The Smith Manoeuvre – Is your mortgage tax deductible?

The Smith Manoeuvre is an efficient strategy to use equity in your home to invest for your future without using your cash flow. It converts your mortgage over time into a tax deductible investment credit line.

smithmanlogoMost Canadians are searching for a feeling of financial security, but all the bills and life expenses mean they never build up enough of a nest egg to be secure. The Smith Manoeuvre is a strategy that can help you build your nest egg and make your retirement plan work.

It is best to consider it as part of your retirement plan. I have helped thousands of Canadians plan for their retirement and found that many people are unable to invest enough to be able to have the retirement they want without a significant effect on their lifestyle. In many cases, the Smith Manoeuvre can fill the gap by providing enough additional investments for them to achieve their desired retirement.

In short, the Smith Manoeuvre involves borrowing the available equity in your home to invest bit by bit as you gain equity with each mortgage payment. As your mortgage declines, it is replaced by a tax deductible credit line from money borrowed to invest. You can borrow from the credit line to pay its own interest (capitalize the interest), so it does not require your cash flow. The interest tax deductions can give you tax refunds, which you can use to pay down your mortgage more quickly. Over time, your investments can build up a large nest egg that can help fund the retirement you want.

I meet with people all the time whose main financial goal (if they have one at all) is a general desire to somehow pay off their mortgage as soon as possible, and then they can finally start saving for retirement. But it is increasingly clear that much of Canada’s hard working middle class continues to face under-funded “golden years’ simply because they run out of time. One of the main benefits of the Smith Manoeuvre is that it can help you start saving for your retirement now – not 20 years from now.

Long term returns on the stock market have been far higher than typical borrowing rates, so you could earn a significant investment gain over time, especially when you include the tax benefits. For example, if your secured credit line interest rate is 3.2% and you are in a 40% tax bracket, you only need to invest to earn more than 1.9% per year after tax long term to benefit. That is quite a low hurdle.

Borrowing to invest is inherently risky. It should never be done only for the tax deductions. The risks decline considerably with time, however. The stock market fluctuates widely in one-year periods, but the worst 25-year return of the S&P500 in the last 80 years has been a gain of 5.6% per year1. This is why the Smith Manoeuvre is generally only suitable for high risk tolerance investors with longer time horizons.

When it comes to the Smith Manoeuvre, I am the:

  • leading expert in Canada.
  • only accountant working with it.
  • only planner combining it with comprehensive financial planning.
  • only source for all 7 Smith Manoeuvre strategies.

Ed is recognized by Fraser Smith in his book “The Smith Manoeuvre” on page 82 (4th printing – July, 2005).

This page is intended to discuss all the main issues regarding the Smith Manoeuvre. It answers the following questions:

  1. What are the benefits?
  2. What are the risks?
  3. How do you manage the risks?
  4. How do you implement it?
  5. How do you avoid having to use your cash flow?
  6. Are there really 7 Smith Manoeuvre strategies?
  7. Is it legal?
  8. What is the best way to invest with the Smith Manoeuvre?
  9. How can I learn more and find out whether the Smith Manoeuvre is right for me?

If you would like to learn more about the Smith Manoeuvre and whether it is suitable for you, the best way is to read this site in detail. It is the best source for accurate information about the strategy. Please ask any questions in the comments below.

If you think the strategy might be suitable for you, then you should discuss with your financial planner whether or not to include it in your retirement plan. If you Work with Me” to create your Unified Financial Plan, I can help you determine whether or not to include the Smith Manoeuvre in your retirement plan.

What are the benefits?

Most discussions about the Smith Manoeuvre recommend it as a way to make your mortgage tax deductible like our American friends have, but it does not actually do that. It converts your mortgage over time into a credit line used to borrow to invest for your future. The interest on the credit line is normally tax deductible.

The 3 main benefits of the Smith Manoeuvre are:

  1. Invest for your future without using your cash flow.
  2. Tax deductions.
  3. Pay your mortgage off faster.

The main benefit comes from the long term compound growth of your investments, which is normally far more than your extra tax refunds. For this reason, you should think of the Smith Manoeuvre primarily as a strategy of borrowing to invest for your future. The tax deduction should not be your main reason for implementing it.

Interest on money borrowed to invest is, however, one of the only tax deductions that is available to all taxpayers. People that earn salaries usually have few options, other than RRSPs, to reduce their taxes.

The long term benefits can be significant, though. Starting with home equity of only 20%, the expected benefit from the basic “Plain Jane” version of the Smith Manoeuvre over 25 years is roughly equal to the value of your home today.2 Starting with a lump sum or doing a more aggressive version can yield higher benefits.

What are the risks?

The long term growth and tax refunds are nice, but borrowing to invest is not for everyone. The Smith Manoeuvre is a risky strategy because you are borrowing to invest. It magnifies your gains and your losses a lot and can easily double or triple your profit or your loss. You owe the balance of the loan and the interest regardless of how your investments perform.

If you are the type of person that might panic and sell during a large market crash, then the Smith Manoeuvre is not right for you. If you do it for 30 years, there will likely be a few market crashes during that time and you need to be able to stay invested through them.

To consider this type of strategy, you need to be able to tolerate the ups and downs of your investments and stay invested for the long term, especially after any market crash and if the value of your investments falls below the amount you owe on the credit line.

The biggest problem with borrowing to invest is that investors often do it at the worst possible time and not for the long term. Investors are often drawn to it after the stock markets have been rising strongly for several years. Stocks can feel safer in strong bull markets, but this is the riskiest time to invest.

How do you manage the risks?

The best way to deal with the risks is to invest for the long term and have a sound investment strategy. In general, you should only consider the Smith Manoeuvre if you are planning to stick with it for a minimum of 20 years, and preferably much longer. You also need to have the emotional and financial strength necessary to maintain this as a long term strategy.

The Smith Manoeuvre is an efficient way of borrowing to invest, so it is only suitable for people that have a high risk tolerance. From my experience, it works best with people that are optimistic about the future, have a reasonable understanding of long term stock market history, a long term outlook, and that consider it to be a key part of their retirement plan.

While the stock market is volatile, the long term risk is far lower than most people believe. If you invest for 20 years or more, the range of historical returns (standard deviation) of stocks is actually lower than bonds.3 The companies on the stock market tend to do anything they can to keep growing their profits after a downturn, which is the main reason the stock market has historically reliably recovered from all declines.

How do you implement it?

To implement it, you need a “readvanceable mortgage”, which is a mortgage linked with a credit line. Readvanceable mortgages are available from most banks. The credit limit for your mortgage plus the credit line is normally 80% of the appraised value of your home. (New mortgage rules limiting the credit line to 65% still allow you to start with a combined limit of 80% of the value of your home.)

In the “Plain Jane” Smith Manoeuvre, with each mortgage payment, you pay down some principal which immediately becomes available credit in the credit line. You can borrow this amount to invest directly from the credit line. For example, if your mortgage payment is $1,000 bi-weekly and the principal portion is $500 bi-weekly, as soon as you make your mortgage payment, you gain $500 of credit in the credit line linked to your mortgage. You can then borrow $500 bi-weekly from the credit line to invest.

If you invest bi-weekly or monthly in this way, you get the “dollar cost averaging” benefit of a lower average cost, which makes this a safer way to invest than investing one lump sum.

Your investment credit line interest is normally tax deductible, so you should start receiving tax refunds. They may be very small in the early years. In the classic Smith Manoeuvre scenario, you would use your tax refunds to pay down your mortgage and then immediately reborrow the same amount from your credit line to invest. (In practice, you should look at your entire financial situation and use the tax refund in the most effective way.)

If you use only tax refunds from the basic Smith Manoeuvre to pay your mortgage more quickly, you generally pay off your 25-year mortgage about three years sooner.2

If you need help in getting the best readvanceable mortgage for your situation, check out my free “Ed’s Mortgage Referral Service”. I know the advantages and disadvantages of all the readvanceable mortgages available in Canada and have contacts and experience with most of them.

How do you avoid having to use your cash flow?

The Smith Manoeuvre can be done without using your cash flow if you “capitalize the interest”. This means you borrow from your credit line to pay the interest on the credit line.

There is a tax advantage for doing this. The tax rule is that if the interest on your credit line is tax deductible, then the interest on the interest is also tax deductible. There are usually more effective uses for your cash flow than paying low rate, tax deductible interest, such as paying off non-deductible debt or investing in your RRSP.

The key issue with capitalizing interest is tracking. You need to be able to track that the money you borrowed was used to pay the interest.

Banks generally will not allow you to automatically use the credit line to pay its own interest, so you need to “guerilla capitalize” the interest, which means you do it as a manual transaction. Have the interest paid from your chequing, but then withdraw the exact same amount (to the penny) from your credit line to replenish your chequing account. A better way is to have a dedicated separate chequing account that is used only for these transactions.

Are there really 7 Smith Manoeuvre strategies?

The Smith Manoeuvre is not just one strategy. There are actually seven categories of Smith Manoeuvre strategies. The variations are limited only by your imagination, but here are the main categories of strategies:

“Plain Jane” Smith Manoeuvre:
This is the basic original Smith Manoeuvre starting with zero and investing bi-weekly or monthly the principal portion of each mortgage payment. The standard way is to invest up to 80% of your home value. You can, of course, borrow to invest significantly less (if 80% is uncomfortable for you) or more (if your goal is t build a larger nest egg over time).

“Singleton Shuffle”:

You can convert part of your mortgage to a tax deductible credit line instantly if you have non-registered investments. To do this, sell the investments to pay down your mortgage and then immediately reborrow the same amount from the credit line to reinvest.

When I met Frank and Isabel, they had a $100,000 mortgage and $100,000 investments at the same bank branch. I sold the investments to pay off the mortgage, then immediately borrowed $100,000 to invest again. They still had $100,000 in investments and a $100,000 debt, but the new mortgage interest is now tax deductible because it was used to buy the investments. It is usually a good idea to use any non-registered investments to convert part of your mortgage to tax deductible as you start the Smith Manoeuvre.

You can kick-start the Smith Manoeuvre if you have additional equity in your home. You can borrow the available equity to invest, so that you can start with a lump sum. This still normally requires no cash flow, since you can capitalize the interest.

“Debt Miracle”:
If you have other non-deductible debts and some home equity available, you can merge all the debts and the payments into your new mortgage. You refinance all your debt at lower rates, plus you are effectively converting all the debts to tax deductible interest over time. This can make your monthly Smith Manoeuvre investment very large.

When I met Stefan and Maureen, they were struggling with debt payments and not able to invest much. They had a $1,000 per month mortgage payment, $500 per month for a car loan, $250 per month for a credit line and $250 per month for a credit card. I merged all their debts into their mortgage and kept the payment at $2,000 per month. This is the same payment, but now $1,500 per month is the principal portion, which allowed Stefan and Maureen to invest $1,500 per month with the Smith Manoeuvre.

Smith Manoeuvre with Dividends:
If your objective is more about paying down your mortgage and not about maximizing your benefit, you can invest entirely in dividend-paying investments. You can use the dividends to pay down your mortgage more quickly and then immediately reborrow the same amounts to invest.

Your overall benefit from this strategy is reduced by the “tax drag” from the tax on the dividends every year, which reduces your tax refunds. Dividends are generally taxed at lower rates, but at much higher rates than deferred capital gains, which are the norm with the Smith Manoeuvre.

Some people implement the Smith Manoeuvre using dividend-paying stocks, ETFs or mutual funds. Dividend investing has historically been a relatively effective way to invest, since it generally means you are invested in larger, more stable and slower growing companies.

However, dividends are fully taxable every year, unless they are from Canadian companies. Most people that invest for dividends end up non-diversified because they end up invested entirely in Canada.

Some people implement the Smith Manoeuvre with mutual funds that can give you an eligible dividend up to 6% from any investment, including global equity, balanced or bond funds. This can pay your non-deductible mortgage off quite a bit more quickly and allow you to diversify properly.

The expected benefit from the Smith Manoeuvre with Dividends is generally lower than the other strategies here because of the “tax drag” (sometimes called “tax bleed”.

One tax-deferred option for taking income from your leveraged investments after you retire is to invest in “T8” mutual funds that pay out up to 8% of the balance each year. Most of this payment is “return of capital” (“ROC”), which is tax-deferred (usually for about 12 ½ years), but reduces the amount of your credit line that is deductible.

If you maintain the Smith Manoeuvre investments into retirement, then this is one of the options for receiving retirement income.

This strategy was heavily marketed in the past as a way to pay off a mortgage very quickly, but actually has no benefits – unless you need the income. The “return of capital” (“ROC”) means the original loan or credit line becomes non-deductible over time. For tax purposes, paying a return of capital payment onto your mortgage is the same as cashing in your investment and spending it.

When you receive payments that include ROC, the book value of your investment is reduced by the amount of ROC. This means your capital gain when you eventually sell the investment is higher.

For example, Rocco borrowed $100,000 to invest in a T8 mutual fund. He received $8,000 per year in monthly payments and paid no tax on them, because they are ROC. This has 2 tax issues:

  1. The ROC reduces the deductibility of the investment loan. After one year, the interest on only $92,000 of the loan is tax deductible. After 2 years, only $84,000. Rocco had to track this on a spreadsheet to accurately record the interest tax deduction on his tax return each year.

If part of the ROC payment is used to pay the interest on the credit line or paid onto the tax deductible credit line, then it does not reduce the deductibility. This can become complex to track.

  1. ROC means a larger capital gain in the future. Rocco’s $8,000 per year payments were tax-free for the first 12 ½ years. At that point, the book value of his investment had been reduced to zero. At that point, all ROC payments become taxed annually as capital gains.


Rocco sold his investment 20 years later. He was fortunate that it was still worth $100,000, after having paid out $8,000 per year every year. He thought there would be no capital gain, since the investment had the same value as when he invested. However, since the book value was zero, he had a $100,000 capital gain on sale.

The Smith/Snyder is should generally only be considered if you need the income and understand the tax consequences. You should be careful with any investment that pays “return of capital” (“ROC”).

Rempel Maximum:
I created this strategy for the very small number of clients that want the maximum possible wealth building they can do with their given cash flow. It is only suitable for people with very high risk tolerance focused on building up the largest nest egg they can.

Instead of investing the principal portion of each mortgage payment, you can borrow a large lump sum to invest so that the interest-only payments are equal to the principal portion. You could use either a credit line or an investment loan.

For example, Mark wanted to aggressively grow his wealth. His mortgage payment paid $500 per month principal. Instead of investing the $500 per month from his credit line, he took out an investment loan of $150,000 at 4%. He used his credit line to pay the interest payments of $500 per month, so it did not come from his cash flow. He only had to make his regular mortgage payment.

With the “Plain Jane” Smith Manoeuvre, Mark would have started from zero and invested $500 per month. With the Rempel Maximum, he invested $150,000 once. His cash flow was the same with either strategy.

Mark wanted to grow his wealth and was sophisticated enough to tolerate the much higher risk. He was confident that with effective investments, the $150,000 investment would grow much faster than starting with zero and investing $500 per month.


Is it legal?

Yes. There is generally no issue with the tax deduction, as long as you follow the tax rules. You are only deducting interest borrowed to invest, which is the same tax rule most businesses use. The main tax issues to maintain tax deductibility are:

It is critical to always be able to trace that any amount borrowed was invested.

Keep tax deductible credit line separate:
Do not co-mingle deductible and non-deductible debts.

Current use:
CRA is concerned with the “current use” of money borrowed, not the original use. If you borrow to invest and then cash in the investment to spend, your credit line is no longer deductible because the “current use” of the money is your spending.

Non-registered investments:
The investments cannot be in an RRSP or TFSA.

“Expectation of income”:
Your investments should be reasonably expected to pay income. This is often misinterpreted as the investments must pay dividends or interest. In general, almost any stock or mutual fund is fine, even if it does not pay a dividend, as long as its prospectus does not prohibit ever paying a dividend. All that is necessary is a reasonable expectation that the investment could pay a dividend or interest at some point. Tax-efficient corporate class mutual funds that have never paid any taxable distributions are normally fine.

Selling investments:
If you sell any investments, the lower of the amount invested (actually the book value) or the proceeds of selling must be paid down on the credit line, or the interest on that amount of the credit line becomes non-deductible.

Taxable investment income:
The general rule is that if you receive taxable income from your investments, such as dividends or a capital gains distribution, you can use that cash for any purpose without affecting the deductibility of the credit line. You must clearly be able to trace the cash you withdraw to the taxable income.

For example, Nancy borrowed $100,000 to invest. Her investment rose in value to $110,000. Then she lost her job. When her Employment Insurance ran out, she decided to cash in $10,000 to make her mortgage payments. She was glad to have these investments to support her in her emergency.

Nancy thought she was only withdrawing her gain. However, the book value of the $10,000 she sold was $9,091. The result was that she had a capital gain of only $909. However, $9,091 of her investment credit line was no longer deductible.

If she had wanted to withdraw only her $10,000 gain, she would need to sell the entire $110,000 in order to trigger the $10,000 capital gain. She could then withdraw the $10,000 and then reinvest the remaining $100,000.

Return of capital:
If you receive any payments from the investments that are tax-free because they are “return of capital” (“ROC”), such as from a T8 fund or an ETF, that amount must be paid onto the credit line, or the interest on that amount of the credit line is no longer deductible. If you receive any ROC, you need to track how much of your investment credit line is still deductible to do your tax return each year.


What is the best way to invest with the Smith Manoeuvre?

Investments for the Smith Manoeuvre should be tax-efficient, generally more conservative than your other investments such as those in your RRSP, and should be high quality investments that you will be confident with during a large market crash.

Investing tax-efficiently can significantly increase the benefit. Capital gains and dividends are taxed at preferred rates, but the lowest tax by far is on deferred capital gains. The most tax-efficient investments pay little or no taxable income and defer most or all of your gains far into the future when you start withdrawing in retirement. Meanwhile, you can still claim your interest deduction each year.

Key to effectively implementing the Smith Manoeuvre is to have investments that you will still be confident with after they fall significantly in value. The Smith Manoeuvre is borrowing to invest, which is a risky strategy. It should only be done with a long time horizon, preferably 20-30 years or more. In that time, the stock market is very likely to have some major crashes or bear markets. It is critical that you can maintain your investments through these bear markets. If you sell even once in the next 30 years after a 30% decline, you have severely reduced the effectiveness of the Smith Manoeuvre.

In short, any investment that you would sell if it declined by 30-40% is not a good choice. If you would sell your investments after a decline, then the Smith Manoeuvre is probably too risky for you. You need to be able to remain invested through the inevitable bear markets.

The Smith Manoeuvre is mostly commonly done with mutual funds, segregated funds, ETFs or individual stocks. In general, it is best to avoid individual stocks and funds restricted to specific sectors, since they are usually riskier than broad-based funds.

Focusing on global equity mutual funds, segregated funds or ETFs with a buy-and-hold philosophy is generally the most effective. This gives you broad diversification and reduces the temptation to market time. Studies, such as the Dalbar study, show that investors lose an average of 6% per year by regularly moving investments to whatever has been performing well recently. Most investors “buy high and sell low” over and over again by buying investing in currently popular investments. Buy-and-hold investors tend to have higher returns and pay less tax.

Personally, my process is to find the world’s best investors that are available and have them invest for me. I call them “All Star Fund Managers”. I won them in corporate class mutual funds that I intend to hold long term. All my fund managers have long term track records that outperform their index after all fees. I know them well and believe their outperformance results from skill.

Investing with All Star Fund Managers gives me confidence to stay invested and even buy more at market lows. For example, after the market crash in 2008, I remained completely confident my fund managers would eventually recover the loss, and even published an article just a few weeks from the bottom in March 2009 called: “How to take advantage of the market crash of 2008”.

How can I learn more and find out whether the Smith Manoeuvre is right for me?

If you think the strategy might be suitable for you, then you should discuss with your financial planner whether or not to include it in your retirement plan.

If you Work with Me” to create your Unified Financial Plan, I can help you determine whether or not to include the Smith Manoeuvre in your retirement plan.

For help in getting the best readvanceable mortgage for your situation, check out my free “Ed’s Mortgage Referral Service”. I know the advantages and disadvantages of all the readvanceable mortgages available in Canada and have contacts and experience with most of them.

If your mortgage is not due yet and you want to start sooner, check out “Ed’s Mortgage Breaking Calculation” to find out whether or not paying the penalty so you can start now is worth it.

Please ask any questions in the comments below.

1 Standard & Poors

2 Smith Manoeuvre Calculator. Assumes starting mortgage at 80% of home value, 25-year amortization, 3% mortgage, 4% credit line, 8% long term investment return (less than long term returns of stock markets), and 46% marginal tax bracket.

3 “Stocks for the Long Run”, 2008, Prof. Jeremy Siegel


  1. Stephane Bourgeois

    Hi Ed,

    I would love to have your feedback on this DRIP version of your Smith Manoeuvre with Dividends strategy.

    I use DRIP club to buy the 1st share and then use optional cash purchase (OCP) to perform your top-up starting strategy with the available HELOC balance. This would be split along 5-6 company to diversify investing, can be Canadian or US stock that are DRIP, OCP and PAD eligible.
    I would then setup each one Pre-Authorized Debit (PAD) to borrow total of the principal amount amount that is available on the HELOC each month.
    All dividends are fractionally reinvestment in a the same non-registered account, so this should avoid tax bleed. I would also capitalized the interest paid on the HELOC.

    I have this ideal in my head for more than 4 months now and don’t see anyone doing this.

    What is your take?


  2. Ed Rempel

    Hi Stephane,

    Interesting way to try to optimize the strategy. You still end up with a “tax bleed”, though. The dividends are reinvested, but they are still taxable.

    If you have a proper, globally diversified portfolio, all the non-Canadian dividends are fully taxed each year. Canadian dividends are taxed at preferred rates, but roughly similar to capital gains – and far higher than deferred capital gains.

    I modelled it on the Smith Manoeuvre Calculator. Receiving dividends allow you to pay down your mortgage more quickly, but means you get smaller tax refunds. The tax on the dividends is much bigger than the mortgage savings, though. In short, the expected benefit of the strategy over many years is reduced by receiving dividends – even if they are all Canadian dividends.

    There are a couple exceptions where it can work. The main one is for low income people with a taxable income below $45,000 (including the dividends after grossing them up). With income that low, the Smith Manoeuvre may not make much sense at all, though.


  3. Molly

    Perfect shot! Thanks for your post!

  4. Luckie

    It’s like you’re on a mission to save me time and money!

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  6. Tuie

    Hi Ed!
    I’ve enjoyed your comments on numerous Canadian finance blogs!
    I’m thinking of starting the Smith Maneuvre on my house. We already have a readvanceable mortgage through CIBC and about $120k of equity in the house/room on the HELOC. Before jumping in I have a few questions:
    1. What happens if you sell your house? How does that affect your HELOC?
    2. To receive the tax credit each year, that is assuming you have investment income to apply it against correct? If you don’t have investment income in the year, can you apply for a refund? Or do you have to carry it forward? (Planning on having very little taxable income from my portfolio)
    3. How significant is the risk of being caught towards the end of the investment time horizon with your portfolio down significantly and a climbing interest rate on your loan?
    Thanks so much!

  7. Ed Rempel

    Hi Tuie,

    Thanks for the kind words. Glad I could be helpful.

    To answer your questions:

    1. No problem moving to a new home while doing the Smith Manoeuvre. Make sure you will have the 20% down. The starting balance of your Smith Manoeuvre HELOC on your new home should be the exact closing balance on your old home.

    2. No, you do not need to receive investment income. You only need to own investments that are able to pay income.

    This means you can’t buy raw land, gold bars, or options, but generally any mutual fund, seg fund, ETF or stock is fine. As long as it does not have a prospectus that prevents paying income.

    Your idea to invest for minimum taxable investment income is smart. You can still deduct the Smith Manoeuvre interest, as long as you have qualifying investments. Try to minimize dividends and interest, and defer capital gains. The lowest investment tax is on deferred capital gains.

    With tax-efficient investments, you should be able to get a tax refund in most years.

    3. Interesting question. The risk of being caught with investments down at the end of your investment time horizon depend a lot on your strategy and time frame.

    You should have a long time horizon to do the Smith Manoeuvre. I suggest a minimum of 20 years. The longer the better. In the last 150 years, the worst 15-year period of the S&P500 was a gain of less than 1%/year, but the worst 25-year period was a gain of 5%/year.

    If you invest for 25+ years and don’t make the behavioural mistakes most investors make, you are highly likely to have a large gain.

    If you have a strategy with a fixed end to the Smith Manoeuvre, you can plan to reduce risk the last few years.

    Some people plan to cash in investments and sell to pay off the HELOC at retirement, which means there would be a possibility of a major decline just before selling.

    The most efficient end for the Smith Manoeuvre is to keep it right through retirement as long as you own your home. That means you pay off the HELOC from selling your home, not from selling your investments.

    This strategy allows you to keep getting investment income from your investments through retirement, which means there is no fixed end to the Smith Manoeuvre.

    That would eliminate the risk of a crash, since you never take a large lump sum – just annual retirement cash flow.

    Interest rates rising is not something I’m worried about much. The rule of thumb is that your investments need to make 2/3 of the interest rate long term to break even after tax.

    Therefore, if rates rise from 3% to 5%, you only need your investments to make about 3.3% long term to break even after tax.

    Interest rates would only worry me if they have a huge rise, say to 10%. I think that is highly unlikely.

    Does that answer your questions, Tuie? Whas is your strategy for the end of the Smith Manoeuvre time horizon?


  8. michael

    Ed – phenomenal read, thank you. I’ve been coming back to your material for a year or so now, and finally took the step to setup my own SM. I made a bulk purchase of equities based on already available HELOC room ($110k, will take it to $150, and then start using dividends to pay down mortgage and add to the non-reg account balance from the HELOC).

    Question: what to do with the remainder cash left in the non-reg accoumt? I.e. I moved $50k over, bought $49,7 in equity, leaving $300 in the non-reg account cash. Should I immediately move this back against the HELOC owing, as only the interest on $49,7k in this case is tax deductible? Or will the interest on the $50k (seeing as it’s being deposited into an investment account) be deemed tax deductible?

    Many thanks


  9. Ed Rempel

    Hi Michael,

    Thanks for the kinds words. Congratulations on taking the step. I hope it works well for you. Just make sure you can stay invested through the inevitable bear markets or market crashes.

    The good news is that entire $50K should remain deductible. There is no issue with having a small cash holding in your investment account.

    One general comment. Paying the dividends onto your mortgage is fine, as long as you can trace them. However, I would recommend not to invest for dividends. They cause a “tax bleed” that reduces the benefits of the strategy long term. The lowest tax is on deferred capital gains, not on dividends.

    I’m mentioning this because I have read notes from quite a few investors doing the Smith Manoeuvre and focusing on dividends the last few years. That means they are heavily overweight in Canada and not investing based on the proper investment criteria, such as quality, growth of earnings, risk/return, etc.

    The Smith Manoeuvre works best when you are focused on tax-efficiency and global equities for the long term.

    I hope that is helpful, Michael.


  10. Michael

    Ed – thanks so much for the response re: the cash balance in the investment account and your thoughts on dividend strategy. I feel like I should know the answer here, as I’ve been investing in equity (non-reg and reg) for many years, with good returns (mostly!), yet I don’t know how to “defer capital gains” (other than the fact that many of my equity positions are long on good companies which I have not yet sold).

    Certainly I intend to do some growth investment with some more cash in my Smith Manouevre account, it just seemed like a good place for me to place some of my Canadian Dividend plays to balance out other accounts (mostly registered) that have more US equity, either large cap tech stocks or smaller, riskier stuff that has worked out pretty well).

    Could you clarify what you mean by deferred capital gains, is it simply buy and hold and enjoy the appreciation?

    Thanks so much.


  11. Joe

    Ed once again awesome blog. It’s refreshing to read your perspective on things. Quick question.

    I completely agree with the idea that divided investing isn’t the best strategy for the SM. KInda like trying to accelerate with one foot on the gas and the other taping the brake.

    What about swap based ETF’s such as those offered by Horizon? You get the low fee couch potatoe diversification, but are these derivatives worth the risk?

    Thanks again

  12. Ed Rempel

    Hi Michael,

    Good question. Deferred capital gains are the lowest taxed type of investment income, especially if you can defer the tax for many years or decades, so investing for deferred capital gains is beneficial.

    Using tax-deferred vehicles, like RRSPs and TFSAs are of course useful. However, you cannot use them for the Smith Manoeuvre.

    There are a few ways to invest to defer capital gains:

    1. Buy-and-hold: Capital gains are deferred until you sell. This means you need to buy investments that you are comfortable holding for many years.
    2. Invest in funds: A little known fact is that mutual funds, seg funds, pooled funds and ETFs get tax credits every year based on the capital gains allocated to investors that sold the fund at a gain. It is called the “Capital Gains Refund Mechanism” (CGRM). This is a technical accounting thing, but very significant.

    This is why investors that buy their own stocks or use broker “separately managed accounts” (SMAs) usually pay for more tax. Fund investors can sometimes invest for 20 or 30 years with the fund being up 300% or 500% and all holding in the fund turned over a few times – and yet the fund investor may get little or nothing in capital gains distributions (T3 or T5 slips) at year-end. Investors that own their own stocks are often considering the tax consequences every time they sell a stock.

    Here is an article on CGRM: .

    3. Corporate class mutual funds: This type of mutual fund can net the gains from one type of fund against losses in another fund to avoid having to distribute capital gains. This works best when a fund company has many sector and regional funds in their corporate class structure, not just core broad-based funds. For example, if a fund company has a resource fund, a technology fund, a health care fund, an emerging markets fund, a US growth fund and a small cap value fund, most likely some of these funds will have losses every year. These losses can be triggered and used to offset taxable capital gains incurred on the funds that went up.

    You can also switch funds without triggering a capital gain, but this is being restricted as of January 1, 2017. For example, until the end of 2016, you can switch a Canadian dividend fund to a US growth fund without triggering a capital gain, if both are in the same corporate class. After 2016, you will still be able to switch tax-deferred between 2 funds with identical holdings, such as Class A fund (regular fund) and a Class T fund (pays a distribution).

    4. T-SWP funds: After you retire and are taking income from your investments, a T-SWP can give you tax-deferred income for 12 to 25 years. For example, a T8 fund will pay out 8% per year which is all considered to be “return of capital” (ROC). It is not taxable until your book value reaches zero (in about 12 years). A T5 fund pays out 5% and can defer it up to 20 years. These funds create a tax problem for the Smith Manoeuvre, though, since they reduce the tax deductibility of the investment credit line.

    5. Retirement income by SWP: When you retire and are taking income from your investments, you can sell some investments every month or year to give you the cash flow you need. Only the gain portion of the amount you sell is taxable, not the book value. This allows you to continue to defer tax.

    For example, if you if you invested $100,000 and it tripled to $300,000 when you retire, you could sell $15,000 to provide some retirement income. $5,000 is your book value, so only the $10,000 gain is taxable. It is a capital gain, so only $5,000 is added to your taxable income. This is almost definitely lower tax than receiving $15,000 in dividends.

    This was a great question, Michael. I think I will post it as an article.


  13. Ed Rempel

    Hi Joe,

    My understanding is that swap-based ETFs are not eligible for the Smith Manoeuvre. I am not an expert on ETFs, since I would never own one. (I’m never satisfied with index returns.)

    The issue is that their prospectus does not allow them to ever pay a dividend or interest. The interest from the cash they hold is swapped for a capital gain/loss on the index. They don’t hold the underlying stocks, so they cannot receive dividends.

    For interest to be deductible, you need to buy an investment that could pay you income at some point. It does not matter if it ever has, only whether it could.

    For example, Warren Buffett’s Berkshire Hathaway would qualify. It has never paid a dividend and probably never will. It could though. Buffett does not pay a dividend because he can reinvest the profits at a higher rate than the shareholders are likely to.

    However a call option or put option would not qualify, because there is no opportunity to ever pay a dividend or interest.

    CRA has generally interpreted equity investing relatively broadly, so they might ignore swap-based ETFs. However, I would not recommend them, since at any time in the future, CRA could retroactively deny all your interest deduction for the last 7 years for money borrowed to buy them.


  14. Tom

    Good day, Ed. Thank you for the useful article. I do have a few questions before I start the SM:

    1. Step 1 of the SM is to liquidate all existing assets from your non-reg account and apply it to the mortgage. Is this step necessary? I already have a non-reg account with about 15 companies purchased.

    2. Can principle payments be made to the HELOC while engaged in the SM? Aside from reducing the amount of interest you would claim, is there any other drawback to this? Are there any issues with borrowing up to a certain amount (i.e. $20K) then paying back that amount before borrowing a new chunk of money?

    3. Should the HELOC be used for SM only? i.e. if an expense comes up and you use the HELOC to pay that expense, does it complicate things with the CRA (i.e. the borrowed money wouldn’t be for investments in this case)?

    Looking forward to your response.

  15. Joe


    Thanks for the response. You’re a fountain of information. It never occurred to me to check the prospectus. I just assumed they would qualify. Once again thanks for providing so much value. I look forward to your new articles and I will continue to actively share them with friends and family.

    Take care.

  16. Ed Rempel

    Hi Tom,

    Thanks for your questions.

    1. There are many ways to do the Smith Manoeuvre. This step is not a requirement, but does have benefits.

    If you sell the investments, pay down your mortgage, then reborrow from the credit line to buy back investments, you will have instantly converted part of your mortgage to a tax deductible credit line. That amount is tax deductible from then going forward.

    This may trigger capital gains and you have to be careful about the “superficial loss” rules, so there might be offset to the tax savings. Since the tax savings are every year going forward, they most likely are more significant than capital gains on selling, which is a one-time event.

    It is also important to keep your leveraged investments separate from your non-leveraged investments for tracking purposes.

    In your case, this could be an opportunity to diversify. It sounds like you are not really diversified being all in Canada and all in dividend stocks. The dividends also cause a “tax bleed” that reduces the benefits of the Smith Manoeuvre. If you sell to rebuy new investments, it could be an opportunity for you to have proper global diversification and to be more tax efficient.

    2. There is no problem making principal payments on the HELOC. You are right that you lose the tax deductibility of that portion.

    If you are paying down the HELOC, usually it is better to pay down your mortgage first, since it is not tax deductible. Any time you get extra cash you plan to invest, you can pay down your mortgage and then reborrow that amount from the HELOC to invest. Each time you do that, you convert part of your mortgage to a tax deductible credit line.

    If you are cashing in some investments (and not reinvesting), you do need to pay the proceeds (or at least the book value) onto the HELOC.

    It sounds from your question that you will only ever have $20K borrowed at any time? You may find larger advantages to letting the HELOC accumulate until your mortgage is paid off.

    3. Yes, the HELOC should be used for the SM only. The investments should also be kept separate. This is for tracking purposes. If you are ever audited by CRA, it will be up to you to prove the HELOC is tax deductible by showing all the transactions. If there is a mix of tax deductible and non-deductible amounts in your HELOC, you have to start prorating the interest payments, allocating payments, etc. It makes it far more complex.

    Most readvanceable mortgages allow you to have multiple HELOCs within the one readvanceable mortgage. If you need to borrow for other purposes, just create a separate split HELOC for the non-deductible purposes.

    I hope that is helpful for you, Tom.


  17. Steve

    Hello Ed,
    At 49 I’m looking to find out more about the SM. Have read the book now looking to determine best course of action on our investment sittling idly in the bank doing nothing.
    I’m self employed, my wife works as an employee full time, we have our home (own but not outright) we’ve gained/lost equity in Calgary as of late but on a home of $500K value our current mort is $375 as a conventional mortgage.
    I’m struggling with what to do next as we had a 3 yr and we are coming up on 2.7 years and want to participate in the SM to pay down/off the mortgage and invest at the same time. The issue is we are considering a move to smaller as our family needs have changed, best to wait until a move is finalized then look at either HELOC or ?? type of mortgage?
    Best way to discuss and get ahold of you?

  18. Ed Rempel

    Hi Steve,

    There are a few issues in your questions.

    First, you need to determine whether the Smith Manoeuvre is right for you. On the upside, there is a large potential long term gain. On the downside, it is a risky strategy of borrowing to invest. The investment credit line can grow to be quite large eventually. You need to be able to stick with the strategy through the inevitable bear markets or market crashes.

    If it is right for you, then you have an opportunity to start when your mortgage comes due in a few months.

    There are many ways to do the Smith Manoeuvre. With the Plain Jane regular version, you could sell your non-registered investments and then reborrow to buy the back when you have your readvanceable mortgage.

    If the bank appraises your home at $500K, then you can borrow up to $400K. Your mortgage is $375K, so you could start by borrowing the $25K equity plus any amount you pay down on your mortgage.

    When are you thinking you might move, Steve?

    A couple thoughts on moving:

    – You should do the math on how much you would actually clear if you downsize. Given the costs of moving, real estate commissions, other fees, and the cost of setting up your new home the way you want it, many people find little benefit from downsizing. Here in the Toronto area, if you sell a 3,000 sq. ft. home to move to a much smaller 1,500 sq. ft. home, after all costs you may only clear $100-200K. (We have 2 levels of land transfer tax, as well.) Is it really worthwhile for you to downsize, Steve?
    – If you are planning to move, try to make your mortgage come due when you move. You could move in a few months when your mortgage comes due and start the SM with your new home. Or take a 1 or 2-year mortgage and then move when that comes due.
    – If you start the SM in a few months, it is easy to move it to a new home if you do move in the future.

    If you want to discuss this with me, send me a note in “Contact” and let me know how to reach you, Steve.


  19. Jasmine Commisso

    We’ve recently asked a financial advisor at our local TD branch here in South Surrey if we could get some advise on whether the Smith Maneuver would be beneficial to us. She and along with her other colleagues didn’t seem to know much about it. Could you refer us to someone well versed in the subject please. Preferably in the South Surrey, White Rock area.

  20. Ed Rempel

    Hi Jasmine,

    Sorry, I don’t know anyone I would recommend in your area. I would suggest to you that, with the Smith Manoeuvre, it is more important to have a top quality, experience advisor than a local one.

    The Smith Manoeuvre can have very large benefits over the long term, but it is also a risky strategy of borrowing to invest.

    The best way to figure out whether it is beneficial for you is to have a personal financial done for you. A plan makes it clear exactly what you need to do to have the life you want.

    The benefits of the plan alone are much larger than you may realize. People with a financial plan that includes a retirement plan have on average 4.2 times the wealth of people without a plan.

    The Smith Manoeuvre should only be done as a long term strategy (at least 20 years). A financial plan will tell you whether it makes sense for you throughout your life.

    There is more info here: .

    I hope that is helpful for you, Jasmine.


  21. Tom

    Hi, Ed.

    I’m in the midst of implementing the Singleton Shuffle (i.e. I have sold off all my non-reg investments with the intent to pay down a portion of my mortgage and borrow back the principle).

    I have two questions:
    1. I have made it a rule in the past that I will not invest in any stock unless I have a minimum of $1,000.00 cash in my investment account, in an effort to avoid paying too many commission fees (i.e. $9.95 per transaction, which works out to 1% of my total purchase). I pay down my mortgage on a bi-weekly basis, and currently (including an additional $100.00 double-down), I am paying about $435.00 in principle each payment. If I adhere to my rule, that would mean I would need to wait until three (3) mortgage payments are made before I can invest in anything (i.e. $435 * 3 = $1,305.00.) Would there be an issue if the transferred principle amount (from HELOC to non-reg account after each mortgage payment) sits in the non-reg account for up to 6 weeks before I use it for investing? Or should I be buying equities with each transfer?

    2. I’m confused about the whole “percentage of mortgage” rule that I read on Million Dollar Journey’s website

    My HELOC ‘limit’ states a value of about $200K. My starting mortgage amount is $160K. Which one do I take 65% of (I renewed in 2014 after consolidating other consumer debt into the overall mortgage)? If it is of the $200K, then I have $130K to work with. If it is the overall mortgage amount of $160K, I only have $104K to work with.

    Looking forward to your response.

  22. Ed Rempel

    Hi Tom,

    Interesting questions.

    1. No problem. Investment portfolios often have a cash position, so it is not unusual. The issue is tracing the borrowed funds to the investments. Cash is a qualifying investment unless you hold so much for so long that it is unreasonable to have an expectation of profit. I would suggest, to be safe, try to have less than half your portfolio in cash and try to avoid very large cash holdings for more than a year at a time.

    Your process should not be an issue at all. In fact, it may be easier to just advance larger amounts from your HELOC every couple months. That way, you are not paying interest on money that is sitting in cash.

    2. The 65% HELOC limit is not an issue until your mortgage is almost paid off. It’s a little confusing to figure out from your info. What was your home appraised for? The amount available for you is either the full $200K ‘limit’, or the limit less your mortgage or $40K.

    The HELOC limit minus your mortgage balance should be the amount available for you. The statements usually show a “variable limit” and a “total limit”. Your total credit limit should be 80% of your home value. You can borrow up to this amount between your mortgage and your investment credit line.

    The 65% is a separate limit on the credit line portion only. Once your mortgage is down to 15% of your home value, your credit line could be up to 65% if you invest the full amount. That would put you at a total of 80% (15% + 65%). At that point, you cannot readvance more on the credit line.

    You are much earlier in the Smith Manoeuvre process, so don’t worry about the 65% limit now, Tom.

    There are options to work within this when you get there. All you need to do is put a portion of your investment credit line back in as a separate mortgage.

    I hope that is helpful, Tom.


  23. Tom

    Thank you for your reply, Ed. Your feedback has been helpful once again. I better understand the HELOC limit issue now.

    Thanks again.

  24. Aaron

    Hi Ed – my wife and I are on our early forties and have been fortunate to have paid off our mortgage. We have good employment and have structured our taxable investments for ROC because we do not need income but like cash flow. I am beginning think that longer term this strategy might fail because it’s hard to keep finding was to reduce risk through diversification. I have read quite a bit about the Smith Maneuver and am considering the taking the plunge. My concern is related to volatility. My investments are low are relative to the market whereas growth stocks tend to bounce around more. How do you reconcile this within the SM?

  25. Calvin

    hi Ed, thanks for all the information, your website is really helpful and it has helped me answer a lot of questions that I have had. I have read the SM book and have researched the SM on various websites. I will be getting a mortgage in the coming months and have been doing a lot of research as the SM seems like a very logical move. One thing that I have found is that in the examples I have seen of the SM implementation, the interest rate on the mortgage is always higher than the interest rate on the line of credit used for the investment.

    Right now in today’s market, I have been researching the rates, and I would be able to get a mortgage for a rate of 2.06% and a rate of 3.2% on a line of credit (prime + 0.5%).

    Can you explain how the SM is effected by the mortgage rate being lower than the line of credit rate as I cannot seem to find any information regarding this.


  26. Ed Rempel

    Hi Aaron,

    That’s a great question. Key to the success of the Smith Manoeuvre is that it must be a long term strategy. When you think long term, everything is different.

    Let me explain. The SM must be long term because the stock market has historically only been reliable long term. For example, the worst 25-year return in the last 150 years for the S&P500 is 5%/year, and the worst in the last 80 years is 8%/year. This means that if you do the SM for 25 years or more, there is a high chance that you will have a good return.

    When you think long term, risk is different. Most people consider volatility to be risk. They measure risk with standard deviation, or a measure of how variable returns are over 1-year or 3-year periods.

    I define risk as the risk of permanent loss of capital. Because I think long term, I don’t worry about good quality investments going up and down.

    Permanent loss of capital can result from selling or getting more conservative after a major market drop, buying over-valued investments (most commonly whatever is currently popular), or from buying bad investments.

    My personal investment philosophy is entirely about hiring the world’s best fund managers. I have had the same fund managers for years and am very confident that they will not make these common investment mistakes. And because I am confident in these investments, if they ever take a big drop in value, I will buy more. Certainly I will never sell because an investment is down.

    With this philosophy, I don’t worry if my investments “bounce around more”, as you said. For me, bouncing around a moderate amount is either irrelevant. Bouncing around a lot is a buying opportunity.

    From my experience, this long term view is extremely helpful in making the Smith Manoeuvre successful. I spend time educating my clients about investments. If they can be comfortable with volatility and have a long term outlook, then I am more likely to think that they are a good fit for the Smith Manoeuvre.

    By the way, Aaron, why do you need income now? Are your investments and potentially the Smith Manoeuvre focused on income now or part of your long term retirement plan?


  27. Ed Rempel

    Hi Calvin,

    Good observation. I see you are looking at the SM carefully.

    Before I answer your question, I need to point out that the Smith Manoeuvre is primarily leveraged investing. The tax benefits are a relatively minor additional benefit.

    When I do projections of the Smith Manoeuvre with the Smith Manoeuvre Calculator, typically about 85% of the long term benefit is investment growth less interest cost. Only about 15% is related to tax refunds.

    To be beneficial, you need to long term have investment returns higher than the credit line cost after tax. It is the investment rate of return that you should compare to the credit line rate, not the mortgage rate (for the most part).

    Having said that, your point is important in deciding whether or not to speed up the Smith Manoeuvre with higher mortgage payments, and then reborrowing higher amounts to invest.

    You are correct about the effect of low interest rates short term. If you pay 3.2% on the tax-deductible credit line and are in the 42% marginal tax bracket, your after-tax cost is 1.86%. That’s only .2% lower than a 2.06% mortgage. If you are in the 31% tax bracket, your after-tax cost is 2.21%, which is .15% higher than the mortgage rate.

    The key point is that the Smith Manoeuvre credit line remains tax deductible for many years (possibly all your life).

    There is likely to be a bigger benefit in the future for a couple main reasons:

    1. Sometime in the future, interest rates are likely to be higher, in which case they work out much better. Let’s say all rates rise by 2%, then you would pay 5.2% on the credit line, which is 3.0% after tax (if you are in the 42% bracket). The mortgage rate 2% higher would be 4.06%. There is a big savings of more than 1%.

    2. Once you pay off your mortgage completely and owe only your Smith Manoeuvre credit line, you can convert it back into a mortgage to get the lower rate. If you keep it intact and separate, it would still be tax deductible.

    For example, if your mortgage is paid off today, you can convert the credit line to a mortgage at 2.06% (for example), which would be 1.19% after tax (with a 42% tax bracket).

    In short, even if there is little savings on the interest & tax right now, the Smith Manoeuvre converts your mortgage to a tax deductible credit line that remains tax deductible as long as you maintain the strategy. The benefit on this year’s conversion is likely to be far higher in the future.

    By the way, if you need help getting these great rates in a readvanceable mortgage (and usually your legal and appraisal fees covered), I have a free mortgage referral service on this site under “Contact”.


  28. Al

    Hi Ed, thank you for this article and for making yourself available to help us!

    I have a paid off home, and in mid 2015 I took out the maximum allowable HELoC amount (65%) at prime (2.x%) from my bank (the HELoC is under my spouse and my name).

    I invested the entire amount in an income fund (under just my name) offered by the same bank that provides approximately 5% annual return (in dividend payouts), paid monthly in cash. I pay off the monthly interest charged on my HELoC, every month.

    I made these decisions thinking I could write off the HELoC interest payments. Have I done things correctly so far?

    When it came time to do my 2015 taxes earlier this year, my bank only sent me a T5 slip that I don’t really understand. I can’t figure out how they calculated any of the amounts in boxes 24,25,26. I don’t have any other nonregistered investments at this bank, so this T5 can only be for the dividends earned from this income fund.
    I can’t figure out why the amount in box 24 is much less than what I actually received in dividend payouts, nor do I understand why the amount in box 25 (the taxable amount) can be greater than the actual amount in box 24. I also don’t know how they calculated the dividend tax credit amount in box 26.

    Does this T5 somehow factor in my HELoC interest payments? If not, where do I claim the deduction for those interest payments?

    Sorry for this long post, but any help with these lingering questions is greatly appreciated!

  29. Ed Rempel

    Hi Al,

    There are a few issues with what you have done so far. What you are doing is not actually the Smith Manoeuvre.

    1. It looks like the 5% from the income fund is not the return or the dividend. It is just a distribution that it pays our regardless of what the fund makes.

    That means it is paying out “return of capital” (ROC), which means the 5% payments are you getting your own money back. At the end of the year, the fund determines how much is payable and sends you the T5. Since the dividend is less than the cash you received, the difference is considered “return of capital” and reduces the amount of your investment loan that is tax deductible.

    There is a calculation you would need to do for your tax return to determine how much of the interest is tax deductible. Take the 5% distribution less the cash dividend amount (box 24) and subtract that from the amount you borrowed to invest. That is the amount on which interest is still tax deductible. You should prorate the portion of your interest expense and only claim the portion that is tax deductible.

    I hope that explanation is clear. It is a bit complicated. This issue comes up when you take a fund that pays a fixed distribution. A fixed distribution amount, such as 5%, means you receive return of capital (ROC).

    2. By receiving all these dividends, you have a “tax bleed” on the strategy. You get an interest deduction, but also have to pay tax on your dividends every year. If you invested more tax-efficiently, you would get larger tax refunds that you can pay onto your mortgage.

    3. It is usually best to have your invest joint with your spouse for estate planning purposes. You can still claim both the interest deduction and any tax related to the investments entirely on your tax return.

    To answer your question about the T5 slip, that is the way dividends are taxed. The process is designed to integrate personal and corporate tax (your tax and that of the companies in the fund that paid the dividends). The cash dividend is “grossed up” by 38% and you pay tax on the grossed up amount. Then you get a dividend tax credit of 15.02%.

    A better strategy for you would be to do the Smith Manoeuvre. Get a readvanceable mortgage and use the credit line to borrow to pay its own interest (capitalize the interest). Then have your fund reinvest all distributions. Better yet, invest in tax-efficient funds, which are generally global equity funds that are corporate class funds.

    This allows your fund to be invested for growth based on your risk/return, instead of investing for income. The fund can grow without withdrawing from it. Your tax deductible credit line stays fully tax deductible and grows more quickly, since it is paying its own interest.

    Over time, you should get a lot more growth and pay a lot less tax with a proper Smith Manoeuvre strategy.

    Is that helpful for you, Al?


  30. Mark

    Thank you for the wonderful information. I have one unanswered question about the Smith Manoeuvre. I understand that under normal circumstances when I sell my house after it has gone up in value I do not pay capital gains tax. However, now with the Smith Manoeuvre it seems the house could be considered an investment asset – does that mean it would be subject to capital gains tax when it is sold?

  31. Ed Rempel

    Hi Mark,

    Good question. No, your home will not be subject to capital gains tax. Don’t worry. Your principal residence exemption still applies.

    With the Smith Manoeuvre, you are not investing in your home. You are only using it as collateral for an investment credit line.

    You will have to eventually pay capital gains tax on your investments. However, if you invest tax-efficiently, you can defer nearly all of that capital gains tax for many years into the future.


  32. David

    I’ve been reading about Smith Manoeuvre and Cash dam for years. It seems to be one of the only (legal) ways to avoid tax in Canada. However, now that I’m actually in a position to implement this strategy, I’m not sure if it makes good economic sense.

    I’ll illustrate why with an example:
    Let’s say I implement a cash dam to convert all the interest on the debt on my principal residence to a write-off. For ease, the total debt is $1mm. My business expenses are such that it would take approx. 4 years to fully convert the $1mm debt over. I will use a re-advanceable mortgage/LOC, and pay the qualifying business expenses from the LOC, while using an equal amount of business revenue to pre-pay the mortgage component. Without the cash dam, the interest on my mortgage is $22,000 a year (2.2%) and is not a write-off. With the cash-damn, the interest is $32,000 (3.2%) and is a write-off. I will save approx. $12,800 in taxes (40% of $32,000), but it will cost me $10,000 extra interest and the effort of managing this complex process on a monthly basis. The benefit will be even less in years 0-4 while the debt is being “swapped.”

    Am I missing something here? It just doesn’t seem like it would be worth it to implement this practically.

  33. Ed Rempel

    Hi David,

    You are right. The Smith Manoeuvre is a very effective strategy and can make the difference to get you to the future you want. The Cash Dam is a nice, but small, additional tax savings.

    Great question. Your math is right. The one thing you are missing is the long term perspective.

    Just to clarify, the secured credit line today is typically 3.2%. You are in a 40% tax bracket, so the after tax cost to you of the interest is 1.92%.

    Your mortgage is 2.2%. We have been getting 2.09% most recently. The difference between those rates and 1.92% is .2% to .3%. It is something, but not huge.

    On your $1 million mortgage, that is a savings of $2-3,000/year.

    The piece you are missing is that it remains deductible for years and the benefit will be larger when interest rates rise.

    For example, if interest rates eventually rise by 1%, then you will have a 4.2% credit line that costs you 2.52% after tax.

    A mortgage at that time could be 3.09% or 3.2%, so the gain is closer to .6% to .7%.

    In your case, the Cash Dam can work very well, if it can convert your $1 million mortgage to tax deductible, in 4 years.

    You may be wondering whether there is a benefit of doing the Smith Manoeuvre when the Cash Dam can convert your entire mortgage to tax deductible already.

    There still might be a benefit. Remember that the Smith Manoeuvre has far larger benefits than Cash Dam, because it includes compounding investment growth. The Cash Dam is purely a tax strategy.

    In addition, the Cash Dam makes your credit line tax deductible only as long as you have your business. If you sell it or retire, your credit line stops being tax deductible and you have a large non-deductible mortgage to pay off.

    If you would keep Smith Manoeuvre investments well into retirement, the Smith Manoeuvre can maintain the deductibility much longer. In addition, you have an investment portfolio that should be larger than the debt at that time that could be used to pay it off (quickly or slowly).


  34. clark

    Hi Ed,
    Awesome blog. Very informative.
    I have been reading up on SM and have decided to take the plunge. I understand the benefits and risk (can be mitigate with the long time horizon).
    Could you comment on the below?
    Thanks in advance.

    conventional mortgage with TD: 200K (2nd year of 5 year variable)
    amortization: 15 years
    rate: Prime – .7%
    penalty to refinance: 1263 (
    Home Value (estimate): 700K
    rsp: 200K
    non-rsp: 40K
    resp: 30K
    tax bracket: 43%

    Option 1: Break mortgage and get TD flexline
    1. Would it be worthwhile to pay the penalty and refinance?

    Option 2: Investment loan till renewal by keeping existing mortgage and get a non-readvanceable HELOC
    1. TD mentioned that I could qualify for 275K at P + .3% but need to pay legal (500) + appraisal (200-300)
    2. Plan to invest 200K and capitalized the interest till the mortgage renewal date. The HELOC will fund the interest for the four years. Am I doing this correct for the tax deductibility of the interest? Year one will have a shortfall of around 3500 after the tax refund. I know this shouldn’t be my main driver to do the SM.
    3. On mortgage renewal, Roll HELOC into the HELOC of the TD flexline and close out HELOC or would it be better to keep two HELOC?
    4. What would be the process to roll the HELOC into the HELOC of the TD flexline or is this not allowed?

    Any other options?

  35. Ed Rempel

    Hi Clark,

    First, you have not said anything here to clarify whether the SM is for you. The biggest issue is whether you would be able to stick with it when the next bear market or crash happens. If you borrow $200K and it falls by 40% to $120k, will you sell, get more conservative to avoid further losses, do nothing or buy more?

    To figure out whether or not to pay the penalty, the question is: What would you do differently if you refinance? For example, you have $275K credit available. If you get a new TD Flexline, will you invest the full $275K, or still only invest $200K?

    If you would invest the extra $75K, then it is worthwhile for you to pay the penalty, If not, then there is no advantage to refinance.

    To answer your questions:
    1. P+.3% is a good rate. The going rate is P+.5%. Some other banks will pay your legal and appraisal fees. I have a free mortgage referral service on my blog, if that is helpful.
    2. Yes, that process works.
    3. Roll it in. Simpler to have one.
    4. Just ask the bank to merge them.

    I hope that’s helpful, Clark.


  36. Tuie

    A couple things I’ve noticed across most sites is that two major facts related to the Smith maneuver are often glossed over or not addressed by most. One as a benefit and one as a detractor to the approach.
    1) The benefit of shifting your exposure from one massive asset in the Real Estate Asset Category to a diversified portfolio. I think a lot of people are taught to first invest in a home and then think about investing second (if at all). This can be an incredibly risky strategy having 99% of your wealth tied up in one large asset that is exposed to the property specific risk and also the specific real estate market that you live in. You would never tie up 99% of your wealth in one specific stock! Obviously equity and real estate are very different for a number of reasons but the fact remains that real estate is far from a sure thing. If you own a million dollar house today and have $500k of equity built up in it, then tomorrow the market you live in tanks or the condo you own gets a special assessment and your property value drops by $100k to $900K, you lose that $100k directly out of your equity if you have to sell tomorrow UNLESS you have the Smith Maneuver employed. Then you would have essentially shifted that equity exposure to a diversified portfolio hopefully at least worth the amount of your equity if not more. You could then theoretically sell your house and your investment portfolio and at least come out with the $500k you built up originally.

    2) The downside that I think people don’t talk about as much is the compound growth of your HELOC that occurs as a result of capitalizing your interest payments. Your HELOC balance owing grows every time that you capitalize interest. As such you are getting compound growth on the loan from day one after every interest charge. I found this point quite important when looking into doing the Smith Maneuver on a smaller scale (only borrowing a smaller portion of the equity amount I had built up in my home) so that I would get some benefit from the move but keep my overall debt limit to a lower amount. As you know, compound growth is sneaky and you can quickly end up with a larger HELOC balance and overall debt level than expected if you don’t account for this from the get go.

    Because of this, I’ve been hesitant to pull the trigger because the real benefits come from fully implementing the Maneuver but with that comes greater risk. Doing a small modified version doesn’t quite have the same risk reward profile.

    Just a few thoughts!

  37. Ed Rempel

    Hey Tuie,

    Good insights, Tuie. You have obviously been thinking about this.

    I agree completely on the diversification. Most of my clients have the bulk of their net worth in their home. If they do the Smith Manoeuvre, that definitely adds a lot of diversification.

    Rental properties make it worse. The strange argument I have heard a few times is people wanting to add a rental property “to diversify”. These people have an $800K home and $100K in RRSPs. I told them “You are already 90% in real estate. Adding more real estate is not diversification – it’s “di-worse-ification”!

    You are right that the tax deductible credit line compounds growth if you capitalize the interest. However, your mortgage declines at the same rate that the credit line grows, so your total debt remains the same.

    With the Smith Manoeuvre, you convert your non-deductible debt into tax deductible debt. Your total debt does not grow or decline (other than lump sum investments).

    I see you are hesitant to pull the trigger.

    My suggestion for you is to think long term. Don’t think about the debt and the investments on day 1. Think about them after 25 years. There are many ways to do the Smith Manoeuvre – 7 categories of strategies and you can do it large or small.

    After 25 years, how high a debt are you comfortable with? Do you want to cap it at some point? The most common Smith Manoeuvre ends with your credit line at 80% of your home value, but you can do more or less. What would the investments be at that time if it was a good, bad or normal time? The worst 25-year period of the S&P500 since 1871 was a gain of 4.9%/year, the best was 17.4%/year and the average was 9.7%/year.

    The risk is what I call the “Big Mistake” – selling or getting more conservative after a bear market or market crash. If you do that even once in the next 25 years, you can mess up the entire strategy. There have been 4 bear markets with declines over 40% in the last 145 years. Could you stay confident in those times? Even better, could you buy low in those times?

    I hope that’s helpful, Tuie.

    The Smith Manoeuvre is a risky strategy that probably should only be done with professional advice.


  38. Tuie

    Thanks Ed!
    Question about the HELOC maximum allowance of 80%, is that based on the Market Value of your house revalued each year? Or on the original purchase price?
    If it is based on the market value what happens if your home declines in value below the 80% threshold? If your loan balance becomes more than 80% of the market value do you get a margin call for to bring your loan back down to 80%?

  39. Vipul Patel

    Hi Ed,

    For the SM investing, Do you find the Vanguard ETF – VAB is a good choice with regards to the tax efficiency?
    I started SM about 2 years ago with mutual funds, This year in May I realize that MER is too high to stay invested in mutual funds so I transfer all my investment in the Canadian couch potato portfolio.

    Please let me know your thoughts on this.


  40. Vipul Patel


    Thanks for your blogs and comments across all the platforms & forums.

    In addition to my question above, I just want to confirm my strategy of SM investing:
    1) Borrowed 30K from our HELOC – 2 years ago.
    2) Invested in couch potato ETF portfolio including into VAB (about 30%) – I just learned from your blog that dividend paying investment is not best approach, I am willing to move my investment for a better result.
    3) Paying monthly interest from my chequing account (The bank provides total yearly interest paid statement).
    4) Paying mortgage bi-weekly with some extra contribution to pay-off it faster.

    To keep the investing cost low, I prefer investing in passive ETF funds for long time period.
    Do you think this is a right strategy?


  41. Ed Rempel

    Hi Tuie,

    The HELOC limit of 80% is on appraised value of your home. The bank arranges an appraisal. That appraisal tends to remain until the next time you refinance or ask for an appraisal.

    Some people ask for an appraisal every 2 or 3 years in order to create additional credit to invest. We can usually get the legal and appraisal fees paid by the bank.

    If your home declines in value, the limit stays the same. It only changes when you refinance or move the mortgage to another bank. In the early 1990s when Toronto real estate fell in value by 30%, people with HELOCs just left them. They could not refinance in any way, but the banks left them with the same limit.

    There can be no margin call. Remember, this is a secured credit line with your home as collateral. This is not a margin account.

    If you get above the 80% limit, the bank might bounce your next cheque or withdrawal. They usually give you a bit of wiggle room.


  42. Ed Rempel

    Hi VP,

    I am not a fan of the couch potato portfolio. It’s quite easy to beat over time. It’s over-weight bonds and over-weight Canada. A global equity focused portfolio would be a better choice. The global markets have out-performed Canada long term, Canada’s index is not at all diversified, and bonds really drag down your return.

    Personally, I’m not interested in below-index options. I cannot see myself ever owning an ETF or index product of any kind.

    My investments are entirely in mutual funds managed by All Star Fund Managers. All my fund managers have outperformed their index over the long term and over their career (after all fees). My specialty is analyzing fund managers and I am convinced it is skill.

    The average fund manager does not beat the index, but the top ones do. I have learned what to look for to identify skill. One factor is a high Active Share. Most studies on mutual funds vs ETFs are quite simplistic, just looking at average funds and not trying to identify how to outperform.

    The most in-depth study on fund managers was the Active Share study at Yale. It showed that most fund managers lag because they are closet indexers. If you take the fund managers with a high Active Share (portfolio very different from the index), most fund managers beat the index and the out-performance was sustained.

    Here are a few articles on the topic:
    There is also a video here: (2nd one on the right).

    VAB is a bond fund. Bond funds are not tax-efficient. With the Smith Manoeuvre, we are hoping to avoid T3 and T5 slips as much as possible. You can get lower distributions with a corporate class mutual fund, but an easier way is to think carefully about how much you need in bonds.

    Bonds are less volatile than stocks short-term and medium-term, but more volatile long-term. Despite conventional wisdom, the standard deviation (risk measure) of bonds is higher than stocks over 20+ year time periods.

    Of course, you need to be within your risk tolerance and be able to stay invested through market crashes and bear markets, and bonds can help with that. If you must have fixed income, there are better options than bonds, especially now that interest rates appear to have bottomed after 30 years. Bonds today cannot really be expected to even keep up with inflation.

    The bond substitutes, like high dividend stocks or REITS provide higher and more tax-efficient income than bonds. But they have the same risk as bonds today – expensive, low rates and will decline if interest rates rise.

    Assuming you can stay invested long term, then bonds make no sense. Lower return and higher risk.

    A 30% bond allocation has the same effect on your return as a 2% MER.

    Change your thinking to think long term. Then a much higher stock allocation makes sense. Most of my clients are 100% in equities. Here is an article about having confidence in equities: .


  43. Ed Rempel

    Hi Vipul,

    Thank you for the kind words.

    Looking at your strategy, I have a few comments:

    1. Are you doing the full Smith Manoeuvre or just leveraging $30,000? You didn’t mention anything about capitalizing the interest or regularly adding to your leveraged investments.

    2. Why did you choose $30,000? Is that your available equity or the amount you are comfortable borrowing to invest?

    3. Investing 30% in bonds is not tax-efficient and will reduce your long term returns. You need to invest within your risk tolerance, though, so perhaps this makes sense in your case. I, personally, invest 100% in equities.

    4. I am not a fan of couch potato and passive ETF investing (as I mentioned), because I am not satisfied with below index investing.

    Having said that, I think it is a decent strategy for people that are DIYers that are not experts in investing and. As Warren Buffett says, index investing is a good idea for “know-nothing investors”.

    My personal investments are in mutual funds with All Star Fund Managers that have outperformed their index over their career.

    Definitely better than ETFs is the Index Plus Program ( ). I work with a portfolio manager that charges only .25% plus 20% of his return above the index. He only covers his costs unless he beats the index. He has outperformed his index 3 or 4 quarters for the last 7 years.

    Costs are similar to ETFs, plus there is a high likelihood of beating the index (which is not possible with ETFs). His fees are also tax-deductible.

    The Index Plus Program is one example of an index-beating strategy. The portfolio manager puts his money where his mouth is.


  44. Vipul

    Hi Ed,

    Thank you very much for your comments on my questions above.
    Yes, I am a new-bee with little knowledge about investing and I am on a learning path.

    To answers your questions 1) & 2) I am just doing leveraging (trial base) with 30K at my comfort level.
    3) My risk tolerance profile suggest Invest 30-35% in fixed income.

    I got your message about investing over-weight Canada — Will correct it in future.
    I will definitely explore investing with portfolio managers once I am ready for it.

    Thanks again,

  45. Ed Rempel

    Hi Vipul,

    Since you are a newby with a more conservative risk tolerance, are you sure that the Smith Manoeuvre makes sense for you at all, Vipul? I worry about you.

    How did you do your risk tolerance profile? Why do you think that 30-35% fixed income makes sense for you?

    The Smith Manoeuvre is a risky strategy in that you are borrowing to invest. I usually think of the strategy alone being more risky than a 100% equity unleveraged portfolio. It is not for everyone. Generally, more conservative people or people with little investing experience probably should not be doing it, at least without professional advice.

    For this reason, I rarely see bonds in a Smith Manoeuvre portfolio. It also does not make much sense, since the expected return over time on bonds from today is probably lower than the interest rate on your credit line and bonds produce fully-taxed interest income.

    Perhaps you should just invest 30-35% less and then invest only in equities?

    I have found from experience that proper planning can make a huge difference with the Smith Manoeuvre. When someone wants to do the Smith Manoeuvre and then we create a proper retirement plan and I educate them about different types of investments, they often develop a long term focus and confidence with investments that allow them to do the Smith Manoeuvre with much higher amounts.

    For example, if you paid for a financial plan that gave you a long term focus and included investment education, and then invested professionally with an advisor that will be there for you in the next market crash, you might be comfortable doing a $100K or $200K Smith Manoeuvre and investing 100% equities. The higher amount should easily make you many times the cost of a financial plan.

    There are many benefits to having a financial plan. It helps you put all your financial decisions in proper perspective. Many issues you may struggle with are completely clear when you look at your long term goals within a plan.

    Some people hesitate with the cost of a plan, but one factor alone, such as being comfortable with a larger plan can bring you a huge benefit over the long term.

    Just my insight, Vipul. You seem to be tip-toeing into it very cautiously. I look at your situation and wonder if this is even right for you and how you will handle the next market crash. A financial plan and some education can make a huge difference in your life.


  46. Mark

    Hi Ed, thanks so much for sharing your expert insights! I’ve been researching this strategy and decided to take the plunge in 2017 (happy new year by the way!).

    However I’m not quite sure what type of investments I should use. I feel like my time horizon is more like 10 years (rather than 20-30 years).

    Also, we will probably want to move in about 2-3 years to accommodate our growing family, and I’m not sure how that will affect things. At that time we may:

    1) rent a new place and keep our current property to rent out,
    2) sell our current property and buy another one, OR
    3) use our leveraged investments for a down payment on a second mortgage (own both properties).

    I feel like options 1 and 2 would not need to disturb our smith manoeuvre strategy, but 3 would be bad if the market is taking a dive at that time (which would probably also mean it’s a good time to invest in a property).

    Do you think the SM is not right for my situation, or can I still make it work by choosing the right type of investments?

  47. Ed Rempel

    Hi Mark,

    Happy New Year! Your decision to start the Smith Manoeuvre in 2017 could make this an exciting year for you.

    My first question is – What do you mean you “feel like my time horizon is more like 10 years”? What may prevent you from continuing the strategy longer?

    In general, the minimum time frame to do the Smith Manoeuvre should be 20-30 years. Let me explain why, so you can understand the issues with a shorter time frame.

    RISK: The worst 25-year period in the last 50 years of the S&P500 was a gain of 5%/year. That is both a gain and probably more than enough to pay the interest on your credit line (especially after the tax refund). This means that if the next 25 years end up being the worst in history, you could still expect that you may have a minor gain from the Smith Manoeuvre. A loss is quite unlikely (unless you make behavioural investing mistakes).

    The worst 10-year return was a loss of 1.5%/year. In 3% of 10-year periods, the S&P500 lost money. This means you would have a non-negligible risk of losing money – in addition to your interest payments.

    REWARD: The benefit of the Smith Manoeuvre is an exponential growth curve. The investments have a compound growth, while the credit line remains flat. If you shorten the time frame by 50%, you probably give up closer to 75% of the benefits.

    If you also invest more conservatively, because of the shorter time frame, you give up even more of the benefit.

    The bottom line is that the odds are that you will still benefit from the strategy, but if you only do it for 10 years (instead of 20-30), you have a noticeably higher risk of loss and you give up most of the benefit.

    Moving to a new home is not a problem for the Smith Manoeuvre, unless you don’t have the 20% down to qualify for a readvanceable mortgage. If you invest your equity now, you need to clear enough cash from the sale (after real estate commissions, land transfer tax, legal fees, etc.) to put 20% down on your new home.

    Your view on the 3 options is probably correct. With option 3, you could do the Smith Manoeuvre on both properties (plus possibly the Cash Dam), but where would you get the 20% down?

    If you intend to go ahead, I would suggest:

    1. Look for ways to make this a 20-30 year strategy (or longer).
    2. You probably should work with a professional. You said you are unsure of how to invest and a couple of your comments worry me. The cost of an financial planner can easily be covered and has many benefits. Either, investing a 10% higher amount or allocating 15% less to bonds would pay for the entire cost of a financial planner.


  48. Mark

    Thanks Ed. Regarding the time frame, 10 years is what I’m comfortable committing to now, but I am open to using this strategy indefinitely as long as it is working for me. I guess I just want to keep my options open in case I want to use the funds to retire early or buy a home, or for something unforeseen.

    I am new to investing but I understand the basics and I’m good with numbers. I’m just not sure what type of investments are best for my scenario. I’m considering 60/40 split of equities/bonds, or dividend stocks, but given my lack of experience and ability to predict the future it’s hard to move forward with confidence especially considering the risk element of leveraging. Perhaps I will consider a financial planner!

  49. Ed Rempel

    Hi Mark,

    The Smith Manoeuvre is borrowing to invest, which is a riskier strategy. There will be market crashes and bear markets in the future. You need to be able to remain confident in your investments and the strategy when they are down.

    It is best to be an experienced investor before starting, at least if you are doing it on your own. It is best to commit to 20+ years.

    Retiring early does not need to be an issue. You can continue the Smith Manoeuvre right into retirement. There are several options for that. It can be a key part of our retirement income.

    Investing in bonds with the Smith Manoeuvre is questionable, since they will be lucky to make enough to pay the credit line interest – plus the interest on the bonds is taxable every year.

    Dividend stocks are normally a decent investment, but they have become very popular, so many are overvalued. A key part of equity investing is to avoid the popular, overpriced trends.

    I have some options that can help you here, Mark: .


  50. Michael


    I’ve been managing the SM against my HELOC for the last 7 months or so. Things are tracking well. I’ve done this on top of managing my own portfolio (RRSP, TFSA, and Cash) for 15 years.

    One thing I’m failing to get past is how I can effectively use a self-directed cash account to invest in US Equity for the SM portfolio, given the need to re-pay the original HELOC amount (in CAD) on any equity position taken and closed out. i.e. I will lose out ~4% on the f/x transfer both ways (originally from CAD to USD, and then back again upon the stock sale.

    Am I missing something? Is there a smart way to do it by managing a balance of CAD and USD funds in the trading accounts? Or are my options effectively CDN stocks, Mutual Funds, and US stocks w/ double-f/x hit?

    Thanks so much.

  51. Ed Rempel

    Hi Michael,

    There is no need to repay the HELOC every time you sell a stock, as long as you keep all the Smith Manoeuvre portfolio separate from any other accounts.

    The key issue is that if you are ever audited, you need to be able to trace all the money from the credit line to investments that you still hold.

    My own Smith Manoeuvre portfolio is entirely in mutual funds (and a couple hedge funds) and mostly global. If I sell one, I leave it in the investment account and just invest in a different one. There is no need to pay the money back to the HELOC, as long as it is staying within the investment account.

    There would also be no problem for you if you opened and invested in a US dollar account.

    I hope that is helpful, Michael.



  52. Ali

    Hi Ed,

    I have found this an interesting read.

    I am interested in the SM and was interested in the Rempel Maximum, but I don’t quite understand it.

    I have a home worth $400k and a Mortgage of $280k. My Principle repayment is approx. $650 per month. How much Investment loan would I be able to get based on that, in order to enact the Rempel Maximum?

    Secondly, once I invest in shares, can I supplement the returns by writing options on the shares (a buy-write strategy).


  53. Ed Rempel

    Hi Ali,

    The Rempel Maximum is a high growth strategy for people serious about building wealth, with a high risk tolerance and long term outlook.

    The concept is to get the maximum leverage and wealth-building possible with your given payments. The idea is to use the principal portion of your mortgage payment to pay interest on an investment loan, instead of just investing it.

    In your case, $650/month principal is $7,800/year. If you can get a loan at prime +1%, divide $7,800 / 3.7% = $210,000. I would suggest to assume .5% or 1% higher, to allow for interest rates to rise, which would mean a loan of $165,000 to $185,000.

    Just so you are clear, borrowing $185,000 to invest is likely to grow wealth far more than starting with zero and investing $650/month.

    Clearly, this is a much more aggressive and risky strategy, as well. Make sure you would be able to stay invested with a decline of 40% on whatever amount your borrow to invest.

    I believe that this is only a good idea if you are committed to it for a minimum of 20-25 years. The stock market has reliably produced good gains over long periods of time like this. The worst 25-year period of the S&P500 in the last 80 years was a gain of 8%/year. That would mean doubling your money 3 times.

    How to get the loan may limit your options. You can only borrow about $40,000 against your home, so the rest would have to come from another type of loan.

    I would recommend against using a margin account or any loan that has a margin call.

    There are some banks that will give you a loan for the full amount you want to borrow to buy mutual funds or segregated funds. This is limited by your net worth and TDSR. They also have loans that are easier to qualify for that are 3:1.

    In your case, one way to borrow Rempel Maximum type amount could be to borrow $40,000 against your home and then pledge that for a 3:1 loan. That would give you a total loan of $160,000.

    There are some issues with the option-writing strategy:

    1. You would need to find a loan that allows you to purchase shares and write options. The banks I know of for investment loans will only lend for broad portfolios like mutual funds. They won’t lend to purchase individual shares, since that is potentially far higher risk. If you have another way to get a loan, it may be possible.
    2. Technically, options have no possibility of ever paying income, so they could be an issue for having your loan interest deductible. Writing options may be better than buying them, because you receive money. You are not actually investing borrowed money in an option. I have not looked into the exact tax deductibility application, but likely it would qualify as a small part of a portfolio strategy. You should be aware that there might be some risk on deductibility. With options, you can elect to record the option premium as income or a capital gain. If this is part of a leverage strategy, I would recommend to record the premiums received as income.
    3. Personally, I am not a fan of option writing. From studies I read years ago, it seems that people that write options usually make lower long term returns. That is intuitively likely. You are giving up the chance of large returns for a little taxable income. That seems like a bad trade for me. I am confident in the long term growth of the stock market and would not want to cap my gains.

    My advice: leave options trading to the experts. Studies show that almost all options traders lose money long term, regardless of whether they are buying or selling them.

    My concern in your case is your motivation. The Rempel Maximum is an aggressive strategy. Writing options is an income strategy. If you are looking for income, than is your risk tolerance high enough? For example, if you receive 5% income but the value of your shares drops 40%, will you be confident in your investments enough to stick with them – and ideally buy more?

    To illustrate the mindset you need to be successful with this, I started doing the Rempel Maximum personally about 20 years ago. There have been a couple big market crashes in that time, which for me were great buying opportunities. In early 2009 at the bottom of the crash when everyone was selling in panic, I considered it the best buying opportunity of my life. I invested every available dollar and switched a couple core, large cap mutual funds to aggressive small cap funds.

    To make this strategy successful, you have to be confident in your investments no matter how far they fall. If you can do that and invest for the long term, the Rempel Maximum is the best wealth-building strategy I know.


  54. Kenrick Chang

    Hi Ed,

    Great article. The one aspect I hope you would shed more light. At what point would you recommend you pay down the Credit Line?

    This particular point has me worried:

    Current use:
    CRA is concerned with the “current use” of money borrowed, not the original use. If you borrow to invest and then cash in the investment to spend, your credit line is no longer deductible because the “current use” of the money is your spending.

    This would indicate to me that I should pay off my credit line before I consider using any of my investment proceeds for spending purposes.

    After I pay off my mortgage, do I put my old mortgage payments into repaying the HELOC instead? I am concerned about the CRA and whether or not they will come after me for back taxes if I use my investment to spend.

    Thank you

  55. Ed Rempel

    Hi Kenrick,

    Great question!

    Before I get into what to do with the credit line in the end, let me address your tax question.

    Yes, CRA is concerned about the “current use” of the borrowed money. In most cases, this is not an issue until you retire and want to start taking money out of the investments.

    If you sell any investments and spend the money part of the credit line becomes non-deductible. You can manage this to either keep the credit line fully deductible or to calculate how much of the interest is still deductible.

    For example, if you borrow $100,000 to invest and then sell $10,000 to spend, then the interest on $90,000 of the $100,000 is dedutible.

    The rules are that if you sell some of an investment, the credit line is still 100% tax deductible if:

    – The amount you sold (or the book value if it is lower) is paid onto the loan.
    – The amount you sold (or the book value if it is lower) is used to pay the interest on the loan.

    For example, you borrow $500,000 over 25 years. When you retire it has grown to $1 million and the credit line is still at $500,000. You use the “4% withdrawal rule” and withdraw $40,000/year for your retirement income. The book value of that $40,000 is $20,0000. The interest on the credit line is $20,000/year. You put the $40,000 withdrawal into the same bank account that is paying the $20,000 interest. Because the book value of the investments sold is all used to pay the interest, the credit line remains 100% deductible.

    You have to do the calculation and it is more complicated than you may think. But if you manage it well, you are not forced to pay down the credit line to keep it tax deductible.

    What should you do with the credit line after your mortgage is paid off? What should you do with it when you retire?

    There are several options:

    1. The standard option that gives you the highest retirement income is to keep the credit line right through retirement until you sell your home. You pay interest only. You can use the all of the investments to provide cash flow through your retirement. Later in life, perhaps in your 80s, you eventually sell your home and move to a retirement home, which pays off the credit line.

    The credit line interest rate is always a bit higher than the mortgage rate, but you can convert back to a mortgage but reborrow, so that you get the mortgage rate without reducing the total investment loan.

    In short, the credit line is paid off by selling your home, not by the investments. Instead of getting a huge amount of cash late in your life from selling your home, you have used that equity effectively to provide a more comfortable retirement.

    2. When you either pay off the mortgage or retire, you can convert the credit line back into a mortgage and pay it off slowly over 25 or 30 years. You get a lower interest rate on the mortgage, plus you might feel more comfortable knowing the credit line is eventually paid off. Your retirement cash flow is a bit lower because you pay principal plus interest.

    3. When you retire, you could sell investments to pay off the credit line entirely and go into retirement debt-free. This means you have a lot smaller investment portfolio to provide your retirement lifestyle.

    You can decide which of the 3 main options is best for you.

    From experience, I believe that before you start on this Smith Manoeuvre road, think ahead to where it is going. Doing the Smith Manoeuvre as a part of your long term retirement plan allows you to think through the tradeoff between the level of risk you are comfortable with and the level of retirement lifestyle you want.


  56. UberBaumer

    Hi Ed,

    First, I have to thank you for the wealth of information you’ve put out there; my wife and I have flirted with the Smith Maneuver but didn’t have the risk tolerance. Now, our situation is a bit different, and I’m wondering how you think we could best leverage our equity. By utilizing our prepayment privilege on the revolving mortgage @ 2.89%, we used the LOC to pay down the mortgage balance by about $180,000, and immediately paid off the LOC with a new mortgage @ 2.24%. Here are the numbers:

    Home Power Plan, mortgage portion:
    Rate – 2.89%
    Maturity – December 2019
    Balance – $453,396.15
    P+I – Bi-weekly $1,329.74, principal component approximately $810
    Remaining amortization – 16 yrs 5 mths

    Home Power Plan, LOC portion:
    Rate – 2.70% Prime
    Balance – $2,968.46
    Availability – $174,853.54
    Limit – $177,822

    This was registered (all figures approximate):
    $833,000 Collateral Charge
    $666,600 Mortgage
    $541,450 Max LOC rebalancing limit (65% LTV $833,000)

    Because a recent appraisal had the house value at $1.1M, it gave us enough equity to register a new charge for paying off the LOC;

    2nd Mortgage product (standard charge):
    Rate – 2.24%
    Maturity – December 31st 2021
    Balance – $182,264.11
    P+I – Bi-weekly $320.26
    Remaining Amortization – 29 yrs 11 mths

    So, by utilizing the LOC and Prepayment privilege, we were able to pay down about $180,000 at 2.89% and move it to the new mortgage @ 2.24%. We’ve reduced that payment to the minimum, reallocating funds to pay down the 2.89%. There is a balance on the LOC because I have our mortgage payments coming from there, since the LOC rate is lower than the mortgage rate (I understand that to keep the books “clean” for the Smith Man, I’d need to stop using the LOC for non-investment purposes).

    Lastly, we have an unsecured LOC at Prime + 0.5% with a $90,000 limit and $0 balance.

    In summary:

    $453,396.15 balance @ 2.89%
    $182,264.11 balance @ 2.24%

    $55,303 spousal RRSP in my name (to be withdrawn in 2019 at my tax rate)
    In the next month or so, we will be receiving $50,000, which may go in a TFSA…

    Secured LOC availability $174,853.54 @ 2.70%
    Unsecured LOC availability $90,000 @ 3.20%

    Our risk tolerance is medium/medium-high.

    Do we go all-in, pay down the 2.89% by $50,000, and leverage the new total credit availability of $314,853.54 ($224,853.54 secured, $90,000 unsecured)? ETFs?

  57. Ed Rempel

    Hi UberBaumer,

    You have all the numbers there, but you really need a financial plan, UberBaumer.

    You have a lot of options. The best choice depends on your goals, tax brackets and risk tolerance.

    For example, we need to consider your RRSP, TFSA, emergency fund and Smith Manoeuvre all together. What is the best use of each dollar you have available? Should you contribute to RRSP or TFSA, keep it for emergencies, or pay it down on your mortgage and reborrow to invest with the Smith Manoeuvre?

    As a general rule of thumb, for people with a higher income, maximizing your RRSP is often the best use of money. Mathematically, the Smith Manoeuvre benefits often calculate as better than maximizing your TFSA.

    You may want to keep all or part of your unsecured credit line unused as your emergency fund. It is at a higher rate, as well.

    If you do the Smith Manoeuvre, you need to pay off the small balance on the credit line first.

    Also, are you confident that you can tolerate the risk of borrowing to invest? You said your risk tolerance is medium/medium high. That is for investment volatility. In addition to that, borrowing to invest is an additional risk.

    For example, if you did borrow $314,000 to invest and then there was a 30% market crash and you are down $100,000, what would you do?

    If you would consider selling or converting to something more conservative to “stop the bleeding”, then the Smith Manoeuvre is probably too aggressive for you. If you are confident you would stay invested, and possibly even use the lower price as a buying opportunity, then the Smith Manoeuvre can be an exceptional wealth buidling strategy for you.


  58. Peter Michailidis

    Hi Ed,

    Great post. I’ve spent the last few days just reading through all the comments and have thoroughly enjoyed it. I do have a few questions.

    I’ve been doing the SM for almost 2 years now. My investment portfolio has gone down but I’m in it for the long haul so I’m not worried. I started with a mortgage at around $136,000 and took out the equity of approximately $125,000 to invest over several months. Currently I’m at a position of:

    $111,000 – Mortgage Remaining
    $142,000 – Scotia HELOC (125,000 initial investment + capitalized interest + distributions reinvested)
    $123,000 – Investment Balance

    I’ve invested in private mutual funds (I work for a wealth management firm so it’s non-fee paying which is great) and stocks. Every month I’ve been taking cash distributions and applying that to the mortgage and then taking the same amount from the HELOC and reinvesting. My HELOC essentially runs near the limit as the regular mortgage payments are just about double the capitalized interest. I also have to request the bank to increase the HELOC max every 6-8 months since it doesn’t automatically increase with every mortgage payment (Scotia is odd that way).

    I have a couple questions based on what i’ve read.

    1. Should I stop taking out the distributions and paying down the mortgage and then reinvesting the same from the HELOC. You mentioned Deferral of capital gains in an earlier post. Some of the funds pay income and capital gains as distributions monthly. Wondering from a tax perspective what’s the best thing for me to do.

    2. I also have a TFSA worth about 47,000 and was wondering if it would be smart to cash it in (or a portion) and pay down the mortgage and reinvest using the SM. I’d love the idea of paying off the mortgage in the next 2-3 years but wondering if leaving it tax sheltered is smarter. I’d love your thoughts on it.

  59. Ed Rempel

    Hi Peter,

    Most Scotia STEP mortgages do automatically increase the HELOC limit. Do you have a STEP mortgage?

    Having the HELOC track close to the limit is usually the general objective. Why is this an issue for you?

    To answer your questions:

    1. Receiving monthly distributions may be an issue. Do they include any Return of Capital (ROC)? Monthly distributions from mutual funds almost always include ROC. If so, that reduces the deductibility of your HELOC and is a complex calculation you would need to make.

    Even if there is no ROC, why did you buy mutual funds that pay monthly? Unless you are in a very low tax bracket, investing for income creates unnecessary tax. You may be thinking that it pays down your mortgage more quickly, but I modeled this in various scenarios and found that investing tax-efficiently always built wealth faster.

    Investing for income created a “tax drag” that reduced the long term benefit of the Smith Manoeuvre, in my models.

    In short, yes, I would suggest to stop the monthly contributions and invest for deferred capital gains (unless there is something quite unique in your situation).

    2. I have found that, in most cases, the Smith Manoeuvre beats TFSAs. You can have identical investments. The TFSA gives you tax-free growth, but the Smith Manoeuvre usually gives you tax refunds almost every year. The interest deduction is usually more than any taxable income on the investments, especially if you invest tax-efficiently.

    In my experience, even people that have been doing the Smith Manoeuvre for many years, are retired, and are taking cash flow from the investments tax-efficiently usually still get tax refunds almost every year.

    There is also no major benefit from paying off your mortgage quickly with the Smith Manoeuvre. You don’t have to make any payments on the tax-deductible credit line while you have a mortgage, because you can capitalize the payment. However, once the mortgage is gone, then you should pay the credit line from your cash flow until you retire.

    The credit line payment should be a bit lower than your mortgage payment, because it is interest-only while your mortgage is P+I, but it is not a lot lower.

    I hope that’s helpful for you, Peter.


  60. Peter M.

    Hi Ed,

    Thanks for replying so quickly.

    I asked Scotia multiple times if I could set it up to increase the limit automatically but they said they could not. It is definitely part of the STEP mortgage so I was shocked because I had researched it before hand. As per your question of why is the HELOC running close to the limit being an issue. It’s for this lack of “automatic” increase. I need to request a limit increase every few months as I make mortgage payments and reinvest dividends.

    I do not believe the distributions are return of capital but I will research and find out. I liked taking the dividends out as it did help pay down the mortgage and since I was reinvesting the funds the following month I didn’t think it was a major issue. Knowing that it creates a “tax bleed” and lowers my annual tax return, I will follow your advise and keep them reinvested.

    My TFSAs are invested in similar investments at my firm so selling them and then paying down the mortgage and then adding them to my existing cash portfolio seems like a logical next step. What’s the most tax efficient investment? Dividend payment or Deferred Capital gain?

    And currently my mortgage payments are about $850 a month (of which 79% is principle) my Interest on my HELOC is about $350 a month. So I’m making substantial room to the HELOC with every payment for investment opportunities.


  61. Ed Rempel

    Hi Peter,

    Scotia is a wierd bank. I have talked with quite a few people that have the STEP mortgage over the years and it works in various ways for different people. I don’t recommend Scotia for this reason. I never know exactly how the mortgage will work.

    Having said that, all the people with a STEP have it readvance automatically. Some have to wait until the end of the month, but it always readvances.

    I just had a case where they setup a STEP mortgage, but then had to pay an additional $75 fee to convert the credit line portion into a “revolver”, which allowed it to readvance automatically.

    If you have the only STEP mortgage in Canada that cannot be converted to automatic readvancing, then I would recommend to move your mortgage.

    Sometimes banks just don’t take you seriously unless they think they will lose the mortgage. I would suggest to phone your contact (more effective than going in) and ask for the amount of the penalty to break the mortgage. If he asks why, telll him you are planning to move the mortgage to one that readvances. See if that gets you a proper response.

    When is it due, what is your interest rate and what is the penalty to get out of it? Today, we are getting rates around 2.2% with a fully readvanceable mortgage and they pay your legal and appraisal fees. That is the offer to compare against your current mortgage.


  62. Ed Rempel

    Hi Peter,

    If you are receiving a fixed distribution, then it almost definitely includes return of capital (ROC). Otherwise, the distribution would vary. There are only a couple specific exceptions I am aware of.

    If you have been receiving ROC, then that amount of your HELOC is not deductible. You need to either calculate the pro-rated amount of interest that is deductible or put that amount of your HELOC back into your mortgage.

    I understand your motivation to pay off your mortgage more quickly. You should know this probably reduces the overall benefit of the Smith Manoeuvre.

    I have a Smith Manoeuvre Calculator software that calculates the expected benefit over time with whatever assumptions I enter. I found that any version that includes receiving dividends, paying them down on the mortgage and reborrowing to invest reduced the long term benefit of the strategy (except for low income people making less than $45,000/year). This is because of the “tax bleed” of tax every year on the dividends.

    If you reinvest the distributions, you probably still have to pay tax on them, which means you still have the tax bleed. In general, it is most effective to invest for deferred capital gains, rather than investing specifically to receive taxable dividends.

    You should not invest only for tax reasons, though. Your investment choices should still primarily be for effective investing and based on your goals and risk tolerance, not primarily based on tax reasons.

    You work for a mutual fund company, which is a good advantage in fee savings for you. It’s also good for your career and feeling part of your company to own your own funds. However, make sure you are still properly diversified and have the top fund managers.

    I have worked with people employed by fund companies before. The often ended up with suboptimal portfolios. One guy had everything with one fund manager. One was overly focused in Canada and on a specific style because that was what his company was best at. One was well diversified with several fund managers in different styles and globally diversified, but included some below average fund managers when there were clearly better fund managers at other fund companies.

    My suggestion, without knowing any details of your portfolio, is to make sure you have an effective portfolio with top fund managers diversified globally by style and tax-efficient. You probably should have a good amount with your own company, but don’t feel like you have to invest entirely there if it is suboptimal for you.

    I hope that is a helpful comment for you, Peter.


  63. Adrian

    Hi Ed. Friends scenario:
    Mom is primary resisent in 1 mil dollar property she bought for 740k and has 500k morgage. Son is not an home owner and would do a no arm lentgh deal of the house with the mom to purchase the home at 500k. ACB will be inconsequnetial simce they both primary resident.
    Son would get 500k morgage and pay 20% down, 100k. Money from parents or self. Son then can then get HELOC or just just start with Readvancable morgage. Son can then do smith maneouver since his house is appraised at 1mill. He would have 500k to put in investments right now and not touch it for 25+years. Then the 400k morgage leftover from the 500k purchase of house can be slowly made tax deductible using smith maneouver.
    Mom has separate income and investments and retirement ready at 55. Dad just passed from cancer and it’s only her and son in Canada. She wants to set up son now and is willing to rent or live with him in the house and help pay mortagage.


  64. Adrian

    Son can also put 40% down on the 500k to get a better start for SM. Son makes less than 45k right now as he is 22 and won’t be over 45k until 30. Would it be ideal to use dividends to pay down mortgage since the tax bLeed is minimal at that tax bracket.
    Would you be able to switch to a different portfolio when you are at age 30-35 and house mortgage is paid off since the mom would be helping accelerate the payments.

    Sorry last question. If his mom would have to cosign to help him get mortgage that would work but she would just be on the hook for 400k morgage or 300k mortgage if son put 40% down. If it’s a Readvancable morgage and mom cosigns would she be liable for all future HELOC balances?it would be ideal for him to get approved on his own but he doesn’t have high income rn(20k). Mom makes 130k

  65. Mark

    Is it possible to apply the Smith Manoeuvre to investments in things like bitcoin or other cryptocurrencies? I know it may be risky, but I’m just wondering if the interest would still be deductible.

  66. Mark

    Actually I can answer my own question above. The rules state that there has to be some reasonable expectation of receiving INCOME from the investment. In the case of bitcoin (and I imagine forex as well) the only way you can get a return on your investment is by eventually selling at a higher price (capital gains). So it fails the “purpose test” and the interest would NOT be deductible. See

  67. Jamie

    Hi Ed,

    I have a question regarding distributions from SM investments that may involve more complex math.

    I have mutual funds with my SM that sometimes pay out a distribution once per year. They are still tax efficient investments and I am not worried about any ROC in the distribution (all Capital Gains or Dividends). Currently they just get reinvested with the same funds that pay them out.

    My question is: Is it better to have the distributions automatically buy the same funds within the account, or is it better to take the investments as cash, pay down the mortgage with them, re-borrow and invest that same amount? I can see how its a bit more complicated and may take more tracking and transactions.

    From what I can tell there seems to be no tax issue as the distributions will have tax paid as it will be accounted for on a T5. I just don’t know if there’s an advantage by keeping the funds within the account and reinvested in terms of changing the ACB of the funds vs. converting a small portion of your non-deductible mortgage to deductible credit line.


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