I posted it on his blog:

http://blog.danwhite.ca/2010/01/03/request-for-info-on-what-happened-with-the-smith-maneurver/#comment-20118

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.

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.

Ed

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.

Ed

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.

Ed

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

Sandor

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…

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.

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”:

http://www.jamiegolombek.com/printfriendly.php?article_id=916

Note especially the expenses claimed in the last few paragraphs.

Ed