Who Should Use the Smith Manoeuvre?
- Homeowners looking to pay significantly less tax and grow their retirement savings.
- Anyone who owns a home that has at least 20% equity in the property.
- Canadians that want to make their mortgage tax deductible.
What is the Smith Manoeuvre?
The Smith Manoeuvre will get you free tax refunds from the CRA, help you pay off your mortgage faster, and build your investment portfolio... simultaneously. The Smith Manoeuvre is a financial strategy designed to convert the non-deductible interest debt of a house mortgage to a deductible-interest debt of an investment loan, which simultaneously ensures the building of a free and clear investment portfolio.
How Does the Smith Manoeuvre Work?
The Plain Jane Smith Manoeuvre (The basic two-step process):
- Pay down your mortgage as fast as you can. Re-borrow the monthly principal reduction of your mortgage and invest the loan proceeds.
- Apply tax refunds against your first mortgage then immediately re-borrow and invest the same amount.
The Enhanced Plain Jane Smith Manoeuvre (Develop even larger net worth!):
- Cash in and apply current paid up assets against the first mortgage in the morning, re-borrow and invest the same amount in the afternoon.
- Divert any monthly savings or investment programs against the first mortgage, and immediately re-borrow and invest the same amount.
How Do I Get Started?
- Obtain a copy of Is Your Mortgage Tax Deductible? The Smith Manoeuvre by Fraser Smith available through First Foundation, or on-line at: www.smithman.net. – and read it.
- Arrange a free, no-obligation, consultation and proposal with one of the experts at First Foundation.
Smith Manoeuvre Frequently Asked Questions (FAQ)
Here are Frequently Asked Questions on The Smith Manoeuvre. We hope these questions and answers will help you learn everything you want to know about this smart financial technique.
If my mortgage payment is a fixed amount every month but I'm increasing my loan on the line...
On the west coast of Canada, several credit unions will let you capitalize the interest on the line of credit. Here is what happens in this case: Let's say that the first month you implement the Smith Manoeuvre and your mortgage payment is $1,400, of which, $1,150 goes to the bank for interest and $250 goes to reduce the principal on your mortgage. You borrow back that $250 from the LOC and invest it (this will yield tax deductions because the interest on the investment loan is tax deductible)...
The next month you make that same $1,400 mortgage payment but more goes toward principal reduction, say $252. On your credit line, the lender says you can now take out that $252. However, you have about $2 of interest to pay on that first $250 you borrowed to invest last month from the LOC. Since your credit union allows you to capitalize interest, you do so (the $2 is added onto your LOC). Therefore you really only have $250 remaining to draw and invest. Next month same thing. Your mortgage principal is reduced $254, say, but you now owe $4 in interest on the LOC. Capitalize that interest and pull only $250 to invest. This continues all the way until the mortgage debt has been fully converted. You still invest the full $250 every month and there was no new cash required from you because the amount you are required to pay in interest on the LOC is covered by the fact that the amount of principal reduction on your mortgage is increasing which comes across to the line of credit to keep things in balance.
Banks will NOT allow you to capitalize the interest, so in month 2 pull the full $252 from the credit line, transfer it to a separate investment chequing account (ICA) and set up a PAC with your investment company to draw $250 to invest each month, and use the remainder to pay back to the financial institution to pay the interest expense as it comes due each month. For example, month 3 you would pull the full $254 to your ICA, $250 will be invested via the PAC and the remaining $4 would go back to the financial institution to cover the interest. This is Guerrilla Capitalization as further described on p.77 of the book, "The Smith Manoeuvre".
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Can't I just get a Home Equity Line of Credit (HELOC)
Usually a HELOC (Home Equity Line of Credit) is a second mortgage to secure a loan or a credit line. If money borrowed in this fashion is used for investment, the interest expense will generally be deductible. So the ability to do the borrowing part of The Smith Manoeuvre seems to be in place. Unfortunately, the other half of The Smith Manoeuvre, the ability to recover monthly reductions of the first mortgage in order to increase the investment portfolio, is impaired. Do not let a banker convince you to use a simple HELOC to implement The Smith Manoeuvre - there is a much smarter way to set up your financing that costs no more to establish than a HELOC, but avoids subsequent operational difficulties. It is called a readvanceable mortgage. Your financial planner and your mortgage broker will teach you the important reasons why you don't want to use HELOC's. Be certain you are getting a readvanceable mortgage.
Is Smith Manoeuvre too good to be true?
The Smith Manoeuvre is indeed very good, and very true. It is completely legal. For over two decades, thousands of families have used or are using The Smith Manoeuvre. It has been reviewed by the CRA and endorsed by reputable clients, and experts. It has been approved by highly regarded financial experts and institutions including Van City and Coast Capital, the two largest credit unions in Canada.
Can I count on a 10% average annual rate of return?
No, but taking into consideration market peaks and valleys, every decade since 1950 years has yielded at least a 10% average annual rate of return in the markets, before tax. You and your financial planner are free to apply your own assumptions to The Smith Manoeuvre. The Smithman Calculator will show you how you can make substantial gains whether you use 7%, 8%, 9% or 10%.
How does the stock market turmoil factor into this?
The beauty of The Smith Manoeuvre is that you can use your tax- deductible investment loan to buy all sorts of investments - not only stocks. You can invest in investment real estate, mutual funds, your business, your spouse's business or someone else's business. The book outlines all the choices. No matter what you do, use a good financial planner and sound investment practices to build a balanced portfolio, and reduce exposure to stock market and real estate downturns. Diversification is the golden rule of reducing risk. To have all of your assets tied up in high risk stocks - or even in your home - puts you at risk.
What if I lose my job?
The Smith Manoeuvre provides a financial security blanket. It builds a free and clear investment portfolio that you can call upon if financial need arises. It gives you the freedom of liquidating free and clear investments to reverse the program if necessary.
What if I move to another house during the process?
No problem. That has happened many times to people using The Smith Manoeuvre, and the bank is happy to arrange what it calls a "Substitution of Collateral" - which means, "no problem." It is a routine procedure, which ensures you need not have a concern about moving to a different home.
Will I be risking my house?
The Smith Manoeuvre actually protects your home ownership by increasing your financial security significantly. Your debt level need not be increased. Your home mortgage is reduced while your portfolio grows. When your home mortgage is fully converted, you can expect that the value of your portfolio will exceed the amount of the investment loan, which you can then pay off. Or leave in place to continue to generate tax refunds every year for the rest of your life. Your choice. You can build a safe portfolio using a good financial planner and sound investment practices. Risk is spread out over a long period of time, making unpredictable market conditions manageable. The higher risk is not investing at all, or not investing soon enough, to meet the needs of retirement and periods of insecurity. This is why an increasing number of seniors are ending up house rich, but cash poor, with little or no retirement income on which to live. The large increase in the number of seniors forced to take a Reverse Mortgage such as CHIP, (the Canadian Home Income Plan) is proof of that. A home mortgage loan is the wrong kind of debt. The interest, paid for with after-tax income, over a long amortization period, severely hampers your financial future. If your home is your sole investment, you have put all your eggs in one basket. House values may drop as baby-boomers retire, causing a reduction in demand. Diversifying your investments, and investing earlier in life, is a safer course of action. Thousands of people have used or are currently using The Smith Manoeuvre. If you're going to have a mortgage debt, why not turn it into a "good debt" that generates tax refunds, just like they did?
What is new and different about The Smith Manoeuvre?
It is a new method of designing your finances that extends the remarkable benefits of debt conversion to almost anyone with a mortgage. Wealthier Canadians commonly employ expensive tax accountants and tax lawyers to replace their non-tax deductible loans (houses, vehicles) with investment loans. Fraser Smith has improved upon those methods, introducing a new procedure that enables the rest of us to convert our non-deductible mortgage to a tax-deductible loan. This is a one-of-a-kind strategy that has been used by thousands of Canadians. It is the first time the unique techniques have been published. Until now, debt conversion practices have been too cumbersome and expensive for most people. The Smith Manoeuvre changes that. While others recommend paying off the mortgage and THEN borrowing to invest, The Smith Manoeuvre shows you how to do both at the same time. Sooner is better in both cases.
Can I really get free money?
Yes. By converting your home mortgage into a tax-deductible loan, you are turning the interest into a tax deduction. When you subtract that deduction from your income, you get a tax refund. That refund is free money. You don't have to invest any of your own income or increase your debt to get the tax refund. The refund you receive from investing in RRSPs is not free money. You pay for your RRSP by using your own after-tax income to buy the tax refund. Then they tax you at your maximum tax rate when you start to take the money out of your RRSP.
How can debt be good?
Debt is good when it is tax-deductible. It is bad when it's the wrong kind of debt - the kind that is not deductible against your income. Bad debt can be converted to good debt if you employ The Smith Manoeuvre. Wealthy people have debt, and they like it that way. They use their after-tax cash for toys and holidays. However, they borrow to invest and deduct the interest on those investment loans. That's called "good debt" and it's how the rich become richer. If you have house mortgage debt, it is the wrong kind of debt until you convert it to tax-deductible debt. The Smith Manoeuvre's streamlined techniques show you how to make it happen.
Is The Smith Manoeuvre legal?
Yes. The Smith Manoeuvre uses the common tools of Canadian financial institutions and CRA (Revenue Canada). It has been reviewed by the CRA and endorsed by economists, financial planners and financial institutions. It is a legal and common practice to deduct interest when you borrow to invest to produce income.