Do you know anyone that has used The Smith Manoeuvre – Canadian Tax Deductible Mortgage strategy?

Category: Houses

 

Hi David,

The Smith Manoeuvre – Canadian Tax Deductible Mortgage

Do you know anyone that has used this strategy? Would love your insight on this subject.

 


 

Hi Michael,

I haven’t heard the term “Smith Maneuver” in years.

I got into real estate in 2004 and this was a topic of discussion.

I had a background in finance and economics, and being a couple years out of business school, I toyed with this idea for a year or so, discussed with some clients, and brought it to the attention of one client who ran a hedge fund.

He was the only person who ever expressed interest in the idea, and after significant research and thought, he concluded, “This idea is a theoretical one, not a practical one.”

I honestly think it’s been a decade since I’ve heard “Smith Maneuver” mentioned, maybe more.

I wish I could tell you more about the idea, or my thoughts on it, but simply put, I have none.  I’ve never had a client use it, and I somewhat agree with this being something that works in theory, and not in reality.  I feel as though it requires an individual’s financial position to never change, and remain constant, so the steps can be repeated over and over.  But life changes, people move, people start businesses and/or lose jobs, people have kids.

Check out this example: http://www.investopedia.com/articles/personal-finance/051713/smith-maneuver-canadian-mortgage-taxdeductible-plan.asp

It runs the example into Year-25.

Who in the world can expect to know what they’re doing in Year-4 of “life after today,” let alone Year-25?

David.

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  1. Yes says:

    Sure, I expect lots of people do it, just not as formalized as written out in the Investopedia site. The basic idea is as follows (using fake #s, of course):

    Assume we start with a $500,000 house, $20,000 cash, and $100,000 mortgage. Net worth is $420,000.

    We could do 2 things with that $20k cash:
    1) Pay down the mortgage.
    New position is $500,000 house, and $80,000 mortgage. Same $420,000 net worth.

    2) Or set up a $20,000 investment loan. Pay down the mortgage by $20k, and invest the $20,000 in the market.
    New position is $500,000 house, $20,000 investment. And liabilities of $80,000 mortgage and $20,000 investment loan.
    Same $420,000 net worth. But the $20,000 investment loan is tax deductible.

    The difference between the above example and the Investopedia site is it directs you to maximize the position to take full advantage of the tax deductibility. But it comes at the cost of increased risk. You’re betting that the spread between the equity investment and the post-tax variable rate loan will remain positive. I wouldn’t want to make that bet with more than I felt comfortable losing.

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