home equity to debt. It is important to note that you don’t need a home equity line of credit to do that, although the process works fine.
    The process is flawed in that if your primary purpose of the exercise is to make your home mortgage tax deductible, that opens you up to attack by CRA. GAAR; General Anti Avoidance regulations.
    If some of your investment is in things that produce capital gains, you can not deduct the interest in your annual tax returns, but you can factor it in when you sell the asset to reduce the capital gain.
    If you are going to do this kind of stuff, you need to set yourself up strategically. With your investments they need to be positioned as active business and not as investments. For your investment portfolio, you need to become an active trader.
    You need to keep impeccable records. Keeping good records seems to be a little known process. Apparently WNBC is the only company that teaches this process.
    You also need to know that CRA is aware of this program. When a tax strategy becomes popular with the population, it becomes popular with CRA. You will note that the law keeps getting tighter on tax reduction planning. Remember those income trusts?
    The only strategy you can count on is under the flag of business. Make absolutely sure, you have very good advice that applies to you.
    If you are an occasional or passive investor the Smith Manoeuvre could be a costly mistake for you to use it.
    If you think that the Smith Manoeuvre is for you, it could be true. However if you rush in thinking that it is an easy slam dunk tax saving, then too late; you may figure out that there were better options to save taxes. There are options that perhaps you just never went looking for.
    Ten years ago I was vocal about the dangers of the tax deferral donations programs and I was cursed by many. Today rescuing people who took the plunge is good for our business. CRA says they are going after every single Canadian who took part, and now that the law has changed, they are now ging after the promoters of the schemes. I expect the same thing will happen with the Smith Manoeuvre.
    How will CRA know who did the SM? Easy! Every Canadian not operating an active real estate business operation, or is an active trader who has high income expenses on line 221 of their tax return. *** and yes you can write off the interest on your rental real estate business. Just make sure you have impeccable documentation to show the money structure. CRA’s default attitude on everything is to look for reasons why you can not deduct things. Interest is just one of many fruitful targets for CRA.

    What do I think? Hmmm… I love these things; they are good for my business which includes helping people who get in a mess with CRA. Long live the Smith Manoeuvre!

    See what CRA says about interest charges.
    Line 221 – Carrying charges and interest expenses
    You can claim the following carrying charges and interest you paid to
    earn income from investments:
    • Fees to manage or take care of your investments (other than administration fees you paid for your registered retirement savings plan or registered retirement income fund).
    • Fees that you paid to a bank or trust company for the safe-keeping of investments such as safety deposit box charges.
    • Fees for certain investment advice. See IT238, Fees Paid to Investment Counsel.
    • Fees to have someone complete your tax return but only if:
    o you had income from a business or property;
    o accounting was a usual part of the operations of your business or property; and
    o you did not use the amounts claimed to reduce the business or property income you reported.
    • Most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. For details, contact us.
    • Interest you paid during 2006 on a policy loan made to earn income. To make this claim, have your insurer complete Form T2210, Verification of Policy Loan Interest by the Insurer, on or before April 30, 2007.
    • Interest we paid you on an income tax refund. You have to report the interest in the year you receive it (see line 121). If we then reassessed your return and you repaid any of the refund interest in 2006, you can deduct the amount of interest you repaid, up to the amount you had included in your income.
    You cannot deduct on line 221 any of the following amounts:
    • Interest you paid on money you borrowed to contribute to a registered retirement savings plan or a registered education savings plan.
    • The interest portion of your student loan repayments (although you may be able to claim a credit on line 319 on Schedule 1 for this amount).
    • Subscription fees paid for financial newspapers or magazines, or newsletters.
    • Brokerage fees or commissions you paid when you bought or sold securities. Instead, you use these costs when you calculate your capital gain or capital loss. For more information, see Capital Gains.

  138. I work as a Financial Planner with Investors Group and I am an avid supporter of the SM.

    Lots of people say the SM exposes you to risk. I put all my clients into our Segregated Funds which come with a 100% maturity guarantee. And you don’t need an insurance policy in order to hold a Segregated Fund.

    When you are borrowing for investment purposes there are two main reasons why people do not do it:
    1) Risk of Losing Capital
    2) Potential for Profit

    So by using a Segregated Fund as an investment vehicle, we have eliminated problem #1.

    Problem number 2 is eliminated by itself when we use a long term time horizon. Ask any financial advisor and they would be willing to bet their life that any properly diversified balanced portfolio will make you money over any 10 year period. Remember the market as returned over any 10 year period on average 8 to 10 percent.

    Now for my clients we just keep it real simple, our most popular fund, it’s top 5 holdings are the chartered banks. It has been around since 1962 and it has returned on average 8.33% every year.

    When was the last time the 5 major chartered banks in Canada did not make any money over a 10 year period? over a 15 year period? over a 20 year period?

    You combine the SM with our “All In One Account” and your total debt (mortgage) payments do not change at all.

    If you are in the Lower Mainland area, I would be more than happy to sit down with you and show you how we can implement the SM in your case, just drop me an email Harjit.Sandhu@investorsgroup.com

  139. Hi all,

    What happens when you get crazy distributions from a fund, part of which is roc/intererst/and dividends. Do you have to use those funds to pay back the investment loan, or can you use it to pay down your mortgage. Do you have to separate the distribution to an roc component so that your investment load remains fully tax deductible?


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  141. In many of the examples given in the posts, they assume a marginal tax rate of 40%. My income last year was $34,000. To be honest, I don’t know what my rate is, but I assume that it’s around 20%. I own a town condo home that I bought in 2006 with 25% down with a mortgage of $63,000. I have a young family and I’m the sole bread winner. As much as I wouuld like, I don’t foresee any major changes in my income in the next few years.

    Since I don’t have a lot of extra cash flow, the strategy of paying down the mortgage quickly and then invest once it’s paid off is something in the distant future. The prospect of maximizing my RRSP contributions is also unrealistic for me at this time. SM seems to me like a strategy that would allow me to build an investment portfolio without increasing my cash outflow. To me this is the most appealing part of SM.

    I must admit to having some reservations about using leverage to fund investments, but I should be ok if I take a long term view . Which is why I would like some input from you.

    Will I be further ahead using SM or can someone recomend an alternate strategy for someone of my income range?

  142. Pingback: DIY Smith Manoeuvre, Part 1

  143. Canadian Capitalist

    calberst: You’ll have to use the return of capital to pay back the investment loan because future tax deductions equal to the ROC portion won’t be allowed.

    Ashamansony: You’ll benefit from SM as long as your after-tax investment returns are greater than your after-tax investment costs (mostly interest in this case). However, I don’t know if that will be true in the future, neither does anyone else.

  144. Hi calberst,

    Your best bet is to have all distributions reinvested, instead of paid out. We’ve done the SM with hundreds of clients and have analyzed it in depth. There is almost never any advantage at all of having a distribution paid out (including your situation as you describe it).

    Some advisors are flogging the distribution as if it is the return of the fund. The funds paying 12-15% distributions (crazy, as you say) are mostly balanced funds that cannot be expected to make more than 6-7% long term. They will pay out their distribution for a while anyway, which means your investment value will plunge.

    The entire ROC portion must be paid down on the investment loan in order for the loan to remain fully deductible. This is sometimes presented as a way to pay your mortgage down more quickly, but it is really just a way to change your mortgage into a NON-deductible investment loan or credit line (if you take the distribution). Since the investment loan or credit line is usually at a higher rate than your mortgage and both are not tax deductible, this is a negative.

    The long term projected benefit of the SM can be huge, but the huge benefit comes from the compound return of the investments over time. If you’ve seen one of those compound growth curves, you know what I mean.

    When you take the distribution from the fund, you lose the compound growth and most of the benefit. If you pay the distribution onto your mortgage, you lose because you replace your mortgage with a higher rate NON-deductible investment loan or credit line. If you pay the distribution onto the investment loan, you maintain your deductibility but you eliminate most of the SM potential benefit. If you believe your investment will outperform your investment loan after tax, why would you want to take money out of your investment to pay down the loan???

    We’ve done comparisons of many strategies and almost all strategies that involve taking the distribution have lower expected benefits than the same strategy with zero distributions. The only exception is that sometimes taking some of the distribution allows you to leverage more highly than you could by only readvancing your mortgage principal paydown (which can be a benefit if done right).

    The other problem is that only a small portion of mutual funds are available with a monthly disribution. Most of the best mutual funds don’t pay monthly distributions. If you have zero distributions, you have far better investment choices than if you restrict your choice to the few that have monthly distibutions.

    My advice to you is to have the distribution reinvested. Pay your leverage interest entirely from readvancing the mortgage. Or better yet, pick a better fund by focussing on risk and return, instead of the distribution.


  145. @DAN

    Why the fear mongering? the SM has been found to be a legal investment vehicle and has been upheld by the courts on several challenges.

    It’s a legitimate strategy and it’s here to stay, and more people should take advantage of it.

  146. hi ed,
    i was reading through your posts..they are higly educative…
    you are doing a great service to the investor community…
    i have a few queries..

    1)what happens if we have a bear market like 1929…with leverage you would lose out heavily…

    2)i understand that you do not use index mutual fund…has not statistics proved that 90% of funds underperform index..

    3)i just read “Naked Investor”..is it possible for the financial advisor to skim client’s money..i mean the client saves hard for years..then to find that his advisor has stolen the money..
    what kind of control/access do the clients pass to their advisors…

  147. I have not read all the comments in this forum but going by what I have read in the article and the first few comments I believe that no one has understood the process correctly.

    CC says:
    “As I have mentioned before, I don’t think that the SM is for everyone and I don’t think the majority of people that learn about the SM really understand what risk they are exposing themselves to if the market doesn’t give positive returns. ”

    Everyone seems to think that they are taking on more risk when they use the equity built up in their home to invest when in fact they are actually reducing their risk and with all due respect to those that love math (me included) this is more of a theoretical problem. You can use any numbers you want to show that the SM, as a concept, generates either a positive or negative return as you can for any investment concept.

    What is a mortgage? It is an investment (leverage) loan nothing more and nothing less. It is this knowledge that everyone has seemed to forgotten. This loan has two negatives, interest is not tax deductible and the investment is not well diversified. By using the SM you are able to solve both of these problems.

    If we use modern portfolio theory and buy a well-diversified portfolio that is not strongly positively or even negatively correlated with the value of your house then you would tend to reduce your exposure to risk (You could increase your returns well) but you would defiantly reduce your risk (i.e. Move toward the efficient frontier boundary). This is what I believe the real strength of this concept to be, to reduce risk and create downside protection (particularly when used within a seg fund).

    Probably the strangest part is that those who you would think are the least likely candidates for this are the ones who most need it (i.e. seniors or retired home owners who’s wealth is mostly tied up in the value of their home, just ask those in some southern US cities). I do not believe that I am alone in this thought and would challenge others to do some research on what some of the brightest finance professors in the country are saying about the need for downside protection

  148. 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?

  149. Hi Chris,

    You hit the nail right on the head! You can own funds that have bonds, stocks and cash (well diversified) that distribute no income and little or no capital gains.

    In today’s market (sub-prime mess) if you are buying into the market (dollar cost averaging) you are lowering your risk. If one is in a high tax bracket has a number of years still to work they should do their homework and check it out for themselves.

    With the new budget, the TFSA (tax free savings account) may also, work well in the future with the SM.

    Brian Poncelet, CFP

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  152. I read most posts on this blog (going backwards from #153), and this blog is definitely very informative.

    I recently asked about the SM with my FA, sounds faboulous. What was attractive was paying off the mortgage in half the time, with the same cash flows.

    Here’s how she suggested I start:
    House Value: ~$330,000
    Mortage: $165,000
    Home Equity LOC: $100,000 @ 5.75%
    Investment LOC: $100,000 @ 5.75%
    [so total additional debt: $200,000]
    Monthly Mortgage Pmt: $1050
    Debt-free in: 11.5 years.

    I’d put $200k in a t-series Mutual Fund with 8% guarenteed distribution.
    That gives me $1333/month, which SHOULD be ROC income.

    Question regarding t-series funds:
    From my reading on t-series funds, the fund distributes 8% based on NAV (which fluctuates, of course). So, in the course of 1 year, if the fund makes 0%, the NAV would decrease by 8% in order to pay the distribution.
    Am I correct?
    My concern is that the t-series fund will be inadequate to pay off the LOC at the end of the SM term.

  153. Warren,
    You also lose the tax deductible status of the loan. As you receive ROC, the portion of the loan which is deductible is reduced, by that same percentage.

    Your advisor has not described the Smith Manoeuvre, but something else entirely, which may open you to inquiry by the CRA. Have a look on Million Dollar Journey for more info on the SM process.

    I would also consider looking for a more honest FA.


  154. Warren,

    David made some good points about the ROC. But here is the interesting part, as the market is getting ugly as it does from time to time, some fund companies are cutting the ROC distributions! The fund companies that are not cutting distributions, (yet) are not selling the 12-14% ROC funds any more.

    There is no fund company that will guarantee a distribution unless, you look at Manulife’s Income Plus (but higher fees come with it) and I believe this distribution is 5% not 8%.



  155. I have read many of your comments and found them very helpful. Thanks to all the contributors.

    I need to make a decision and hope with some input I can better judge the direction I should take.

    My situation,

    I own a condo valued at 350,000 with a mortgage of 152,000. I had full intentions of selling it to finance my purchase of a new house costing 370,000. I live in a very popular local and have had many people advise me that I should keep the property as a rental. A comparable property in my area rents for 1600,00 (maintenance and property taxes would amount to $425). I currently pay a mortgage of 1050.00 on the property. I have already been approved for financing for propery #2. I know I can sell my property within days (stats show these condos go within day and over the asking price). Keeping the property is appealing to me but am I in good position to do this? I make just under 80K a year and have a separate debt of 4K. I have own current property for 4 years and have made 120k already. I think it’s a pretty good investment. Is the SM for me?

    What do you think of the Firstline Matrix?

    Thanks. Your help will be appreciated!

  156. Esther,

    Condo Value = $350,000
    Purchase Price = $230,000
    Current Mortgage value = $152,000
    Readvancable Mortgage value = $280,000

    Interest cost = $760/month (less than $500 once income taxes are assessed)
    Maintenance = $425 (less than $300 once income taxes are assessed)
    Insurance =$??

    Rental Income = $1600

    You can carry the condo for about $800/month (after taxes), and pocket $800. You would have to assess this against your initial investment to determine your rate of return.

    Your 4K of debt can be paid out in less than 6 months if you applied the income from the rental against it. It would also be a tidy sum to pay against your new mortgage.

    If you can manage the costs of your new home (you stated you’d been approved, but I don’t know if the approval included the sale of the condo), you could consider retaining the condo as an investment.

    Engaging the Smith Manoeuvre would be an additional tactic beyond the option described above, however, you could flow the additional income from the rental through your new mortgage, and buy more investments.

    Have a look on MillionDollarJourney.com for other SM discussion, and find a quality Financial Advisor to accurately inform you about the risks and rewards of this type of investment.


  157. I am a teacher, just investigating the SM approach. It certainly is interesting. I currently owe 300,000 on my mortgage. House has been assessed at 575,000. I have 7000 on a L of C. I lease a vehicle 714 per monthfor my wife to drive. My business (auto industry) allows me to drive dealer cars so as a result i have started putting aside 400 month in a money mkt. My weekly mortgage is 400 per month. Am i crazy to try the SM. My current advisor from Scotia McLeod likes part of the strategy. However, he wants me to cover the interest costs associated with the borrowing to invest. I am looking for advice!!!

  158. Joseph,
    Sounds like your banker does not wish you to implement the Smith Manoeuvre; he wants you to pay out your loans to him instead of maintaining an investment loan.

    Your mortgage situation could support about a $160,000 HELOC. You could choose to invest this as described in the Smith Manoeuvre if you wish. I assume you are paying $400 weekly on your mortgage. If you implemented the SM, you could invest $1200+ monthly in suitable vehicles, and use the final $400 weekly mortgage payment to pay the interest ( the money returned to your HELOC is yours to use as you see fit, so spend it on an interest payment if you wish). If these are accelerated weekly payments, you could tell your banker that you wish to move to non-accelerated weekly payments, and use the difference between the accelerated payment and the regular payment to pay the interest he is so keen to receive — you have the same out of pocket cost, and he gets his ‘interest’ payment.

    The $400 monthy that you currently invest in a Money Market Fund could be used in a number of ways: investments that return more than money market funds or to appease your banker for an interest payment. This latter option would allow you to invest the full increase in your HELOC each month and satisfy you banker for an interest payment. I’d suggest looking at quality investments for this sum, unless you absolutely must pay the banker’s interest demand.

    You also should drop by MillionDollarJourney.com for other discussions on this strategy.

    Get rid of the $7000 LOC, unless it is an investment loan. Paying out that loan is equal to the interest rate (8%?) * 1+your tax rate in savings.

    Oh, yeah, always get quality investment advice, as we’re just a bunch of anonymous individuals on a blog!


  159. Hi Joseph,

    If you borrow to invest, this is called leverage. The point of the SM is to get a mortgage (HELOC) and keep your mortgage payments the same. Go to http://www.smithman.net and buy the book “Is your mortgage tax-deductible”,by Fraser Smith. This will be a good start. DAvid has made some good comments as well.



  160. Correction:
    Earlier I stated: “….SM, you could invest $1200+ monthly in suitable vehicles, and use the final $400 weekly mortgage payment to pay the interest…”

    I should have suggested you could invest the principal paid from 3 of your weekly payments, and use the principal paid from the final week’s payment to pay interest costs.


  161. I’m not a financial advisor, or a wealthy person, but I think if a middle-income family can save just one extra mortgage payment a year, it will help save some interest in the long run, and if they want to save for retirement at the same time but don’t have a lump sum to invest, then this family should just start up a pre-authorized payment (minimum $25 a month) and have it directly go into a mutual fund (and by using the pre-auth method they can reap a dollar cost average savings on the cost of the mutual fund units they buy, because the price goes up and down), and that way they pay their home a little bit faster and save for their future too…. that’s just my humble opinion

  162. Hi Shannon,

    You are on the right track but assuming you are in a higher tax bracket (say $70,000 gross in Ontario) you would be in a 30% tax bracket combined on the top dollars. The way the SM works so well is using the tax refunds and putting this against the mortgage once a year.

    At your rate of $XX this helps, but will take you a long time to get ahead. If you are making a lower income, or living in the 1960’s when taxes are lower then your way is smart and conservative. If you contribute to RRSPs then you owe it to yourself to do your homework and see if this makes sense in your case.

    The other “thing that is not talked about but should be is risk, not market risk …health risk. What if you get sick or disabled this is far more likely to happen than the market going down over say a ten year period. If the market goes down you will have to wait. If you get cancer and go on long term disability this will only pay about 60% of your income!

    Between ages 35 and 65, seven out of ten people will become disabled for three months or longer. One out of seven employees will be disabled for 5 years or more before retirement. This is what I call risk.



  163. Thanks David.
    I appreciate the advice.

  164. Great blog you’ve got here CC. I actually read all 165 entries in one day.
    I recently attended a seminar here in Calgary organized by M-Link Mortgage company that was describing a strategy based on SM with an accelerator. I later arranged a meeting a got my own numbers calculated. Please take a look at print outs I got:
    I have yet to hear anything about this company and whether this variation of SM is a sound strategy or not and hope to hear from experts here.

  165. Canadian Capitalist

    Iakov: Thanks for reading and your comment. I am unable to read your printouts (takes too long to load).

  166. CC,
    I’m not sure what the problem is, it works for me.

  167. Canadian Capitalist

    Iakov: I was able to scanned images just now. I have to confess that I am not a fan of the Smith Manoeuvre. Why? It’s simple math. Many experts opine that future stock returns will be modest — and we can expect a risk premium of 4% from being in stocks versus cash equivalent.

    Now, the bank charges 1.75% over the risk-free rate. And let’s say the investment advisor charges another 2.5%. What is the investor really left with? The arbitrage between the tax deduction on the interest and the 50% rate on capital gains. Is it worth the risk? I’d say no.

    Investment advisors will disagree but do they really have the investor’s best interests at heart when the SM is so lucrative?

  168. Iakov,
    8% net of taxes from your income fund seems high in today’s market. The diagram also hides the investment loan a bit in my opinion, by putting it up by the “Income Fund” character.

  169. CC: thank you for your comments, but honestly I’m not wise enough to understand them, sorry.
    David: I think you misunderstood, 8% is yearly distribution from income fund. Unless we’re talking about same thing 🙂

  170. David: investment loan apparently is what finances income fund along with ILOC

  171. So wait just one second Iakov, you have a hard time understanding interest rates, MERs, and Taxes, but you want to implement a smith manoeuvre? If that question is true, I would very strongly recommend you avoid the product until you understand exactly what it is they are selling.

  172. Traciatim : instead of giving your wonderful advice do you think you could explain what CC meant in his post? Or is it easier for you to post a note how someone should give up because he doesn’t understand something?
    Very helpful indeed.

  173. Canadian Capitalist

    Iakov: With the SM, you have to make assumptions about future returns. I’m saying that if you make realistic assumptions and invest through an advisor, the SM is highly likely to be a losing proposition. I’ll write a post on this topic next week. I’m not sure which part you don’t understand and if you can point it out, I’ll try my best to explain it better.

    Traciatim isn’t saying you should give up. He is simply saying that you shouldn’t invest in anything unless you have some understanding about it. Otherwise, you’ll easily make a big mistake. We (i.e. myself and many other readers) have nothing to gain or lose from your financial decisions. You do. IMHO, you should read Traciatim’s comment in that spirit.

  174. Iakov said: “investment loan apparently is what finances income fund along with ILOC”

    Then it is possible, or even likely that the distribution is a ‘Return of Capital’. This would have the effect of making your investment loans non-deductible over a period of time, eventually removing your tax deduction, and leaving you with a taxable mortgage again.

    It also is not the Smith Manoeuvre, as you are adopting considerable extra leverage.

    I second Traciatim’s advice — take the time to learn about the Smith Manoeuvre before you allow someone else to manage your money in this fashion. As our host stated, you need to consider the options carefully, having gathered full knowledge. If you have not looked at MillionDollarJourney’s comments on the Smith Manoeuvre, I suggest you also view the posts there.


  175. CC: are you suggesting that using financial adviser is bad? or just in this case?
    DAvid: “taxable mortgage”, can you please explain that part?
    I am learning about SM as I go, so not everything is obviously clear and my first exposure to it was at the seminar I mentioned above. They did say it wasn’t clear cut SM, but with modifications and accelerator (that being income fund you see on diagram). I have a meeting next Fri to pick out investments and I’m bringing my cousin who is an accountant and is very good with investments and all the lingo.

  176. Iakov, excellent decision to bring an accountant. What you are getting in to is simply taking out a huge loan to invest in something that may or may not go up in value. That’s a fairly large decision to make without understanding it incredibly clearly; Especially with such large amounts.

    Some important questions to ask are things like:

    What happens when the value of the house drops below the required loan to value ratio? In the USA a pile of people are faced with this very problem, and are being forced out of their homes. This can and does happen.

    Since we are going in to 2009 with the assumption that inflation is a huge concern, what happens if the floating rate on the loan, mortgage, or line of credit increase by 1-2%, or even 4% over the next few years? This can and has happened to people in the past.

    They assumed in the presentation an 8% rate of return. You haven’t picked out your investments yet. How are they assuming things on unknown variables? What will be your estimated rate of return based on your investment decisions, and what happens if this under-performs and now you owe more money than your investment is worth? Can they call you and ask for you to make up the difference or they will take your house? Though unlikely, if it’s in the agreement they will do it if they have to . . . they are bankers after all 😉

    I wasn’t trying to tell you to give up, I want to make sure you REALLY understand it before you sign anything. If you don’t think you understand everything that can go wrong with the plan during your meeting, don’t sign. They will wait a week while you read it over, and over, and over . . .

    P.S. Interest charged on your mortgage you can’t claim on your taxes to reduce your tax bill. Interest paid on a loan you use to invest can. If they give you ‘Return of Capital’ as part of the payment from the income fund, the amount returned to you is no longer invested, but you still owe it on the line of credit, the interest from this amount that’s returned can no longer be deducted because it’s not borrowed to invest anymore if they gave it back to you. So if they give you your whole original amount back over the years in return of capital you’ll end up with a big line of credit that you don’t get a tax deduction for. This is why I warn, don’t sign unless you understand EVERYTHING!

  177. Traciatim: Thank you, that’s type of discussion I wanted to have. You and others made alot of things clearer.
    I wasn’t planning to sign anything on Fri anyway and truthfully there’s no pressure from M-Link to do that, which is kind of surprising really, when I initially went to they seminar I was fully expecting high pressure sale pitch to “get into this program or it’s going to be too late” but nothing like this happened at all so far, it’s been pleasant experience to talk to these guys. Next Fri is my second face to face meeting with them, they waited patiently for 2 weeks until I could get my cousin to attend. We” go over the whole strategy again and I will use knowledge I acquired here to ask right questions.
    Questions like : is return of capital a part of income fund payment?
    Thanx a million guys.

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  179. Hi everyone. Love the discussions here, very interesting. I’m a new homeowner and am considering SM once I have about 20% equity built up (this 20% will serve as a buffer in case my investments lose worth).

    I have a question about a comment in Smith’s book (I did not read all posts so sorry if this been discussed). He mentions that capitalizing interest is just as valid as paying interest (on money borrowed to invest) from a tax deductibility perspective. Are there any catches to this? It seems like one should not be able to deduct an expense that they have yet to “truly” incur.

  180. So I went to another meeting and asked a question about return of capital.
    Here’s my question:
    “The whole 8% distribution from income fund is a ‘Return of Capital’, since this amount is returned to me and no longer invested, can interest on investment loan be still deductible? The thinking behind this statement is that amount that’s returned can no longer be deducted because it’s not borrowed to invest anymore if I get it back.”

    An this is a reply from financial planner:
    “Basically, the amount of deductible interest decreases by the amount of the ROC in the Income Fund side of the equation; but increases by a greater amount, as the funds are advanced from the HELOC for the purpose of investment on the Wealth Fund side of the equation.
    In short, you are right, with one exception, but your overall tax deduction increases each year until “Mortgage Conversion”, at which point it remains level from there on.”

    Any comments?

  181. Iakov,
    It seems to me the ‘investment loan’ is more for tax avoidance than tax reduction, as it does not generate enough income to be viable without the tax reduction. I’d look very carefully at this offering.


  182. DAvid: how can investment loan generate income? Please explain.

  183. Hey Iakov, you may want to call the CRA and ask if the interest off of an investment loan can be deduction from your taxes if the investment of choice is only returning you return of capital at the start.

    An investment generates income by paying you something you didn’t have before; generally business income, dividends, or interest. You can ask the CRA when you call about the return of capital thing what exactly applies as income for the interest on an investment loan to make it tax deductible.

  184. Traciatim: I shall do that in not too distant future, thanx.

  185. Traciatim: actually come to think of it, in order to have interest tax deductible all is needed is a reasonable expectation of profit and I have that with income fund, I actually expect it to return somewhere around 8-10%, providing I select right investments.
    So, I get an investment loan, I use it to buy income fund that distributes 8% of its value yearly and I expect investments in income fund to grow 8-10% yearly, why wouldn’t interest on a loan be tax deductible? But because distributions are ROC they reduce that tax deductible interest by ROC amount as previously stated.
    I think I got that right.

  186. Sure is quiet here 🙂

  187. Canadian Capitalist

    Iakov: Let me get this straight — you take out an investment loan, invest in a fund that does ROC distributions. You apply the ROC distributions against the principal, then take out a loan (amount equal to the ROC distribution used to pay down the principal) and invest in the same fund. I’ve never heard anything goofier. Why go through all the trouble? Why not research something that doesn’t make a ROC distribution in the first place?

  188. CC: What gave you idea that amount equal to ROC distribution gets invested in the same fund it was taken from?
    I you do me a favor and download couple of scans I provided earlier you’ll see that it is not the case.

  189. Canadian Capitalist

    “Basically, the amount of deductible interest decreases by the amount of the ROC in the Income Fund side of the equation; but increases by a greater amount, as the funds are advanced from the HELOC for the purpose of investment on the Wealth Fund side of the equation.”

    I think that’s what the above response from your advisor means.

  190. CC: I politely disagree with you. May I ask you if you actually looked at the diagram I posted?
    Income fund and Wealth fund are two separate funds. HELOC funds investment loan (and therefore income fund) as well as Wealth fund.
    I do not see how this statement from advisor could make you think what you said in 189.

  191. Canadian Capitalist

    The site is blocked from the office, so I can’t look at it again now. Even if your loan equal to the ROC is invested in a different fund, the question remains: why? Why not avoid the ROC in the first place?

  192. CC: if you send me an e-mail I can send you those scans by e-mail.
    ROC is what accelerates paydown of the mortgage principal utilizing prepayment privileges. As mortgage principal is reduced by ROC amount ILOC is automatically increased by that amount and is available for investment, in this case in Wealth fund.
    So as you can see TDMP not only allows for quicker mortgage repayment but for also accumulating pretty significant non RRSP retirement portfolio.
    Man, I think I’m starting to sound like TDMP salesman:)

  193. Yes Iakov, you sound like a salesman . . . confusing 😉

    I’ll post more later hopefully, for now I’m being hounded to spend some time with the family.

  194. Well, if I understand the strategy that in itself qualifies it as “not confusing”. I can even explain some of it as you can see and starting to like it more and more and see less and less of downside.
    All recent questions from CC were obviously asked because he didn’t take the time to familiarize himself with TDMP.
    No doubt it’s easier to dismiss something then to try to understand it.

  195. Well, I pretty much understand it, I just don’t get how this is any different than just getting a Mortgage, Line of Credit, and Investment account. If you talk to any Mortgage broker they can set up a Mortgage and HELOC for you that will be able to do a similar setup. I also don’t understand the choice of return of capital for the income fund and why it is separated from the wealth fund. This step seems to over-complicate what should be a fairly simple procedure of borrowing to invest.

    The root of it all is simply you are borrowing $505,000 at, I’m assuming, variable interest rates in order to buy assets that may or may not go up in value using complicated tax rules to help you get ahead. If you think it’s a good deal and will provide you, and your family, a head start for the future and feel like their plan works with an acceptable amount of risk then by all means go for it. If it works out it really does sound fantastic.

    I just worry with all these layers that all depend on each other to succeed that if any one of them goes wrong then the whole thing starts to unravel very quickly. Depending on where your house is, what happens if it’s value drops by 30-50% in the next few years? What happens if interest rates rise 5% in the next 5 years? What happens if by some crazy stoke of luck the Green party get voted in because Canada gets fed up with politics and the Greens decide that borrowing to invest shouldn’t get tax advantage because corporate greed is bad?

    All things things are unlikely, some more than others, but a huge pile of rules will change in 25 years time. Make sure you read the fine print so you know what happens in the event that any one piece falls apart or the rules change. If you can live with all the consequences then jump in with both feet. It’s not like anyone is dying over this decision, and you can’t win if you don’t play.

  196. Traciatim: ROC is used so that that I don’t get taxed on distributions every year.
    Why should income fund and wealth fund not be separated? They are there for completely different purposes, one to help pay down mortgage quicker and another to build retirement portfolio.
    This is no different than simply getting a mortgage, HELOC, investment loan and investment account. In fact this is exactly what it is. I don’t understand your point here at all. Why does it have to be different? Is it because of setup fee and monthly fee you think that?
    What layers depend on each other? I disagree with you here. The only linked parts are mortgage and ILOC because one has to increased by amount another decreases automatically, but that’s the end of any linkage.
    Also, from what you’re saying, if house value drops 30-50% and if I have conventional mortgage I won’t have to repay it? I still have to pay it back no matter what my house is worth. This mortgage is no different from any other mortgage and I have same responsibilities to pay it down, it’s just this way I can accomplish it faster. Don’t you agree?
    What I agree with you about is that nobody can predict the future. While some things are less likely to happen than others nobody knows what will happen.
    Tax rules can change, no doubt, but can you imagine what would happen if government decides that people and businesses can not borrow to invest and get interest tax deductible? I’m no tax expert but I think that rule is very old and unlikely to change.
    What is more likely to change though is prime rate. In my 16 years in Canada I’ve seen them fluctuate about 5-7%. What’s good about this strategy is that if rates go up I get more tax refunds and therefore cover for increase in prime rate, of course not all the numbers will be as rosy as if prime rate was low but benefits are still there. I actually have calculations that assume 6% prime rate, those interested can have them.
    I also would like to thank you for having this informative discussion, it helps me tremendously to understand the whole strategy, its positives and negatives. Please continue even if you agree and just playing devil’s advocate.

  197. It appears the investment loan has a twofold purpose:
    -to increase the tax return at an early stage
    -to increase the capital being placed into the HELOC for reborrowing

    The investment fund payout increases the monthly mortgage payment by some $1500 monthly. Since it is a ROC, the applicant does not have to find the cash to pay that portion of the monthly payment. It seems a little of robbing Peter to pay Paul, here, but it does increase the financial pot at the end versus not having the investment loan.

    That said, if you were able to borrow $505,000 and used the regular Smith Manoeuvre, you would have about $100,000 more at the end of 25 years. The trick is borrowing over $500,000 with a house valued at $343,000; the investment loans fill that gap. I expect TDMP has a list of suitable investments for the applicant to select that satisfy TDMP’s risk tolerance.

    This works because the applicant takes on considerably more risk by way of leverage than with the SM, gains far greater tax returns at an early stage, and apparently maintains the tax refund by the rapid increase of the HELOC, as the Investment loan is converted or reduced.

    It seems to be a form of the Cash Flow Dam Fraser Smith proposed. He has recently ceased to recommend using the Cash Dam as he believes it to attract scrutiny from the CRA, and may not pass the test he set out in his original thesis. He suggests that implementing strategies such as the Cash Flow Dam or debt swap, which benefit the borrower by paying down the mortgage and reducing taxes, but do not benefit the economy by actually ncreasing investment, should not be chosen, as it may Attract interest from the CRA in the same fashion as did the Lipson case.


  198. Canadian Capitalist

    Iakov: “All recent questions from CC were obviously asked because he didn’t take the time to familiarize himself with TDMP”.

    Perhaps. But keep in mind that I don’t need to understand TDMP. You do! 🙂

    After reading DAvid and Traciatim’s comments, I understand the TDMP quite well. What they do is a massive initial leverage, followed by an implementation of the traditional SM.

    Seriously though, I’ve mentioned that I am not a huge fan of SM. What the TDMP plan does is add more leverage on top of SM and makes it even more riskier. Your loans total to $505K, supported by a sliver of home equity at $77K and requiring interest payments of $2,900 per month. How is this the same as a homeowner who has a loan of $274K supported by a equity of $77K and requiring mortgage payments of $1,900 per month? We are talking about vastly different scales of risk here.

  199. CC: You are correct that I’m the one that needs to understand TDMP, it just looks strange that you would want to make uninformed comments on something like this in your blog.
    Hey it’s YOUR blog, you can do whatever you want with it 🙂
    I, on the other hand, learned quite a bit by trying to reply to your questions.
    “How is this the same as a homeowner who has a loan of $274K supported by a equity of $77K and requiring mortgage payments of $1,900 per month?”
    I never said it was the same. There’s nothing “the same” about these two strategies except may be that in both cases home owner needs to pay off his mortgage.
    One strategy is pretty safe and predictable. In the end homeowner pays same amount in interest as he borrows and spends on average 25 years to do that. After that he’s left with a house and road ahead to save for retirement.
    Another strategy let’s you payoff mortgage in third of the time, save on non tax deductible interest and build sizable retirement portfolio in the same 25 year time frame. And of course in order to make money you need to spend money and there’s a risk associated with that. The good part is that TDMP doesn’t require any additional cash flow to implement it as, frankly, I don’t even have any extra cash to purchase RRSP’s.
    It’s an old risk-reward thing and I’m thinking hard whether to dive in or not.

  200. Canadian Capitalist

    Iakov: “The good part is that TDMP doesn’t require any additional cash flow to implement it as, frankly, I don’t even have any extra cash to purchase RRSP’s”.

    You are making many large assumptions here. For instance, how sure are you that the 8% monthly distribution from the income fund is sustainable. What if it isn’t? What if they cut the distribution entirely? Would you be able to service the loan AND your mortgage out of your monthly cash flow?

    What about margin calls? Your equity in the income fund is only 33%. I’m surprised you can even get an investment loan with such a small equity.

    What about the margin call on your mortgage? Do you have to appraise and get a mortgage every 5 years? What if home prices fall, say 15%? Would you be able to renew your mortgage?

    With leverage, especially at the high levels we are talking about here, you have to make sure that you will be able to withstand adverse situations. Only you can decide that.

  201. CC: Well, in a long run 8% should be sustainable, it is after all a long term strategy. Can they cut distribution entirely? I don’t have an answer to that question, but will ask CFP I deal with.
    Why would I have to service loan from my cash flow? It is serviced from ILOC as far as I know. I mean if it is a possibility that distributions are cut then I simply not gonna go into this strategy.
    Apparently getting investment loan is not a problem at all, so I was told. If I get it I get it if not then whole thing is a no go, simple.
    Would I have to appraise my house every 5 years? I would only have to do it once (that’s assuming I have to do it, because I think if you renew your mortgage you don’t have to appraise it again) because after 7 years I won’t have a mortgage. Getting a mortgage with TDMP is no different than your mortgage.
    In all honesty CC, I think we’re starting to go in circles here and you can’t seem to find new questions to ask. We’re going over same thing over and over.
    BTW, do you have a chance to go to one of the TDMP seminars. I would love you to go there and ask all these questions after presentation, they have CFP and mortgage broker there to answer all the questions and then you would report here. I wonder how and if your position change.
    Just don’t tell me that you’re not interested or have no time, I won’t accept that. 🙂

  202. Canadian Capitalist

    Iakov: Oh boy. Where do I even begin? I agree with you that this conversation is becoming pointless. All I can suggest is that you carefully think about whether you have managed the risks properly.

  203. Thanx, I will do just that !!!

  204. Iakov,
    I am curious as to why you seem to feel that our host should spend time researching your choice in investment vehicles? You have repeatedly suggested that Canadian Capitalist investigate the firm and investment vehicle you are considering, most recently suggesting attendance at a presentation by this provider. Blogs are a place to publish opinion and exchange thoughts, knowledge and ideas. You might wish to adjust your expectations, and hire an individual who can provide the expertise and investigations you seem to expect.


  205. DAvid: You know I wrote great big replay to you last post but then thought that no matter what I write it wouldn’t matter anyway as I’m a guest here.
    So, I just politely agree with you and fade away into sunset minding my own business.
    Thanx for everything.

  206. Hi Everyone,

    This seems like a pretty straightforward strategy to me. Basically it’s putting a name to the strategy that every financial advisor should urge their clients to do. Pay down your debt quickly, invest any excess capital and think long term. First of all, I’m for anything that will encourage investors to follow a long term strategy and stick with it. You can call it whatever you want, as long as people maintain there discipline and focus on the long term picture, I’m happy. But, the point that everyone is missing I believe is that timing plays a huge part in determining which strategy will work the best. You can talk about annualized returns all you want, but the sequence of returns is actually the more important detail.

    If you implement the SM to take for example a $100,000 loan from the equity in your home, and you start off on a great year in the markets… that’s wonderful. Your investments are up more than the value of your loan and compounding in the future is looking pretty damn good. However, if you start off in say a 20% down year, like we are currently going through globally, your $80,000 investments have a long way to go to get back to catch the $100,000 loan compounding at whatever interest rate you are being charged. Your behind from the start and not likely to catch up.

    When simply paying your mortgage down with the expected 15 – 25 year amortization payments and putting any excess into an investment account, your not as dependant on getting that good start.

    So as I see it, although both strategies will work well if the investor has the discipline and patience to maintain them, if your certain your going to get a good start with your investments, the SM seems like the best way to go. If not, than it seems best to stay away.

    I hope one of you has that crystal ball that I’ve been looking for.

  207. Kristian,
    If you read Smith’s book, he suggests investing small amounts, for the most part, thus taking advantage of dollar cost averaging. Instead of having that $100,000 lump sum falling from highs, such as we are currently experiencing, you are buying through the low.

    If you start out the mortgage in the manner Smith describes, you have only small amounts of principal to invest, as you are starting the mortgage with no excess equity beyond that you used to secure the mortgage-HELOC.

    If you have a large un-invested equity, and are performing a ‘Flintstone Flip’, then your comments ring true, and care must be taken in the choice of investments.


  208. Canadian Capitalist

    As DAvid has correctly pointed out, what you are describing is a plain-vanilla SM on top of an initial leverage. I agree with DAvid that the SM is likely to be easier to stomach because money is added gradually but that doesn’t mean that a downturn could wipe out several years of gains and then some pretty quickly and an investor needs the fortitude to ride out the storm. The problem with leverage is that discipline and patience will be in short supply in such situations.

    I personally prefer the second (less risky and yes, potentially less rewarding) route of simply paying down the mortgage and investing the savings in the market.

  209. CC: Interesting, why do you think that investing savings in the market after paying down mortgage is less risky than investing while still having a mortgage?
    As far as I’m concerned the risks of investing are still the same no matter when you invest. The only difference is that the earlier you start the better chance of success you’ll have in a long run.

  210. Canadian Capitalist

    Iakov: It’s less risky because when you leverage, you don’t get to keep the entire return. You only get the difference between the returns you earn and the interest rate on your loan. Also, depending on the amount of leverage, there might be margin calls to contend with.

    For example, let’s say that the interest rate on a loan is 6% and after the tax benefits, the effective rate is 4%. If markets fall 10%, the loss for a leveraged investor is -14%. If markets rise 10%, the gain for a leveraged investor is 6% (less any taxes).

  211. Hi Iakov,

    There is a direct tax problem with the strategy you described. I mentioned this earlier in this blog, but it is an important issue. As you mentioned, if you take the ROC distribution and put it onto your mortgage, then that amount of your loan is no longer deductible. This is simple logic – if you borrow to invest and then cash in the investment, obviously the loan is no longer deductible. That is what ROC is – getting your own principal back.

    Your illustration showed an “income fund”, but your example is actually a “get your own principal back” fund.

    Canadians are so focused on paying off their mortgages that strategies like this tend to look good. You pay your mortgage off in 8 years, but you replace it with a NON-DEDUCTIBLE investment loan at a higher interest rate. What is the point of that?

    Receiving the ROC distribution does not reduce your debt or convert your debt to deductible. For example, let’s say you have a $100K mortgage and you take out a $100K investment loan to invest in a fund that pays $8K ROC distribution. Then you borrow another $8K from a linked credit line and invest it.

    It is easier to see the result if you ignore the regular mortgage payments, interest and investment return for a moment. When you receive the $8K, you pay your mortgage down to $92K. However, since you have withdrawn $8K of the principal from your investment, $8K of the investment loan is no longer deductible.

    After a year, you still have $100K non-deductible – your $92K mortgage + $8K of the investment loan. You also have $100K in your investment – $92K from the first investment and $8K from reinvesting. You also have $100K in tax deductible loans – $92K of your investment loan + $8K on your investment credit line.

    The complicated part here is that you now have to do the math on your tax return that is called the “Snyder Tax Calcuation”. You have to calculate the 92% of interest on the investment loan that is still tax deductible.

    Now let’s say that instead of all that, you invest the $100K in a fund that does NOT pay any distribution. At the end of the year, you are in the same position – you have your $100K non-deductible all in your mortgage, your $100K investment loan that is 100% deductible, and your $100K investment.

    This is why we call the ROC strategy “4 meaningless transactions”. There are 4 transactions that all together do absolutely nothing:

    1. Fund pays out ROC distribution of $8K.
    2. Pay the $8K onto your mortgage.
    3. Reborrow $8K from a credit line to invest.
    4. Do the Snyder Tax Calculation with your tax return to calculate the amount of your investment loan that is deductible.

    Why bother with all of this when it does absolutely nothing? The answer is that it looks like you are paying down your mortgage. Canadians love that! But you can’t ignore that you are replacing over 8-12 years wit a NON-DEDUCTIBLE investment loan.

    What is funny is that you can do this in 1 day instead of over 8-12 years. Just call your bank and tell them that you want a secured credit line instead of a mortgage. Tada! We have paid off the mortgage and replaced it with a non-deductible credit line.

    The disadvantages of this strategy are the complicated tax calculations and that you have almost all of your money invested in a fund chosen for its ROC distribution – not because it is the best investment based on risk/return/tax-efficiency.

    The answer you quoted from the financial planner in post 182 is meant to confuse you. Of course the amount you reborrow “increases by a greater amount” the tax deductible interest. But this does not change the fact that it is part of the “4 meaningless transactions”.

    You pay $8K onto the mortgage and then reborrow $8,500, which is $8K from the mortgage paydown (one of the 4 meaningless transactions) plus the $500 that is the principal from your ordinary mortgage payment.

    If you do the “Plain Jane” Smith Manoeuvre and just reborrow the $500 principal from each mortgage payment to invest, then you also “increase by a greater amount” the tax-deductible interest – because you borrowed the $500 to invest.

    Again, even though the strategy increases tax deductible interest by a greater amount, it again does exactly the same as the Plain Jane Smith Manoeuvre – make the interest on $500 tax deductible.

    You should never do this type of strategy without having the financial planner do your tax return and put his name on it. That way, you have some assurance that you are getting real financial advice and not a sales pitch.


  212. CC: so what you’re saying is that you know for a fact (or calculated this) that paying down mortgage for 25 years and then starting to invest is more sound of a strategy than leveraging that starts 25 years earlier?
    I have no numbers to back my theory but I would think that over 25 years even with ups and downs of the market, even with need to cover loan interest one can be miles ahead by starting leveraging now versus waiting for 25 years.

  213. Ed,
    Very good explanation, thank you.
    Only one thing I can’t seem to grasp. When you or others say “NON-DEDUCTIBLE investment loan”, I always thought that what can be deducted is the interest on that loan not the loan itself.
    In TDMP strategy, the way I see it is this and I think that’s what TDMP financial planner was trying to relay in his answer in my post 182: 8% distribution from income fund reduces deductible interest on investment loan but in turn increases deductible interest because the ILOC is increased by the whole distribution amount every month.
    I wonder if you can clear this up. I’m sure I’m not the only one who has a problem understanding this part.

  214. Hi CC & Iakov,

    CC, I have to agree with Iakov on this. Borrowing to invest now will probably leave you miles ahead of waiting 25 years to borrow to invest – or waiting 25 years to start investing once you have no mortgage.

    You seem too focused on the short term and not the long term, CC. Perhaps the real issue is not being confident in your investments?

    In your example, you had interst at 6% which would cost 4% after tax. Are you not confident that your investments can earn at least 4% after tax in the long run? That seems like a very low hurdle.

    Especially since you can invest in very tax-efficient investments where there is little or no tax on the investments until you start to sell after you retire.

    There is risk of fluctuation with the investments, but if you stay invested long term, markets have very consistently rebounded and provided great returns in the long run.

    Margin calls are rarely an issue, since there are no margin calls if you borrow from a secured credit line and there most investment loans are available as No Margin Call loans.

    Leverage is a very effective long term strategy, if you invest well and stay invested long term.

    We think of leverage like a power tool. A power saw can get the job done much more quickly and effectively than a hand saw. You may be scared to use a power saw and it can hurt you badly if you use it wrong, but if you are skilled it is far more effective.


  215. Hi Iakov,

    You are right – it is only the interest on the loan that is tax deductible. Saying it is a “non-deductible loan” is just easier. Trying saying an “investment loan on which the interest is not tax deductible” 100 times!

    The financial planner’s quote is means that the interest on only $92K of the investment loan is tax deductible. In that strategy, you then borrow back say $8,500 to invest. Your mortgage was paid down by say $8,500, which is $8K because of the $8K ROC paid onto the mortgage + $500 from the principal portion of your normal mortgage payment.

    The interest on $8,000 of your original investment loan is no longer deductible, but you have borrowed a new $8,500 to invest on which the interest is tax deductible. So, the amount of interest that is deductible increases by the interest on $500.

    Note that you borrowed back $8,000 as part of the “4 meaningless transactions” and then an additional $500 which was the principal portion of your regular mortgage payment.

    My question is: Why not just borrow back the $500 to invest? That way, you increase the tax deductible interest by the interest on this $500 – exactly the same.

    And then you won’t have to do the complicated Snyder Tax Calculation on your tax return (to calculate how much of the investment loan interest is tax deductible) and you can invest in whatever you think are the best funds (not just one that pays out monthly).

    Of course there is one other big difference with that strategy vs. the Plain Jane Smith Manoeuvre – you have $100,000 invested vs. only $500 after the first month. You can do a related strategy we call the “Rempel Maximum”, in which you could use this $500/month to finance an investment loan of $100-120K. This way, you have the same amount invested and all of it is in a “wealth fund”, instead of having it all in an “income fund” (that is really a “get your own principal back” fund).

    We have done many projections with all kinds of variations of these strategies. I can tell you that the most effective strategies are the ones that keep all of your interest tax deductible and allow you to invest in the best investments based on risk/return/tax-efficiency (instead of using a ROC fund).

    Does that make it more clear, Iakov?


  216. Sure does Ed, thank you!

  217. Canadian Capitalist

    Ed: You know my views on this issue. My confidence (or yours) is immaterial to whether long-term stock returns will be more than bonds or stocks will return more than 4%. BTW, if you make 4%, you’re not even in a break even situation.

  218. One thing I did not see in the discussion (perhaps I missed it) is a flaw in the initial assumption that Joe needs an extra $275/month to pay the interest on the investment loan. From what I understand about SM, Joe pays the interest by taking out additional funds from the loan. This way Joe’s cash flow is the same as if he was just paying his mortgage *and* he continues to write $275 interest plus all compound interest off his taxes. Am I missing something?


  219. For people utilizing this strategy we have created an online tracking system. http://www.strategenpro.com.

    Features include:
    -detailed history
    -illustration tools
    -income allocation
    -ability to use actual investments

    Try out the demo.

  220. Hi Mike,

    There is a significant error in your tracking system. Your example shows funds with the T series paying out distributions. These distributions are return of capital (ROC). Any amount of these distributions that you receive will reduce the amount of the loan on which the interest is deductible.

    In your example, you have $1,368.94 monthly distribution in year one, which would be $16,427.28. Therefore, the interest on $16,427.28 of the investment loan is no longer deductible.

    With an investment loan of $181,466.67, you can only claim the interest on $165,039.39 of this loan.

    This declining interest deductibility is called the “Snyder tax calculation”. CRA expects you to do it accurately every year to prove your claim for the interest deduction.


  221. Hi everyone,
    First off, wow; I was looking for some information on the SM and this by far exceeded any informative article – a wealth of knowledge here.

    The one thing I’ve been trying to wrap my brain around. My wife and I are in our mid twenties and our financial advisor suggests we increase our payments on our mortgage to accelerate paying it down; however he suggests that we follow the SM and do not even consider RRSP’s untill our mortgage is fully ‘tax deductible.’ Is this a sound argument or should I be looking for a new advisor?! I’m thinking it might just be my risk tolerance is lower than some who implement the SM.

  222. Brent,
    Your RRSP room will remain until you are ready to use it. If you choose to pay your mortgage down in the SM fashion, once it is paid out, you will be able to apply the excess income to topping up your RRSPs. The investment in the non-registered portfolio, and the RRSP would grow at about the same rate, so there is no real advantage of early contribution to the RRSP. In addition, most of us move to higher tax brackets as we move through our careers. You will a bigger tax reduction for your contribution if you claim the RRSP contribution later in your career. If you are in your twenties, you will have lots of time to let both the non-registered and registered portfolios grow, so waiting ten years and accumulating RRSP credits should be to your advantage,

    You should discuss your risk comfort level with your advisor.


  223. Brent,

    Which version of the Smith Manoeuvre is your advisor recommending? Is he recommending the regular Smith Manoeuvre with monthly investing or higher amounts of leverage? Is he recommending a version where the investments pay out a monthly distribution to put onto the mortgage?

    Without knowing your details, your advisor may have a good reason, but it sounds like a sales pitch of some sort to say to do nothing with RRSP’s. If he is recommending taking monthly distributions out of the fund and paying it onto your mortgage, then I would get a new advisor, since that will eliminate the deductibility of your original investment loan over time.

    To answer your question, RRSP’s are generally a beneficial strategy as well, as long as you use the refunds effectively. In general, you will get a larger refund from RRSP contributions than from increasing your mortgage payment and Smith Manoeuvre, assuming your are doing the regular SM.

    For example, if you are doing the regular Smith Manoeuvre and have an extra $1,000/month of cash flow, you can pay it onto your mortgage and reborrow to invest, in which case you will have $1,000 invested and get a deduction on the interest on $1,000. If you put the same $1,000 into your RRSP, you will still have $1,000 invested, but you will get a refund on the entire $1,000.

    However, if your version of the Smith Manoeuvre involves higher leverage, the answer may be different. Larger leverage would give you larger refunds and larger amounts invested, but whether or not your do this depends on your financial plan, what you need to do to achieve the retirement you want, and your risk tolerance.

    In general, it is a good idea to both max your RRSP and fully convert your mortgage to tax deductible during your working life. So, the right answer is usually a balanced approach, but doing enough RRSP to get a larger refund.


  224. Hi everyone,

    Great discussion. I believe I now have a good grasp of the theory and tax rules behind the SM. My question relates more to the mechanics of its implementation for a DIYer. Everyone recommends keeping good records and a “clean paper trail”. What exactly does this entail?

    I assume I will have a HELOC (used only for investment loan), an investment account (used to hold only SM related investments), and a chequing account. All money transferred between the HELOC and investment accounts will flow through the chequing account first. In addition, the interest paid on the HELOC will first be borrowed from the HELOC, put in the chequing account and then put right back into the HELOC.

    Is this all I need?

  225. I haven’t read through all of these comments – happened upon this site. I just checked into my RRSPs, most in Segregated Mutual Funds, and one in a secure investment at the bank. I finally asked how much per year the segregated funds cost and my financial adviser I rarely speak to said three percent per year – which doesn’t sound like a lot, but then after I asked he said it would be approximately $15000 per year on $150000 or so. The companies should clearly state what the annual amount is and that returns are after that amount is deducted. Right now with only two years to go before the guarantee kicks in, I am happy that my investment is secure; however, I am shocked at the fees I wasn’t aware of and also that the RRSPs never surpassed the highest point in 2001 although the stock market was higher. Still in all, though, I am relieved they are secure if I leave them in until 2011. I am an almost 56 year old single parent of ten years with a 14 year old and a 20 years old who is in university and who wants to attend for three more years after her degree which will be achieved in one year. If I die, so much of my RRSPs go to taxes. The government should change the rules for, for example, single parents so that RRSP money can be left to children in a will instead of a spouse without the huge tax implications.

  226. Andy, I wish to reassure you.
    If your investments are indeed in segregated funds and if you made sure that your children are named as beneficiaries of your RRSP, then they will inherit it as if they were the spouse. They are qualified as preferred beneficiaries, just like a spouse would be.
    What’s more, they will receive it within days, since segfunds are exempt of the probate process.
    Make sure though that you choose a lump sum pay out and direct the inheritance to your children.
    Let’s hope, this provisions will not be needed.

  227. Andy, I wish to reassure you.
    If your investments are indeed in segregated funds and if you made sure that your children are named as beneficiaries of your RRSP, then they will inherit it as if they were the spouse. They are qualified as preferred beneficiaries, just like a spouse would be.
    What’s more, they will receive it within days, since segfunds are exempt of the probate process.
    Make sure though that you choose a lump sum pay out and direct the inheritance to your children. This is better then the will, because that would be subject of probate.
    You can also avert the tax obligations if you calculate how much it would be and you buy a life insurance to pay it off at the time of your death.
    Let’s hope, this provisions will not be needed any time soon. But remember: eventually they will be needed.

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  229. I agree, the SM definitely has it’s risks and they should have been addressed in the book to greater detail.

    I know ‘good’ debt can be used to benefit many people and is sometimes very smart, but I prefer having no debts and would rather invest money that I’m free to lose or risk anyway I see fit. When you owe money on your investment dollars, it limits what you can invest in ‘safely’. Even ‘safe’ investments are sometimes not as safe as they like to claim and that can come back to haunt you.

  230. Nabloid,
    Why would you expect the risks to be addressed to a larger extent in the book? Smith answers the question of downside risk by describing the LONG TERM returns of the market, and providing that information to address the fears of those who would invest in the market, whether using the SM or other methods of investing.

    Remember, the book is an advertising tool; it is not an investigative report. Blogs like this one allow the opportunity for wide ranging discussion on such products, and give far more value to consumers than the best ‘consumer report’.


  231. Hi all

    I am trying to understand teh cash dam with the rental properties. The SM book and CD show great value in using both strategies when you have a rental property, the thing that puzzles me is that if we use the rent from a rental property to pay the mortgage on a prncipal residence and then borrow it back to pay the rental propert expenses, I am not really investing more money and there will be no extra return on the rent. Defenitly the conversion will happen faster this way and I understand that this will have favorable tax implcations however the rent amount (lets say $1000) cannot be invested in buying stocks or other rental properties since it went to pay the rental property expenses. the SM calculator applies the investment portofolio groth rate to the rental amount as well and i don’t think this is correct since te money was not really invested. Appreciate if someone can correct me.


  232. CC – I would like to clarify something:

    I am trying to understand the Smith Manouver (and feel like an idiot) but can you please explain when you say – “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” – where are these numbers coming from? I know that Joe invested 55k initially and that we are assuming 0% return from the seg fund. So here are my questions reagarding the numbers;
    a) is the initial 55k investment per year and one time?
    b) how did you come up with the 99k portfolio?
    c) what loan are you talking about when you say Joe will have a loan of 321k.

    I really appreciate your help.

  233. Canadian Capitalist

    Nick: Don’t feel bad. The SM gives most people a severe headache 🙂

    a) The initial $55K investment is one time.
    b) The $99K portfolio comes from the initial $55K investment plus the regular SM investments over 5 years. Recall that with SM, you take out an investment loan equal to the monthly mortgage principal payment and invest it in your taxable portfolio.
    c) Joe had an initial mortgage of $260K. He then took out a $55K loan. Add it extra fees, he starts out with an initial debt of $321K. With SM, your debt never goes down. That’s why even after 5 years, Joe’s loan remains the same.

    Hope this helps.

  234. Hi Nav!

    These figures came from my calculator, dedicated exclusively to the SM.

    If you write for it in private, I’ll be glad to send you the print-out. It still won’t be the whole thing, but it will help. There are several considerations that are not explained by numbers.
    You can find me here: falconaire.com

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  238. Hello Capitalists!
    I’m a long time reader but first time blogging in on the topic.
    It is good to see that all sides of the argument are being represented here. The reason for my comment is that I’ve seen people apply the basic principles of the Smith/Tax Free mortgage solution to their benefit and to their detriment. My conclusion is that the philosophy is sound, but, the application is flawed usually due to ‘operator’ error.
    There are companies managing this style of investing with great success: Homerun International in Calgary, for instance. The key lies in taking full advantage of the pre-tax conversion and the use of ‘good debt’ versus ‘bad debt’ over an extended period of time, plus maximizing your leverage via an instrument that will pay a solid rate of return over time. For instance, the author above is absolutely ‘half’ correct that the system is a wash if costs are 3% and returns are 8% – he is overlooking the tax advantages (add 39-46% to this), and the face rate return of every dollar that you ‘would have paid’ on your mortgage (i.e., every dollar paid down on a 5% debt is 5% made).
    Further to my ‘flawed’ comment I am referencing the tax consequences of the ‘basic’ model for if one realizes a return annually from a leveraged investment, a tax obligation exists. The ‘adapted/evolved’ model sees the investor taking annual ‘loans’ of his principle investment, applying those funds towards his mortgage, readvancing his LOC and using the available new balance to reinvest (and claim interest costs accordingly).
    If the investment is structured correctly, the investor will not have a tax consequence until the end of the program, and then only portioned out strategically to avoid ‘bracket creep’ (look for profit instruments, not fixed rate products where you pay interest on an accrual basis). As a legitimate capital gain, the consequences should be exactly half of what your benefits were (taxation wise).
    Yes it’s true that at the end of the process remains a debt, but, if invested prudently, your asset should more than offset this. The last advantage overlooked is utilizing your readvanceable mortgage to service your own debt. Much is made about servicing the $55K loan above… why not just pre-calculate the costs of this loan, and draw those costs directly from the debt in advance each year? Although, it shrinks your available investment fund, it should free up your $250-$275/m cashflow. What’s $3K off the top, in order to save a cashflow crunch each month?!?!
    I don’t recommend ‘doing it yourself’, as the benefits are negligible at best, but, in a ‘tax deferred’ program growing at 10-12% or above, the benefits can be life changing!
    Of course, there are risks with any style of investing. I recommend that you sit down with a knowledgeable advisor and tax professional, and if you are implementing the Smith/Tax Free mortgage strategy, think long term, but, review annually and make sure that it still makes sense for you every step of the way!

  239. Hi RealEstateInvestor,

    The strategies you are talking about are not the Smith Manoeuvre. The “adapted/evolved” model has a tax problem. If you take annual loans from your principal investment and pay it onto your mortgage, then part of your original investment loan becomes non-deductible – and CRA requires you to calculate it.

    I assume that “annual loans from your principal investment” means a distribution from your mutual fund principal, or “return of capital” (ROC).

    Also, servicing the debt of the investment loan is not a problem with the Smith Manoeuvre, since you capitalize or compound the interest. In short, the investment credit line pays its own interest. This is more effective than using your cash flow, since any money from your cash flow should be applied to non-deductible debt.

    Withdrawing from your investment also drastically reduces your long term expected return. The main benefit is the long term, compounded growth of the investment vs. the after-tax cost of the investment credit line or loan.

    For example, ff you take 3% out per year, so that your investment grows by 5% instead of 8%, or 7% instead of 10%, then your growth over 20 years is drastically reduced.

    The big benefit comes from leaving your investment untouched to compound over a long period of time.


  240. Thanks for the comments Ed.

    I might not have been clear in my descriptions above, but, your response encompasses my understanding of the technique. Yes, the LOC interest is paid via the LOC itself, effectively ‘compounding’ the costs.
    The confusion here might be in Homerun’s unique approach to annual distributions. As I understand it, although based upon the amount that your investment grew that year, the cheque that they cut you is only a short-term loan that you then use to pay down your mortgage and repay to them from the ensuing LOC increase (inherent in readvanceable mortgage as you mention). This creates a quick cycling of your bad debt paydown to good debt withdrawal. Since the annual ‘payment’ is just a short term loan on your principle investment, your initial investment is still untouched.
    Fundamentally, this is a similar premise to the RRSP Homebuyer’s plan (repaid over 15 years, etc.,).
    This does leave your investment ‘untouched’ as you mention with the compounding effect of the ‘growth’ year over year.
    Anyway, I like how they offer title security for my money plus the annual growth rate of 12% (currently, and subject to change of course) and NO Fees!
    You should check them out if you are ever in Calgary!

  241. Canadian Capitalist

    @RealEstateInvestor: I took a look at the Homerun International. I have no idea what they are investing your money in from the website. Title security is meaningless to me. If I was sold a home for $400,000 and I have clear title to it and a year later I could only sell it for $300,000, title security is meaningless from a capital preservation / growth perspective.

    I want to comment on your claim that I’ve ignored tax differences in my claim that SM is a wash. On the contrary, I’m totally familiar with the tax difference between the deduction on your interest payments and the favourable treatment that capital gains receive. However capital gains isn’t as favourable a tax as it initially appears. Capital gains is a tax on your nominal gains, not real gains but you are making interest payments with real dollars. This is a key difference, especially if we get bouts of serious inflation in the future.

  242. Good Day Ed,

    Thanks for the clarification on the tax oversight – or, the lack there of – lol – sorry if I mis-typed. I too understand PV vs FV and see what you mean by capital gains and ‘real gains’. Having said that, I’m happy to take as much CG and dividend income as I can over straight investment income (all things being equal).
    Not to preach at all, but, Homerun has various investment avenues to substantiate their portfolio, but from what I have researched, their Pay Off Your Mortgage program has been running with great success for over 8 years now and I’ve spoken with two current and one previous client who all claim they have made 12% religiously and paid down their mortgages significantly! One client invests only in ‘joint-venture-style’ products and is averaging over 45% per annum with them! (I’ve been researching for the past 2 years every/most REI company in Alberta).
    I will concede that there are instances where applications of the SM may result a ‘wash’, but, again I believe this is operator error. With all the numbers I’ve run using Homerun’s version of the SM, I’m mortgage free in 7 years and my investment account with Homerun will be equal to my outstanding LOC in the 8th year, and the payouts moving forward, accounting for inflation and CGs, mean I’m clear title between my 9th and 10th year (if I want to cash out entirely).
    The reason I like Homerun’s program is that they account for two items that I’ve not found elsewhere 1) annual tax consequences, with reinvestments and correct cycling of bad debt to good debt and, 2) rate of return with solid security.
    I sincerely appreciate title security! I’ve been a real estate investor for years now and I don’t lend anyone money (or invest – same thing), unless I have excellent coverage (In this case the pledge and all encumbrances is 25-30% LTV).
    I would not personally employ the SM or similar techniques that involve leveraging the family home if it meant investing in stocks or mutuals (too many variables). This might have made sense in the mid 80’s when Smith wrote the book, but, as you know we haven’t averaged 8-10% in our mutuals for some time now. In fact, most people I know have lost 20,30, and even 40% of the Retirement portfolio because of ‘market fluctuations’. People like myself who hold real estate barely saw a blip over the same time frame. In fact, my portfolio is up over the past 3 years (no, I didn’t buy in 2006 because I sensed that the values were not sustainable – not investing blindly is the key).
    It just makes sense to me that if you believed in real estate enough to purchase your home and stop renting, that you would look at real estate investment options to help you further your wealth objectives.
    I don’t care who you are and how you analyze the stats, certain truths remain: 1) real estate increases in value over time. 2) It’s tangible, insurable, and can be improved to increase it’s value, 3) with ‘change of use’, above average rates of return are entirely possible.
    There is no secret as to why a high percentage of the wealthy in this world get involved in real estate development (besides hubris) – it’s where the highest margins in real estate are to be garnered.
    I do agree with your review that clients ‘may’ get fearful and sell their assets at the wrong time, but, this just comes down to education, and why I appreciate companies who take the basics of the SM and techniques like it, and improve on the model.
    Again, I don’t recommend it for the DIY, as I have encountered people on these blogs who tried it, and then wondered why each year they didn’t advance after paying the tax on their investments, interest, etc., – the key, as you point out, is not to cash in your investment – keep it compounding!

  243. Hi RealEstateInvestor,

    What is the investment you are talking about – real estate limited partnerships?

    Is the income you receive and pay onto your mortgage taxable or not?

    We have seen all kinds of marketing schemes that appear to pay off someone’s mortgage quickly. If the income is not taxable, then the original investment loan loses its tax deductibility. If the income is taxable, then your return is reduced by the “tax leakage”. You are almost always better off compounding your growth instead of taking income.


  244. Hi Ed,

    I just read this article by Dan White….

    So is the SM legal or not?? I’m confused..

  245. I’d say this is an easy one – Legal when done correctly.
    Until the CCRA takes away our ability to write off interest on loans taken ‘for the expressed purposes of investing’, with a ‘reasonable expectation of income’, the SM (and it’s derivatives) will survive.
    And as I nation, we rely on these injections of capital back into the economy. Believe me, we would no long have Tim Horton’s or Subway franchise if potential owners couldn’t borrow against their homes and expect to write off the costs.
    Leveraging is an essential component of a progressive industry – it’s not going anywhere.
    With Lipson, although unfortunate, the mortgage was clearly taken to ‘purchase the home’, then used to pay back a previous debt. If they would have just waited to purchase the company shares after they owned the home for a few days, I imagine the case would not have made it past the first appellate court.
    Just my two cents.

  246. Hi Sam,

    Thanks for the heads up. I needed a good laugh!

    The SM is simple borrowing to invest. Nearly every business and business owner has interest expenses for investing in the business. The SM is just the same tax rule.

    The only problems are when you run into playing all kinds of tricks, like taking ROC distributions out or a series of transactions to defeat the purpose of the law (Lipson).

    If you want to know what Dan White is about, here is a very funny article from Jamie Golombek’s web site called “Dumb Write-offs”:


    Note especially the expenses claimed in the last few paragraphs. 🙂


  247. Hi Ed,

    Thanks for the article. That was quite funny, writing off daily startbucks meeting with herself. haha

    I have a couple questions regarding your current active clients utilizing SM. I know people have different investment goals but how are your clients performing? Are they in positive, negative? Do you have percentages? I know that the 2009 stock crash might put a dent in some of the portfolios in the short run but I really want to know if the impact is as great as I think it is. Thanks in advance.


  248. Canadian Capitalist

    @Sam: While I personally hold the opinion that the Smith Manoeuvre is not appropriate for your average homeowner, I think Dan White doesn’t have a good argument for why the tax basis for the SM won’t work. Interest deductibility for loans used for investment purposes is allowed even if the loan is secured against a home. Unless that changes in the future, the SM’s tax basis is sound. The investment basis though, is not so sound.

  249. Hi CC,

    Thanks for the reply. I’m kinda confused about this SM strategy still… I know a lot of people are saying that it is not risky but in my simple mind. If I takeout money from my HELOC with 6% interest and the advertised expectation for the investment is only 8% then this is a lot of effort for a simple 2% gain + tax deductible – setup fee/expenses and if the investment don’t break even then I’m down for that year. I’m really interested in shaving the years off my mortgage but hearing stories that people can go from 10-12 yrs to 5-6 yrs still seem somewhat skewed to me…

  250. Hi Ed and All!

    I didn’t find Mr. White’s article that funny (except the part where he blasts Ed, but that is par for the course and big fun), so, I wrote back to him. Perhaps you would be interested to read my answer, so, here is a copy:

    Dear Mr. White,

    It appears to me that your anger over Ed Rempel’s comments took away your better judgement.
    It also appears that Bob Aaron writes articles about the subject relying on your opinion and you do the same in reversed.
    Perhaps you will understand if I risk saying that you both are betraying a certain inexplicable bias towards the Smith Manoeuvre and what is more, misconstrue the implications of the Lipson case.
    In fact the Lipson case was a Smith Manoeuvre done in reverse, converting business line of credit into a residential mortgage and to boot, it was done in a blatantly crude and convoluted manner that was doomed from the beginning to fail the GAAR test.
    This however, is by no means the equivalent of condemnation of the Smith Manoeuvre.
    In fact, you must have learned over the years that applying borrowed money to invest, be that in an active business, or in passive investments, renders the interest tax deductible, as it was clearly and unequivocally determined by the Ludco case and affirmed by IT533 of CRA.
    It is quite unfathomable therefore, that the two of you should conduct a veritable “crusade” against this truly effective and beneficial strategy. It is not so much a matter of credentials, but rather a matter of objective judgement. Perhaps, you will understand in the light of the foregoing that I have a reasonable doubt about that objective judgement in your case as well as in Mr. Aaron’s.
    What is remaining for you to do, is examining the the principle and the math of the strategy, dispassionately, and see if it makes sense. I suspect that you have not taken this simple step yet. But until you do it is all too early to pronounce any opinion, especially if it is as misconceived as yours above.

    Best wishes


  251. Hi Falconaire,

    Thanks for the support.

    I did find it all very funny. Bob Aaron’s article in the Toronto Star last year quoting Dan White was so far wrong I could only laugh. I’m surprised the Star publishes this stuff.

    Where did you write to Dan White? I just checked his blog and your post does not show.


  252. Hi Sam,

    Let me put SM into perspective. It is a risky strategy. The main benefit/risk is that it is primarily a leveraged investment strategy.

    Therefore, if your investment makes more after tax long term than the interest cost after tax, then it works for you.

    The big problem is that so many people panic and sell or become more conservative after a decline – or get too aggressive after a bull market. Or try to market time or invest ineffectively in some other way.

    You asked about our clients. We have new clients starting every month. Of course the ones that started with a lump sum in early 2008 are down, but have stayed with it and are more than half way recovered already.

    We tell them all ahead of time that there will be bear markets, but they need to be able to stay invested. The key is that those that have faith in the markets and stick with them long term tend to do well. Those that are fearful and focus on trying to avoid losses should not really be doing the SM.

    We had a few clients that had the faith to start early last year. They are up a lot! That is the benefit of having the faith to invest when there is panic all around.


  253. Hi Sam,

    You seem to have some misconceptions about the SM – and it sounds like you have seen some marketing.

    First of all, your credit line is at 6%? Our clients are mostly at prime – 2.25%.

    Secondly, you would think that your investments need to make more than the interest rate on the loan, but that is not true. The reason is that the interest is fully deductible, while the capital gains on the investments are taxed at low rates and can be deferred for many years with tax-efficient investments.

    In general, if your investments make 2/3 of the interest rate over time, you are making a profit after tax. So, if prime averages, say 4% for the next couple decades, you need to find an investment that makes 2/3 of that, or 2.7% or more after tax long term. That is not particularly hard if you invest effectively.

    You refer to setup fees and expenses, but those are usually zero. I have seen some marketing with setup fees and expenses, but there is no reason to pay any. There is no cost for our clients.

    If you have seen stories of people going from 10-12 years left on their mortgage to 5-6, you are probably right that those are skewed. We have seen some marketing where they take a large investment loan to invest in a mutual fund paying a ROC (return of capital) monthly distribution. In that case, they do pay off the mortgage, but neglect to say that it is being replaced by a NON-deductible investment loan of the same amount.

    Every dollar of ROC distribution taken out of the fund and paid onto the mortgage is a dollar of the investment loan that is no longer deductible.

    With the real SM, you only pay the mortgage off a bit faster using your tax refunds. The amount depends on how much you leverage.

    The big misconception about the SM is that many people are interested in it as a way to pay off the mortgage fast. It is only a small benefit there.

    The real benefit comes from being able to invest a large amount towards your retirement without using your cash flow. If you borrow to invest and then invest effectively, the long term benefits are normally huge.

    The versions involving taking money out of the investments to pay off the mortgage more quickly drag down the returns. The real returns come from leaving your investments compound untouched for decades.

    I looked at the Forbes 400 richest people. Every last one made their money by borrowing to invest in a company or portfolio of stocks (or inherited it from someone that did). Leveraging into a corporation or equity portfolio is essentially the way all very wealthy people got there.


  254. Hi Ed!

    I posted it on his blog:


    but being the sole ruler of his own, he probably scrapped it after reading.
    To be sure, I also sent it to Fraser Smith, let him have a bit of fun.

  255. Quite the blog. I’ve been trying to figure out if this is right for me…

    I’ve just purchased a place at $390,000 and will be putting down a minimum of 20% ($97,500)

    I’ll still have about $65000 in RSP and another $55000 in an non-registered investment account. Have a whole life insurance policy that has been funded since 1990 – not sure value right now.

    I’m a first time home buyer and wonder if I should just do the accelerated pay off of the mortgage or do the SM. (Also, could also just plop all my savings into the house, but seems like the bad idea with the low interest rate)

    So, good candidate for SM?

  256. I think I have my head around the SM now and would like to implement it but intend to only use a portion of my available HELOC (@4%) this year just to test the waters. I intend to purchase 120 shares of a Canadian div paying equity that has 7+% yld. At roughly $27/share, that buy will cost me roughly $3240 + comm. but I should be able to reinvest the dividend & pick up 2 more shares/qtr.

    Then, to service that, I’m going to take my chances with another Can Div paying equity that pays roughly 10.6% yld. I plan to buy 350 shares @ $6 for another $2100 + comm. This will pay me around $18.50/mo.

    The interest on HELOC will be around $18/mo ((3240 + 2100 + $40 comm)x4%/12mo). I intend to pay that with the $18.50 monthly dividend in my brokerage account. I think I have to do that for the tax paper trail – any other accts we have are joint accounts, my brokerage acct is in my name only. I believe the interest on the HELOC has to be undeniably paid by me to claim the interest.

    The dividend tax credit will apply since the shares will not be in a registered acct & I will claim the monthly interest on my HELOC so the risk seems minimal and it seems like I will receive 8+/- shares a year without having to supplement my brokerage acct or leverage more. I’ll pay a small amount of tax on the dividend income but get more than that back from deductible interest which I can use to pay down the HELOC or my mortgage.

    Does anybody see any flaws in that plan? Once I get the refund next year for the deductible interest on my HELOC I’ll likely dig in and set up a separate accounts for my husband & I so we can keep the tax end clean. I doubt we’ll ever be comfortable maxing out our available credit for the SM but I believe we can make our HELOC work harder than it is now. I’d love to get some feedback because it seems there’s alot to consider here.

  257. I believe bottom line here is this:

    – If a person is knowledgeable/skilled/savvy investor and knows what to do with money and is able to generate at least a return north of 3-4% over 20 years – SM is what he should do, he’ll have a better ROI.

    – if a person is doesn’t know much about money management, is a high-risk speculator, or leaves money management to someone else and could therefore end up in wrong hands – SM is not for him and he shouldn’t do it.

    My two cents….

  258. Hi Jack,

    I just noticed your post. I guess I don’t visit this site often enough. 🙂

    Being a good candidate for the Smith Manoeuvre is generally more about being the type of person that can stick with your strategy and investments long term than it is about your financial strength.

    If you are the kind of person that would try to time the market or might cash in after a major market crash, then the SM is the wrong strategy for you. If you can invest effectively for the long term, then you may be a good candidate.

    Your financial situation would allow you to start the Smith Manoeuvre. You also could cash in your non-registered investments and your whole life policy (I’m not really a believer in whole life policies.), pay them down on your mortgage and then reborrow from the credit line to invest. This would convert part of your mortgage to tax deductible right away.

    You are right that it is not hard to find a better return than paying down your mortgage today. We are getting mortgages at 2.69% for 2 years. It certainly would not be hard to beat that.

    Your comparison here is between an investment growth strategy (Smith Manoeuvre) and a risk reduction strategy (pay down mortgage).

    Does that answer your question, Jack?


  259. Hi Louise,

    I read your strategy and have a few comments for you:

    1. Your strategy is not the Smith Manoeuvre. It is just a leverage strategy. The Smith Manoeuvre involves using the principal portions of each mortgage payment to either invest or pay the interest on your existing tax deductible credit line.
    2. There would be an advantage for you to do the Smith Manoeuvre. You could borrow from a credit line to pay the interest on your credit line (capitalize the interest), which would allow you to pay your dividends down on your mortgage, which is not deductible. This would save you money after tax, since this would convert part of your mortgage to tax deductible not just this year, but every year from now on. In today’s low interest rates, the benefit may appear small, but it would be far larger when interest rates normalize.
    3. You seem to think that your strategy is a low risk. It is not for several reasons:

  260. Hi Louise,

    I read your strategy and have several comments for you:

    1. Your strategy is not the Smith Manoeuvre. It is a simple leveraged investment strategy. The Smith Manoeuvre involves reborrowing the principal portion of each mortgage payment to either invest or pay the interest on a credit line or investment loan (from previous amounts borrowed to invest).

    2. There would be some advantages for you to do the Smith Manoeuvre. You could borrow money to pay the interest on the tax deductible credit line. We call this “capitalizing the interest”. That would allow you to pay your dividends directly onto your mortgage, which is not tax deductible.

    This would pay off your non-deductible mortgage more quickly. This credit line would be deductible not just this year but for many years. The benefit will be higher when interest rates normalize.

    3. You seem to think your strategy is low risk. There are significant risks, especially the way you want to do it, for several reasons:

    – First, it is borrowing to invest, which is a risky strategy.
    – Second, you are not diversified, with only 2 stocks.
    – Third, you are choosing equities with very high dividends. This implies that there may be something wrong with these companies. Don’t buy a high dividend company without understanding why the dividend is so high.
    – Fourth, dividend stocks are very popular today and are therefore generally higher priced than the market overall. It is probably advisable to invest more broadly than to restrict yourself to the most popular sectors.
    – Finally, “testing the waters” is generally not the best way to start the Smith Manoeuvre. It implies that if your investments go down, you may cash in and take the loss. That is the big risk with the Smith Manoeuvre. The risks are far lower long term, so you need to be able to stick with the strategy long term if you want a good chance of success. It is better to choose your strategy carefully and then commit to it for quite a few years.

    I hope that is helpful (though not very timely), Louise.


  261. Hi Roberto,

    I agree with your comment, except for 2 things:

    1. If even you are a “savvy investor”, you should not necessarily do the Smith Manoeuvre. Your point that you only need to invest to make 3-4%/year long term for the Smith Manoeuvre to benefit you is accurate, but borrowing to invest often intensifies your fear and greed, which can mess you up.

    Most investors consider themselves “savvy”, and yet studies show the vast majority of investors consistently buy high and sell low over and over again.

    For example, today the market is quite cheap, so this is probably an above average time to start the Smith Manoeuvre. However, it seems most investors are into income investments or other defensive strategies, or are “waiting for things to become more clear”. In short, they are waiting until after the market is high to consider investing.

    The #1 factor of success for the Smith Manoeuvre (or stock market investing in general) is investor behaviour. In addition to being a good investor, you must be able to manage your emotions and your behaviour.

    2. You seem to imply that anyone working with a financial planner should not do the Smith Manoeuvre, but DIYers should. A good financial planner can add a lot to the strategy. For example:

    – The main benefit of the Smith Manoeuvre is that can help you save for your retirement without using your cash flow. It is best done as part of your long term retirement plan. A good financial planner should be able to help you create your retirement plan.
    – The Smith Manoeuvre is not very hard to do, but it is also not hard to mess up. I have talked to so many people doing strange leverage strategies that they think are the Smith Manoeuvre or strategies that have tax problems. Many are missing easy ways to get a much larger tax refund or are not tracking their transactions accurately enough to pass a CRA audit. Most have not thought the strategy through and don’t have it as part of a long term strategy. Many may benefit from doing the strategy with far higher dollar amounts, but are not confident enough on their own. A good financial planner can add a lot to the strategy.

    I do agree that you should be somewhat knowledgeable about investing. You should know enough that you know your advisor has your best interest at heart and is using a sound investment strategy and good quality investments.


  262. Pingback: Is the Smith Manoeuvre Risky?

  263. Hi.
    Nobody mentions that usually the Home line credits are subject to variable interest reates….another risk to consider

  264. Good article. Even though I am a proponent of the Smith Manoeuvre, I agree that it is not risk free, and is not for everyone.

    But when the worst case scenario turns out just slightly behind the traditional method of paying down your mortgage before investing, it is mind blowing to think about what the best case scenario or even a good case scenario would bring.

    Still, good discussion.

    I’m a professional financial advisor and planner in Calgary.

    I love to talk shop and meet new people.

    I’m available for any questions on the Smith Manoeuvre or any other financial topics. Hope I can help.

    Daniel Sheehan

    587-223-2215 (cell)

    LinkedIn: ca.linkedin.com/in/daniel4sheehan4oil4engineer/