The Smith Manoeuvre: Canadian Tax Deductible Mortgage

Most Canadians are best off paying their minimum mortgage payment and investing the extra money. At our currently low interest rates, investing beats the pants off paying down the mortgage aggressively.

What if I told you there's a way to kinda do both and save gobs of money in tax? It's my take on the Smith Manoeuvre (SM), a strategy developed by British Columbian financial planner. I want to give full kudos to the late Fraser Smith for sharing this strategy. If you want to really learn the intricacies of this strategy before implementation, buy the book like I did. You can also get it at most public libraries.

The Smith Manoeuvre Guide

The Smith Manoeuvre is an advanced strategy that takes a bit of knowledge to implement. Operational management of several accounts linked to the strategy, careful accounting, and financial discipline are key to making the Smith Manoeuvre pay off big time.

Here are the detailed steps to implement the strategy:

  1. Obtain a re-advanceable HELOC style mortgage. You need to have at least 35% equity in your home first! Make sure the HELOC is structured so you have two separate parts: a nondeductible portion for your house mortgage and a revolving, re-advanceable, tax deductible portion for investing.
  2. Start a online chequing account. Free is best so use Tangerine or PC Bank.
  3. Sell your current taxable (not TFSA/RRSP!) investments and pay down your house mortgage portion of the HELOC.
  4. Start a new Cash/Margin Account with a brokerage. Make sure it is separate from any other Cash/Margin Account you may have! You need a clean paper trail for the CRA.
  5. Make regular mortgage payments and put all extra money towards the house mortgage portion of your HELOC.
  6. Borrow back the newly available money from the investment loan side of your HELOC by making a transfer to the Cash/Margin Account.
  7. Use investment loan money to purchase Canadian dividend paying stocks. Make sure the dividends get deposited in your separate online chequing account.
  8. Use the dividends and new investment money to pay down your house mortgage portion.
  9. Borrow back newly available money from your investment loan portion and transfer to your Cash/Margin Account.
  10. Borrow from investment loan portion, transfer to chequing account, and send back to investment loan portion to pay he interest expense on the investment loan portion.
  11. Claim Canadian dividend income in the exact same manner that you deduct interest expense from taxes! Either to the highest income earner or split between both if in the same tax bracket. Always claim investment income and deduct interest expenses in the exact same proportions.
  12. Adjust the investment loan for any Return of Capital distributions paid by your ETF, REIT, or stocks.
  13. Deduct all interest paid for investment loan portion ONLY in the tax return of the highest income earner (or split between both if in the same tax bracket).
  14. Apply tax refund to house mortgage portion, borrow back under the investment loan portion, and invest in your Cash/Margin account.
  15. Repeat steps 5 through 14.
  16. Final considerations when strategy is complete.

The SM Strategy Effects

In this admittedly complicated strategy, you are basically shifting your debt from non-deductible mortgage interest expense to a fully deductible interest expense for investing. All with no extra monthly cost to you.

There are numerous steps to achieve the strategy. To get an idea of the money flow, here is a diagram of the accounts and steps involved. It's a lot of money movement!


The Smith Manoeuvre does not make you debt-free. Instead, you maintain your debt level at a maximum of 65% of your stated house value, but you can grow a massive investment account alongside your loan. Combining tax savings and investing is a powerful force which generates substantial wealth over time.

This strategy is more risky than simply paying off your mortgage and building an investment account on the side. However, as I will show in my next SM post, the risk is manageable and the rewards can be significant.

Once the strategy is complete (your mortgage portion is paid off), you can either keep the loan going for the huge tax benefits or you can slowly wind down the loan.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.

Leave a Reply