Step 4: Setting Up Your Investment Account
Self-Directed Brokerage Account
For the Smith Manoeuvre, you will want to have a non-registered (Cash/Margin) investment account at a self-directed online brokerage. Personally I love Questrade for many reasons. But there are also other decent options. Some standouts for lower costs include Interactive Brokers, National Bank Direct, and Virtual Brokers.
Depending on the brokerage you choose, the account you want to open may have a different name. Questrade calls it a Standard Margin Account; National Bank has a Cash Account, Margin Account, Margin Account with Short-selling, and Income Account; Virtual Brokers calls it the All-In-One Account; Interactive Brokers simply calls it a Individual Account or Joint Account; QTrade offers the Cash Account or Margin Account; BMO calls it a 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 the brokerage you plan to use if you're not sure. The Smith Manoeuvre requires you to use a non-registered investment account to ensure your investment loan (Portion 2 of the HELOC) is fully tax deductible.
If you already have a non-registered investment account with an online brokerage you can use that, but only if the balance is $0.00 when you start the Smith Manoeuvre. This is important as you do not want to mix the accounting for your Smith Manoeuvre strategy 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, not taxes.
A joint investment account with rights of survivorship means your investment assets and legal access will be seamlessly transferred to your partner in the event of a sudden death. 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 money flow and tax accounting are 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 most 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 keep the investment loan to claim the tax deductions. If there is more money for investing, you will have to create a second non-registered investment account at that time.
To keep your taxes easier, do not mix outside contributions into the investment account intended for your Smith Manoeuvre strategy.
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