The Smith Manoeuvre

Although there is no such thing as a tax deductible mortgage on your principal residence there is a new technique described in a book by B.C. financial strategist, Fraser Smith that gradually converts your non-deductible Canadian mortgage into a tax deductible investment credit line. He is being heralded for giving ordinary taxpayers the same advantages as the wealthy.

"The rich may be getting richer, but rather than complain, we can learn from their methods," says Smith. If setup and executed properly the Smith Manoeuvre may generate huge tax refunds for you. However, if your advisor does it incorrectly it could have hidden flaws that, years later, could bring you fines, penalties and interest charges from CRA.

Ed Rempel, CMA, CFP, of Armstrong & Quaile Associates, a Brampton based financial advisor and tax accountant has become the leading expert on The Smith Manoeuvre in the Toronto area. Ed is recognized by Fraser Smith in his book "The Smith Manoeuvre" on page 82 (4th printing - July, 2005). He is spreading the word by hosting complimentary seminars to educate Canadians, by introducing them to this streamlined, new method.

Ninety percent of Canadians feel that "I can't seem to get ahead." Rempel calls these Canadians the "not-wealthy". "What we really want our money to do for us is to give us a feeling of security" says Rempel, "but many think security comes from paying off our mortgage, when real security comes from having a huge nest egg of investments." For example, who has more security: someone with no mortgage or someone with a $200,000 mortgage and $1 million in investments?

According to Ed, "This blind devotion we have to mortgage pay-down is paralyzing our chances of ever becoming financially secure. Most Canadians spend almost their entire working life struggling to pay off the mortgage, which is why they don’t build up a comfortable nest egg. As a result, too many Canadians retire "house rich and cash poor."

Later in life, to make ends meet, they may resort to a Reverse Mortgage placing themselves back into debt again. The rising popularity of the Reverse Mortgage is a symptom of what's wrong with the way most Canadians deal with their mortgages."

The Smith Manoeuvre prevents this problem by converting the mortgage from bad debt into "good debt." It uses the equity that’s building in your home doing nothing and converts it to an investment loan. This is considered "good debt," because it is tax deductible and generates large annual tax refunds. It can be used to purchase investments that, over time, can grow many times faster than the interest on the loan.

In the U.S. where mortgages are tax deductible, one in fourteen Americans are millionaires. This is because they don't even try to pay off their mortgages. Instead they focus on building their investment nest egg. Of these millionaires, 90% keep a significant mortgage. Why? If you can borrow at 4% and get almost half of this back in income tax refunds, it really only costs about 2%. It’s not hard to find an investment that makes a lot more than 2% after tax long term.

Achieving millionaire status is not out of reach once you learn to think like one. The first step is to stop thinking like the "not-wealthy". Discard the limiting belief about paying off debt and don’t be afraid of investing. Once you focus on building wealth, the magic of compounding will help you grow a substantial nest egg. The wealthy often use professionals to help them invest tax-efficiently. They routinely convert their mortgage debt to tax deductible debt using expensive tax accountants and lawyers. The Smith Manoeuvre provides simple and legal tools to the average person. If executed properly and you don’t take tax-free payments out of the investments, the Smith Manoeuvre will adhere to CRA guidelines and successfully complete an audit.

The expected profit from the Smith Manoeuvre is surprisingly large because of the tax benefits and the effect of compounding over many years.

Here’s an example:

Assuming a 10% return long term, the typical expected benefit over a 25-year period of time is double your current mortgage, so if you now owe $200,000 on your mortgage, you can expect to gain $400,000 without using any of your cash flow.

There are several enhancements that can be applied to the Smith Manoeuvre to create a return as much as 6 times the mortgage balance. His would mean the same homeowner, holding a $200,000 mortgage could gain $1.2 million over 25 years.

The main reason to implement the Smith Manoeuvre is because it can build a nest egg for your retirement without cutting into your lifestyle today. It’s a strategy that simultaneously pays off your mortgage years earlier, gets you annual tax refunds, all while building a large nest egg. Best of all, this is accomplished without using any of your cash flow or increasing your debt.

The Smith Manoeuvre is sometimes promoted by organizations and mortgage brokers who may not be intimately familiar with CRA rules. If the Smith Manoeuvre is to pass a tax audit and perform optimally it must:

• Follow all the tax rules and never take tax-free payments out of the investments.
• Use variable or 1-year mortgages for flexibility and lower rates instead of being locked into the “5-year fixed mortgage trap”. Mortgage Brokers tend to promote the 5-year since it is more profitable for them and may not be the best for you.
• must invest with a fund that has an exceptional investment approach rather than just a high monthly payout, we choose to invest with “All-Star Fund Managers”.

Ed Rempel has been enjoying the benefits of the Smith Manoeuvre on his own mortgage since 1994 and has helped over 600 clients convert theirs too. He conducts complementary seminars to give people a better understanding of how it works.

If you are serious about improving your finances, making smart choices with your money, and want professional advice, Ed Rempel and his team will help you. They will provide a comprehensive review of your finances and implement the Smith Manoeuvre with the enhancements that work best for you.

Read more about our free Smith Manoeuvre Seminars