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When you own a home, the expenses can seem endless – electric upgrades, utility bills, property tax, plumbing issues, lawn maintenance, you name it. And then there’s the mortgage, with an interest rate that has you spending an extra couple hundred dollars a month without even touching the principal payment, as well as the tax. The worst part is that you can’t even deduct any of these expenses if the home is your primary residence – that’s only allowed if it’s a rental property

Normally, Canadians aren’t able to deduct their mortgage interest tax from their income during tax time. However, there is a way to achieve this using the Smith Maneuver.

Check out these 6 homeowner tax breaks.

What Is The Smith Maneuver?

Developed by financial planner and strategist Fraser Smith, the Smith Maneuver is a legal strategy that helps Canadian homeowners turn their mortgage interest into a tax-deductible investment loan. Smith noticed that wealthier Canadians were finding more deductions in their taxes because they had the means to spend more money on expensive accountants. He shared his strategy to level the playing field, and to help low to middle-class Canadians find the same tax breaks.

Learn the difference between a tax credit and tax deduction

How Does The Smith Maneuver Work?

For the Smith Maneuver to work, you need a re-advanceable mortgage. Similar to a line of credit, a re-advanceable mortgage includes both a mortgage and line of credit that you can borrow from. These are commonly known as Home Equity Lines of Credit (HELOC). Each mortgage payment you make pays down your mortgage while also increasing the amount you can borrow from your line of credit. 

The Smith Maneuver converts your mortgage loan or line of credit into an “investment” loan that qualifies for interest deduction during tax season. If you borrow funds from your HELOC and invest them into something that produces income, you can deduct the interest on the borrowed funds from your income.

Check out the new CMHC First-Time Home Buyer incentive

Steps To Set Up The Smith Maneuver

Follow these steps to set up the Smith Maneuver and start deducting your mortgage interest:

  1. Obtain a re-advanceable mortgage loan (HELOC) from a lender

When you buy your first home, make sure the mortgage is re-advanceable. You can also obtain a re-advanceable mortgage when you renew or break your existing mortgage.

  1. Invest using funds from your HELOC

Make sure your investments are likely to give more of a return than the cost of interest in borrowing from the HELOC. 

  1. Make a claim for deduction on the interest incurred on the HELOC
  2. Reinvest your tax refund

Find out what is the maximum tax refund you can get in Canada.

Benefits Of The Smith Maneuver

Here are some reasons to consider the Smith Maneuver:

  • Pay Off Your Mortgage Faster – By deducting interest from your income, you’re able to receive a larger tax refund. Pro Tip – If you use the refund to make a lump sum payment on your mortgage each year, you can pay it off faster.
  • Pay Less in Taxes – Deducting the interest allows you to Tax-Deductible –
    • (Since your new investment loan is tax-deductible, you can reduce the amount of interest you owe. This is particularly advantageous to those who are in a higher income tax bracket.)
  • Invest Without Using Your Own Money– If you have limited cash flow because of debt, low income, or family obligations, the Smith Maneuver gives you an opportunity to invest and earn passive income without using your own money. This allows you to save more for retirement, even if your cash flow is low.

What Are The Risks Of The Smith Maneuver? 

Like any investment, the Smith Maneuver isn’t free of risk. Make sure you consider the following before using it:

  • You’re leveraging your home – If you invest into something that doesn’t make you any money, or worse, if it causes you to lose money, you could be in trouble. Leveraging your home equity is always risky because the lender can take your house if you’re unable to pay back the debt.
  • You may need an accountant Filing taxes is manageable as an individual, but you need to know the rules. If you file without covering all your bases, you could face an audit from the CRA. An accountant can help you navigate your taxes, but they also come at an expense.

What Happens When You Pay Off Your Mortgage?

With a mortgage that isn’t re-advanceable (non-HELOC mortgage), you’re free and clear once you pay it off. This isn’t the case if you have used the Smith Maneuver, however. Even if you’ve paid all of your mortgage interest, you are still on the hook for paying the interest on your HELOC loan. You can address this in two ways:

Option A: Keep your HELOC forever. This works if you’d like to continue to benefit from the Smith Maneuver and use the loan credit to invest.

Option B: Pay off the HELOC. This works for people who aren’t comfortable carrying a large loan into retirement. To pay off your HELOC, redirect the cash that would have gone toward your mortgage, towards the HELOC loan.

Smith Maneuver FAQs

When does it make sense to use the Smith Maneuver?

Using money from a HELOC incurs interest. To make a Smith Maneuver worth that interest, it’s important to ensure that the investment you’re making brings you more income than the cost of the interest, even if it’s deductible.

Can I use the Smith Maneuver on tax-free accounts?

The Smith Maneuver only works on non-registered accounts. So, registered investment accounts like an RRSP or TFSA won’t work.

Is the Smith Maneuver a good choice for a risk-averse person like me?

No. To successfully use the Smith Maneuver, you need to have an appetite for risk. While you have the opportunity to get a nice return by using it, you also have an opportunity to experience higher loss. If you’re unsure, consider seeing a financial professional for advice.

Final Thoughts

The tax world is often complicated, and it’s hard to know how you can make your taxes work for you. The Smith Maneuver can make you extra money at tax time and is accessible to all homeowners who have at least some appetite for risk. 

Chrissy Kapralos avatar on Loans Canada
Chrissy Kapralos

Chrissy is a Toronto-based communications advisor. With an English degree from the University of Toronto and editing courses under her belt from Ryerson University, she has continued her lifelong passion for writing and editing. In addition to working for Loans Canada on a variety of financial topics, Chrissy has a few years of resume writing and editing under her belt, and takes great pleasure in helping people find work that fits with their experience and passions. When she isn't working, you can find her practicing yoga, hanging out with her dog, reading up on financial and real estate news, or planning her next trip abroad.

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