Strategies‎ > ‎

Smith Manoeuvre

The Smith Manoeure is named afer Fraser Smith, a financial planner that popularized the idea through a book he wrote in 2002. 

It is often described as a method of converting your non-tax deductible mortgage (bad debt) into a tax deductible investment loan (good debt). As a result, the Smith Manoeuvre is only for home owners and it involves taking out a loan and using your home as collateral. A loan such as this involves a home equity line of credit (or HELOC for short) and something called a readvanceable mortage (something you might already have - it means that as the mortgage is paid off the HELOC can be increased). 

If you use the HELOC to invest you will indeed be charged interest on the loan but the interest is tax deductible (whereas your mortgage tax isn't). The investment must be income producing, such as from dividends, and you must use a non-registered account for the interest to be tax deductible. When you receive the tax refund you pay down your mortgage.

Note that a lot of articles on the web seem give you the idea that it's a win-win situation but this isn't the case. One aspect often not mentioned is the psychological effect that this can have on you. For one, there are periods when the stock market crashes around you...what if your Smith Manoeuvred investments sink well below what you paid for them. The price you pay is peace of mind.

You'll have to do your own reading to decide if this is for you, but I'm of the mind that a balanced approach to paying off your mortgage and utilizing RRSPs is the way to go.

There are already lots of articles written on the subject and most of them explain the Smith Manoeuvre with much more clarity then I have accomplished above, so here are some good ones below to get you started. Many of these articles have loads of comments at the bottom. I urge you to read to comments as I find a lot of insight can be found there.  Better grab a cup of coffee first.

Further Related Links and Articles

DIY Smith Manoeuvre, Part 1 - Canadian Capitalist
DIY Smith Manoeuvre, Part 2 - The Readvanceable Mortgages - Million Dollar Journey
DIY Smith Manoeuvre, Part 3 - Canadian Capitalist
DIY Smith Manoeuvre, Part 4 - Canadian Capitalist
Smith Manoeuvre is alive and well - Financial Post