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A Guide to the Smith Manoeuvre for Financial Freedom

  • M P
  • Jan 15
  • 5 min read

Updated: 3 days ago

The Smith Manoeuvre offers a unique strategy for Canadian homeowners to turn their mortgage debt into an investment tool. This approach can accelerate wealth building by converting non-deductible mortgage interest into tax-deductible investment loan interest. Understanding how this works and whether it fits your financial goals can open doors to smarter money management and potentially faster financial freedom.



Eye-level view of a Canadian suburban home with a visible mortgage document on a table
Canadian suburban home with mortgage documents on table


What Is the Smith Manoeuvre?


The Smith Manoeuvre is a financial strategy designed to make mortgage interest tax-deductible by converting your mortgage into a revolving investment loan. It was popularized by Fraser Smith, a Canadian financial planner, who noticed that unlike investment loan interest, mortgage interest on a primary residence is not tax-deductible in Canada.


How It Works


  • You take out a re-advanceable mortgage, which combines a traditional mortgage with a line of credit.

  • As you pay down the principal on your mortgage, the credit limit on your line of credit increases by the same amount.

  • You borrow from this line of credit to invest in income-producing assets such as stocks, bonds, or mutual funds.

  • The interest on the investment loan becomes tax-deductible because it is used to earn investment income.

  • Over time, your mortgage balance decreases while your investment loan balance increases, ideally growing your investment portfolio.


This cycle repeats, allowing you to build wealth while paying off your home.


Why Consider the Smith Manoeuvre?


Many Canadians face the challenge of paying off a mortgage while trying to save and invest for the future. The Smith Manoeuvre offers a way to:


  • Make mortgage interest tax-deductible

  • Build an investment portfolio faster

  • Potentially increase net worth over time

  • Use existing debt more efficiently


It is especially appealing for homeowners who want to be proactive about wealth building and are comfortable with some investment risk.


Key Components You Need to Understand


Re-advanceable Mortgage


This mortgage type is essential for the Smith Manoeuvre. It allows you to borrow back the principal you pay down via a line of credit. Not all lenders offer this product, so you may need to shop around.


Investment Loan


The money borrowed from the line of credit is invested in income-producing assets. The interest on this loan is tax-deductible because the borrowed funds are used for investment purposes.


Tax Deductibility


The Canada Revenue Agency (CRA) allows interest on money borrowed for investment purposes to be deducted from taxable income. This is the core benefit of the Smith Manoeuvre.


Step-by-Step Process to Implement the Smith Manoeuvre


  1. Set up a re-advanceable mortgage

    Work with your lender to establish a mortgage that includes a line of credit feature.


  2. Make your regular mortgage payment

    Each payment reduces your mortgage principal and increases your available credit.


  3. Borrow from the line of credit

    Use the increased credit limit to invest in eligible income-producing assets.


  4. Claim the interest deduction

    Keep track of the interest paid on the investment loan for tax purposes.


  5. Repeat the cycle

    Continue making mortgage payments and borrowing to invest, growing your portfolio over time.



Risks and Considerations


While the Smith Manoeuvre can be powerful, it carries risks:


  • Market Risk: Investments can lose value, which may affect your ability to repay the loan.

  • Interest Rate Risk: Variable rates on lines of credit can increase your borrowing costs.

  • Discipline Required: You must consistently follow the process and avoid using the credit for non-investment purposes.

  • Complexity: Managing the strategy requires careful record-keeping and understanding of tax rules.


Consulting with a financial advisor or tax professional is essential before starting.


Suitable Investments for the Smith Manoeuvre


The strategy works best with investments that generate income, such as:


  • Dividend-paying stocks

  • Exchange-traded funds (ETFs)

  • Mutual funds

  • Bonds or bond funds

  • Real estate investment trusts (REITs)


These investments provide income that can help cover interest costs and grow your portfolio.


Tax Implications and Record-Keeping


You must keep detailed records of:


  • Amounts borrowed for investment

  • Interest paid on the investment loan

  • Income earned from investments

  • Any repayments made


This documentation supports your tax deduction claims and helps avoid issues with the CRA.


Who Should Use the Smith Manoeuvre?


This strategy suits homeowners who:


  • Have a stable income and emergency savings

  • Are comfortable with investment risk

  • Want to accelerate mortgage repayment and build wealth simultaneously

  • Understand tax rules or have access to professional advice


It is less suitable for those with irregular income, low risk tolerance, or without a long-term investment horizon.


Practical Example



So what’s the reasonable outcome of doing the SM, and is it worth it?


Example:


Current present-day assumptions assume you have a 500k mortgage and 25 years left on the mortgage. If you implement the Smith Maneuver™, then after 22 years, your mortgage should be fully converted over to a HELOC. Using the yearly tax deductions to prepay your mortgage would knock roughly 3 years off your amortization. The numbers would reasonably look like this after 22 years:



·         ~1.5m investment portfolio (assumes 9.5% CAGR),

·         ~800k HELOC balance (assumes 4.95% HELOC rate)



For a total net benefit of 700k and paying off the mortgage 3 years sooner, versus not doing the Smith Maneuver™. Remember, the Smith Maneuver™ is designed to help Canadians with little to no cash flow left at the end of the month. It requires no cash flow to implement.


How is the Smith Manoeuvre™ treated in retirement ( or after the mortgage is converted) to maintain 100% deductibility?


To maintain 100% deductibility rules say :


  • Book value of investments sold is used to reduce the credit line.

  • Can withdraw the capital gain IF you can trace it separately.

  • Can withdraw taxable income – Capital gains or dividends, but not ROC.

  • Can withdraw to pay tax-deductible interest or investment fees.

  • Can withdraw to pay down tax-deductible credit line.

  • If you withdraw more, then the credit line slowly becomes non-deductible.


If we continue with the same example above, the spreadsheet below will illustrate how the drawdown works: Assumes 800k HELOC balance and a 1.5m investment portfolio.




If you need help with tax planning using leverage or debt conversion (Smith Maneuver™), let me know. Happy to help with tax obligations related to leveraged investing or the Smith Maneuver™


Matthew Perry Tax Prep


Final Thoughts on the Smith Manoeuvre


The Smith Manoeuvre offers a creative way to turn mortgage debt into a tool for building wealth. It requires commitment, understanding, and careful management but can provide significant tax benefits and accelerate financial goals.


If you are a Canadian homeowner looking to make your mortgage work harder for you, exploring this strategy with a trusted financial professional could be a valuable step.


Additional resources for the Smith Manoeuvre™











CRA resources:


Income Tax Folio S3-F6-C1, Interest Deductibility



Income tax act 20(1)




 
 
 

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