Mortgage Blog
Is Your Mortgage Tax Deductible?
Smith Manoeuvre
March 26, 2024 | Posted by: Charles Edwards
Once you have read the book by Robinson Smith, Master Your Mortgage for Financial Freedom, you will ask the same question I did and many others have... Why isn't every Canadian doing this???To paraphrase CS Lewis: “The strategy has not been tried and found wanting. It has been found difficult; and left untried.”
While the Smith Manoeuvre is not necessarily difficult, it is complex enough that you really do need a professional, an SMCP in fact, to get you on the right track. This has to be one of the least well known and most misunderstood financial concepts of our time and yet, one of the most powerful tools for any home owner! It can be and often is life changing!
What is The Smith Manoeuvre?
The Smith Manoeuvre is a financial strategy that was developed in the mid-1980’s which employs refined and proven debt conversion techniques to transform expensive mortgage interest into valuable tax deductions.
The method has a remarkable snowball effect that generates large and growing annual tax refunds, enables the homeowner to knock years off the life of a non-deductible mortgage and build an impressive financial portfolio at the same time. It is the most efficient way for families to raise the resources they need to secure both their house and income in retirement.
The Smith Manoeuvre uses the legal tools of the CRA and Canadian Financial institutions. It has been reviewed by Canada Revenue Agency staff, and endorsed by respected financial experts and economists, investment planners, and lenders.
Why Do Canadians Need The Smith Manoeuvre?
Taxation, inflation and the generally increasing cost of life require that Canadians take action to improve their financial security. The average Canadian pays close to half of their income in taxes to various levels of government – we pay more in tax than we do on food, clothing and shelter combined – the three basic
necessities for simple survival.
When we then account for the effect of inflation and cost of housing and the other financial requirements of life, we have little, if anything, to invest for our future. And this can lead to having to work in retirement, living off a fixed income, being financially reliant on our children and other potentially unpleasant situations
when we should be enjoying the benefits of a lifetime of hard work.
We Canadians are increasingly unable to provide a secure financial future for our families.
How Does The Smith Manoeuvre Work?
Mortgages are very expensive considering we are typically paying interest for 25 years or more on what is likely our largest debt. Add to this the fact that the mortgage interest is not tax-deductible, and it is no wonderwe worry about our financial futures. It can take well-over one million dollars to finally payout a mortgage of less than half that amount.
But if you structure your mortgage correctly with the assistance of a Smith Manoeuvre Certified Professional, you will have the ability to convert those non-deductible mortgage interest payments to tax deductions while simultaneously paying out your mortgage much quicker and also building up a significant investment portfolio that will be there for you in retirement.
The proper mortgage structure allows you to access the equity in your home as fast as you are creating it, either with your regular mortgage payment or in conjunction with regular or periodic prepayments. And by getting these newly available funds invested for growth over time, you are not only generating tax savings which can be used to make extra payments against the mortgage with money that otherwise you would not have available, but you are also investing significant sums each and every month with no new cash required from your pockets.
You are simply using repurposing money that you are already spending – your mortgage payment.
Smith Manoeuvre Fundamentals
If interest is not tax-deductible, it is because you have borrowed to consume – buy cars, clothes, groceries, gas, an expensive lifestyle with fancy dinners and vacations. These ‘things’ you are buying with borrowed money start to decline in value or even disappear as soon as you buy them. And because the interest in not tax deductible, if you paid $6,000 in interest on the borrowing for the year, that full $6,000 is gone, none of it to be seen by you again.
However, if you borrow to invest with the reasonable expectation of generating income, you can deduct the interest. So, while you still may have paid $6,000 in interest on the borrowing for the year, when you send in your tax return, the CRA realizes they took too much money off your paycheque every two weeks for the past year and they have to send you money back in the form of a tax refund.
How much is this refund? Well, if you are at the 40% marginal tax rate, then you get a cheque from the government for $2,400. That means that borrowing only cost you $3,600. That’s a big improvement over borrowing the same amount of money for depreciating items.
And better still, you are only getting the benefit of this deductible interest because you have borrowed to invest – so now instead of purchasing items that cost you a lot in interest expense and decline in value (wealth destruction), you are purchasing assets which cost little in interest expense and increase in value (wealth
creation).
The wealthy truly understand the above concept. They know it and they live it. That’s why they are wealthy.
And remember, the $6,000 of interest referenced above is not additional cash you have had to come up with during the course of the year. The Smith Manoeuvre strategy is self-funding.
What Are the Benefits of The Smith Manoeuvre?
To demonstrate the general concepts of reducing your tax bill, paying out your expensive mortgage debt much sooner and building a significant investment portfolio that otherwise wouldn’t exist – all without requiring any additional cash flow from you each month, let’s look at a specific scenario based on the following
assumptions:
• 40% Marginal Tax Rate
• $800,000 Home Value
• $500,000 Mortgage Balance
• 25 years Amortization
• 6.0% Mortgage Rate
• 7.5% Borrowing Rate (HELOC)
• 8% Annual Forecasted Growth Rate of Investments
Under this scenario, at the end of the 25-year amortization period, the homeowner who did not implement The Smith Manoeuvre will have generated $0 in tax deductions over those 25 years. They will have an investment portfolio of $0. And they will have had to actually earn a total of $1.6 million to finally have been able to pay out that $500,000 mortgage over the full 25 years.
That same homeowner, had they implemented The Smith Manoeuvre, will have generated a total of over $430,000 in tax deductions, will have paid out that expensive non-deductible mortgage debt not in 25 years, but in less than 21 years, and they will have an investment portfolio valued at over $800,000. Also, the
homeowner will have saved almost a quarter of a million dollars of income when it comes to calculating how much income is required to fully amortize the mortgage.
These results could be improved upon significantly if some or all of the available ‘Accelerators’ were used. It is not uncommon for net worth improvement to be upwards or close to a million dollars and take 10-15 or more years off the amortization of the mortgage.
While the Smith Manoeuvre is not necessarily difficult, it is complex enough that you really do need a professional, an SMCP in fact, to get you on the right track. This has to be one of the least well known and most misunderstood financial concepts of our time and yet, one of the most powerful tools for any home owner! It can be and often is life changing!
What is The Smith Manoeuvre?
The Smith Manoeuvre is a financial strategy that was developed in the mid-1980’s which employs refined and proven debt conversion techniques to transform expensive mortgage interest into valuable tax deductions.
The method has a remarkable snowball effect that generates large and growing annual tax refunds, enables the homeowner to knock years off the life of a non-deductible mortgage and build an impressive financial portfolio at the same time. It is the most efficient way for families to raise the resources they need to secure both their house and income in retirement.
The Smith Manoeuvre uses the legal tools of the CRA and Canadian Financial institutions. It has been reviewed by Canada Revenue Agency staff, and endorsed by respected financial experts and economists, investment planners, and lenders.
Why Do Canadians Need The Smith Manoeuvre?
Taxation, inflation and the generally increasing cost of life require that Canadians take action to improve their financial security. The average Canadian pays close to half of their income in taxes to various levels of government – we pay more in tax than we do on food, clothing and shelter combined – the three basic
necessities for simple survival.
When we then account for the effect of inflation and cost of housing and the other financial requirements of life, we have little, if anything, to invest for our future. And this can lead to having to work in retirement, living off a fixed income, being financially reliant on our children and other potentially unpleasant situations
when we should be enjoying the benefits of a lifetime of hard work.
We Canadians are increasingly unable to provide a secure financial future for our families.
How Does The Smith Manoeuvre Work?
Mortgages are very expensive considering we are typically paying interest for 25 years or more on what is likely our largest debt. Add to this the fact that the mortgage interest is not tax-deductible, and it is no wonderwe worry about our financial futures. It can take well-over one million dollars to finally payout a mortgage of less than half that amount.
But if you structure your mortgage correctly with the assistance of a Smith Manoeuvre Certified Professional, you will have the ability to convert those non-deductible mortgage interest payments to tax deductions while simultaneously paying out your mortgage much quicker and also building up a significant investment portfolio that will be there for you in retirement.
The proper mortgage structure allows you to access the equity in your home as fast as you are creating it, either with your regular mortgage payment or in conjunction with regular or periodic prepayments. And by getting these newly available funds invested for growth over time, you are not only generating tax savings which can be used to make extra payments against the mortgage with money that otherwise you would not have available, but you are also investing significant sums each and every month with no new cash required from your pockets.
You are simply using repurposing money that you are already spending – your mortgage payment.
Smith Manoeuvre Fundamentals
If interest is not tax-deductible, it is because you have borrowed to consume – buy cars, clothes, groceries, gas, an expensive lifestyle with fancy dinners and vacations. These ‘things’ you are buying with borrowed money start to decline in value or even disappear as soon as you buy them. And because the interest in not tax deductible, if you paid $6,000 in interest on the borrowing for the year, that full $6,000 is gone, none of it to be seen by you again.
However, if you borrow to invest with the reasonable expectation of generating income, you can deduct the interest. So, while you still may have paid $6,000 in interest on the borrowing for the year, when you send in your tax return, the CRA realizes they took too much money off your paycheque every two weeks for the past year and they have to send you money back in the form of a tax refund.
How much is this refund? Well, if you are at the 40% marginal tax rate, then you get a cheque from the government for $2,400. That means that borrowing only cost you $3,600. That’s a big improvement over borrowing the same amount of money for depreciating items.
And better still, you are only getting the benefit of this deductible interest because you have borrowed to invest – so now instead of purchasing items that cost you a lot in interest expense and decline in value (wealth destruction), you are purchasing assets which cost little in interest expense and increase in value (wealth
creation).
The wealthy truly understand the above concept. They know it and they live it. That’s why they are wealthy.
And remember, the $6,000 of interest referenced above is not additional cash you have had to come up with during the course of the year. The Smith Manoeuvre strategy is self-funding.
What Are the Benefits of The Smith Manoeuvre?
To demonstrate the general concepts of reducing your tax bill, paying out your expensive mortgage debt much sooner and building a significant investment portfolio that otherwise wouldn’t exist – all without requiring any additional cash flow from you each month, let’s look at a specific scenario based on the following
assumptions:
• 40% Marginal Tax Rate
• $800,000 Home Value
• $500,000 Mortgage Balance
• 25 years Amortization
• 6.0% Mortgage Rate
• 7.5% Borrowing Rate (HELOC)
• 8% Annual Forecasted Growth Rate of Investments
Under this scenario, at the end of the 25-year amortization period, the homeowner who did not implement The Smith Manoeuvre will have generated $0 in tax deductions over those 25 years. They will have an investment portfolio of $0. And they will have had to actually earn a total of $1.6 million to finally have been able to pay out that $500,000 mortgage over the full 25 years.
That same homeowner, had they implemented The Smith Manoeuvre, will have generated a total of over $430,000 in tax deductions, will have paid out that expensive non-deductible mortgage debt not in 25 years, but in less than 21 years, and they will have an investment portfolio valued at over $800,000. Also, the
homeowner will have saved almost a quarter of a million dollars of income when it comes to calculating how much income is required to fully amortize the mortgage.
These results could be improved upon significantly if some or all of the available ‘Accelerators’ were used. It is not uncommon for net worth improvement to be upwards or close to a million dollars and take 10-15 or more years off the amortization of the mortgage.
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