In Step 4, we will detail the correct way to structure your investment account for the Smith Manoeuvre.
The Smith Manoeuvre is an investment strategy where you borrow against the equity in your home to invest. Through tax benefits and investment gains, you pay the mortgage off quickly and substitute your typical mortgage for a tax-deductible, stock investing loan.
Step 4: Setting Up Your Investment Account
Self-Directed Brokerage Account
For the Smith Manoeuvre, you will want to have a taxable investment account at a self-directed online brokerage. Personally I love Questrade for many reasons. But there are also other decent options. Some standouts are Virtual Brokers, QTrade, and BMO Investorline.
Depending on the brokerage you choose, the account you want to open may have a different name. Questrade calls it a Standard Margin Account, Virtual Brokers calls it the All-In-One Account, QTrade calls it the Cash Account or Margin Account, BMO calls it Cash Investor Account or Margin Investor Account, and other brokers have similar names for it.
Basically just make sure it's a non-registered, taxable individual/joint investment trading account. Call your brokerage if you're not sure.
A big part of the Smith Manoeuvre is making sure your investment loan (Portion 2 of the HELOC) is fully tax-deductible. For this reason, you cannot use registered accounts for Smith Maneouvre investing. Make sure you keep your money flow separate and never use any of the Smith Manoeuvre accounts, including the chequing account, to make any payments to a TFSA or RRSP account.
If you already have a joint investment account with an online brokerage you can use that, but only if the balance is $0 when you start the Smith Manoeuvre. This is important as you do not want to mix accounting for the Smith Manoeuvre and your other investments.
Use a Joint Cash/Margin Account
When you set up your Smith Manoeuvre investment account, choose a joint account if you are married or common-law. This is for estate purposes primarily--not taxes. As we will discuss in another step, the Smith Manoeuvre works best when claimed by the higher income partner.
With joint investment accounts, your investment assets and legal access will be seamlessly transferred to your partner in the event of a sudden death. God forbid that happens, but always prepare for the worst. Don't put your partner in a situation where they don't understand what you are doing with your finances, they have to fight with banks or brokerages to get information about your accounts, and after dealing with lawyers and probate all your investments have been disposed and they have a big tax bill--not to mention potentially ruining your Smith Manoeuvre strategy.
In joint accounts, the CRA directs the tax responsibility falls to the account contributor(s) in the same ratio each individual contributes to the account. The names on the joint account don't really mean anything from a pure tax perspective as long as the accounting is clear and consistent.
If you have investments in taxable accounts outside of your Smith Manoeuvre account, make sure you keep everything separate. The Smith Manoeuvre costs and income will be claimed by the higher income partner. However, outside of the SM, in general circumstances, you want the investment account to benefit the lower income partner.
Once the Smith Manoeuvre strategy is completed (Portion 1 of the HELOC is paid down to $0), you will normally continue the investment loan portion to claim the tax deductions. If there is more money for investing, you will have to create a second investment account at that time. Do not mix outside contributions into the investment account intended for your Smith Manoeuvre.