Smith Maneuver

What is the Smith Maneuver?

The Smith Maneuver is a financial strategy that is designed to convert non-deductible mortgage interest into tax-deductible investment interest. It was named after Fraser Smith, who popularized the strategy in the 1980s in his book "The Smith Manoeuvre: A Wealth Strategy".

The basic idea behind the Smith Maneuver is to use the equity in your home to borrow money and invest it in income-producing investments, such as stocks, mutual funds, or exchange-traded funds (ETFs). By doing this, you can potentially generate additional income while also turning non-deductible mortgage interest into tax-deductible investment interest.

To implement the Smith Maneuver, you would typically take out a readvanceable mortgage, which is a mortgage that allows you to borrow back the principal payments you make on your mortgage. You would also open a home equity line of credit (HELOC), which is a revolving line of credit that allows you to borrow against the equity in your home. You would then use the HELOC to borrow money and invest it in income-producing investments.

The interest on the HELOC is tax-deductible in Canada if the borrowed funds are used for income-producing investments. This means that you can claim the interest as a tax deduction on your income tax return, reducing your overall tax bill.

What are the basic steps to implement the Smith Maneuver

1. Obtain a readvanceable mortgage: This type of mortgage allows you to borrow back the principal payments you make on your mortgage. It essentially functions as a home equity line of credit (HELOC) and is also known as an “all-in-one” mortgage.
2. Open a HELOC: If you don't already have a HELOC, open one with your mortgage lender or another financial institution. A HELOC is a revolving line of credit that allows you to borrow against the equity in your home.
3. Use the HELOC to invest: Borrow funds from the HELOC and invest them in income-producing investments, such as dividend-paying stocks, mutual funds, or exchange-traded funds (ETFs).
4. Deduct the interest: The interest on the HELOC is tax-deductible in Canada if the borrowed funds are used for income-producing investments. This means you can claim the interest as a tax deduction on your income tax return, reducing your overall tax bill.
5. Repeat: As you continue to make mortgage payments, the principal portion is added back to your HELOC. You can then borrow the newly available funds to invest further and continue the cycle.
6. Monitor your investments: It's important to keep track of your investments and ensure that they are generating enough income to cover the interest on the HELOC.

Calculate Your Interest Deductible

To determine the tax return of the interest paid on your investment loan, multiply the total interest paid during the year by your marginal tax rate.

For example: if you paid $1,000 in interest for the year and you are in the 40% marginal tax bracket, you will receive $400 back from the government.

Source: https://milliondollarjourney.com/use-smith-manoeuvre-tax-deductible-dividend-investing.htm