Hello,

What are CRA's rules on interest deductibility with multiple loan accounts to fund an investment. For eg.

Account 1: a mixed use loan account currently 90% investment use, 10% personal use

Account 2: a 100% investment use account

The idea is to combine both 90% of fund in account 1 + 100% of fund in account 2 to purchase one single investment. The investment will generate monthly cash distribution (including some portion of ROC). The monthly distribution will deposit directly into account 2. Plan to move part of the monthly distributions from account 2 to account 1 since it also contributed 90% of the fund for the investment, so want to apply part of the monthly distributions to pay the interest incurred in account 1.

Question is - would withdrawing from account 2 and deposit into account 1 turn account 2 into a mix use account as well ? According to CRA rule, for interest expense to be deductible, the fund needs to either reinvest or pay down the debt. In this case, the fund withdraw from account 2 and deposit into 1 is effectively paying down part of the investment loan. Only thing is, account 1 already being a mix use account, so any deposit made will be split proportionally.

Hi!

I've been learning the Smith Manoeuvre and seriously considering implementing it. But now, I'm wondering: Do I need a financial planner (SM Certified or not) to set up the Smith Manoeuvre?

I feel like I've got a good grasp of the concept and the implementation details. At the same time, I'm not an expert and I may have missed some blind spots.

Can you help me figure out whether I need a financial planner (SM Certified or not) specifically to implement the Smith Manoeuvre? Or whether I'm good with what I know today?

-- The general principle: what I understand --

Convert bad debt (non-deductible) into good debt (deductible). In other words: pay off my mortgage faster, with no additional financial effort (assuming interest capitalization), and end up with a larger net worth at the end of the period (20, 25, 30 years).

Concretely: The Smith Manoeuvre consists of making mortgage interest tax-deductible by progressively paying down the mortgage principal while re-borrowing that same amount (principal only) through a readvanceable HELOC, then investing that borrowed sum into income-generating investments (VEQT ETF in my case).

Essentially, I see the Smith Manoeuvre as a way to use my home equity to invest, as my equity grows (i.e. with each mortgage payment). The main benefits I see are: 1/ Getting exposed to the stock market earlier and therefore for longer ("time in the market beats timing the market") ; 2/ Receiving tax refunds from deducting the fees (HELOC interest) and using them to pay down the mortgage faster.

-- How I plan to implement it --

• (A) Main bank account: RBC checking account (already got it)
• (B) Mortgage: RBC Homeline Plan (already got it)
• (C) Readvanceable HELOC: RBC Homeline Plan (already got it)
• (D) 1 chequing account dedicated to SM: 1 RBC savings account, dedicated to SM
• (E) 1 investment account: 1 Wealthsimple non-registered account, dedicated to SM

Note: the HELOC will be used exclusively for investing and nothing else (no consumption or renovation/repair projects).

How the loop works:

My SM implementation

1. Each week, I pay my mortgage as usual from A to B (accelerated weekly payment). This frees up available room on my HELOC (C), equal to the amount of principal repaid.

2. Then, I withdraw the newly available funds from the HELOC (C) to account D.

3. Then I send the money from account D to the investment account (E) to buy VEQT units.

4. At the end of the month, the HELOC interest is due. I borrow an equivalent amount from the HELOC (transfer C => D) to pay off that same interest. So basically I capitalize the interest: the interest owed on the HELOC gets added to the HELOC balance. Then I start the same loop again.

At the end of the year:

• I report the VEQT dividends (being careful about keeping ACB and making the distinction between the different types of distributions: cash distribution, non-cash distribution, ROC, etc.)
• I deduct the HELOC interest from my investment income
• I use the tax refund to make an extra lump-sum payment on the mortgage (D=>B)

-- Main risks --

• The investments made with the HELOC tank => if I have to repay the HELOC at that point, I'll have lost money
• Rising rates increase the cost of borrowing with no guarantee that investment returns will keep up
• The CRA could disallow the HELOC deduction if the structure is set up improperly or if there's tax contamination

What do you think?
Is there something I've missed? Do I need a SM certified financial planner or am I ready to do it on my own?

Thanks a lot!

for example if i owe 1mm on my home and i have a portfolio of over 1mm - but it's currently has a book value of 500k (100% appreciation) is there anyway to feasible begin doing the Smith Manover?

Purchased an investment with 60% borrowed and 40% own fund. For simplicity, assume its 600 units with borrowed fund and 400 unit with own funds. The investment pays quarterly unit dividend (ie. non cash), and monthly cash dividend (including a ROC portion).

In the first quarter, the fund made a 5 unit dividend to the investment and three monthly cash dividend total $300, of which ROC is $0.05/unit, ie. total units become 1005, total cash dividend $300, including $50.25 ROC

Suppose all the 3 monthly cash dividends (including ROC) were withdrawn for personal use, the loan principal needs to be reduced by ROC to determine the correct eligible interest expense.

Question is - does loan principal get reduced by 600*$0.05 = $30 or [600+(5 units*60%)]*$0.05 = $30.15 ?

Hi there, i'm about to execute on 120K invested into the SM. Curious if someone could weigh in with their opinion on my investment portfolio.

I'm looking for a mixture of dividends to throw onto the principle aswell as reaping future US growth.

$120K - 80% USD 20% CAD.

CAD - into ENB, RBC, MFC, CNR

USD - all VFV

Does anyone have thoughts as to whether or not I should Gambit the conversion to USD and invest that way, or keep the CAD stock exposure to the US.

Anyway, would love to hear your thoughts.

Thanks.

Hi all,

I just began my SM journey today. Investing everything in XEQT using a Wealthsimple non-registered account.

My mortgage is with TD (Flexline). My question is, how do I transfer funds from HELOC -> sm account -> WS account without being charged a e-transfer fee. Is it even possible?

As of now, when I go to transfer the funds from SM account (TD Every day savings account) to WS account, I am charged a $1 transaction fee. How do I maintain deductibility? Is there a way to pull this off without paying a fee? Want to make sure CRA does not come asking questions come tax time.

Thanks!

Hi!

My partner and I bought our house 5 years ago and consider now using the SM.

I have a clear view on how to set it up if I were the only owner. But I'm not sure how to do it as a couple.

Some info about our context:

- We pay the mortgage 50/50

- We have approx. the same salary but this may change in a few months (difference of ~20k between both salaries)

- At the beginning, I plan to put more money than my partner (because I have about 35k$ in a non-reg)

1. Should we have separate accounts for each one of us (individual SM chequing account + individual SM investment account) ?

2. For the first month, if I plan to put 35k$ (from my personal savings) into the mortgage, how can I track the amount of HELOC interests generated only by this part?

3. Is there any specifics I should know about doing SM in a couple?

Thanks!

Can I do it with XEQT?

I’m looking for recommendations for accountants in the GTA who have helped you with both the initial Smith Manoeuvre setup and the ongoing annual tax reporting.

Ideally looking for recommendations from people who have been successfully running the Smith Manoeuvre for several years and are using accountants who deeply understand CRA tracing, investment loan interest deductibility, Smith Manoeuvre best practices, expertise around cash damming etc.

If you’ve had a good experience, I’d appreciate hearing:

• Who your accountant is (or firm name)
• How long you’ve been using their services
• Whether they’re proactive with planning or mainly handle tax filing

Please feel free to DM me if you prefer not to post publicly.

I am having trouble understanding why would folks capitalize the interest? Yes, you don't use your own money to pay the interest but in the end, doesn't one end up paying more in interest, and the investment returns are not that different because if you capitalize the interest, it reduces the principal you can invest.

Hi!

In a typical Smith Manoeuvre, where do the HELOC interests payment come from?

• from your own revenue (salary)?
• from your HELOC investments dividends — but that supposes your dividend is higher than your HELOC borrowing rate?
• from your next HELOC borrowing?

Thanks!

Currently I've only been using Canadian Dividend stocks with funds from HELOC. I want to add a position using a covered call ETF. (I will use HYLD as an example, I understand this ETF is a bit riskier but this will only be a small portion of the portfolio)

My understanding from comments here is as long as I leave it on drip I don't need to be concerned ROC or ACB and can continue to add the yearly interest charges into taxes as I normally do.

When I decide to start withdrawing the CC ETF distribution for personal expenses then the tax calculation would become more complicated. Is this correct?

My end goal to have a mix of CC ETF and dividend stocks so that when I eventually reach monthly income target I'd sell my place and pay off the HELOC so I don't need to worry about above.

Thanks