DEFINITION of 'The Smith Maneuver'

A strategy that makes interest on a residential mortgage tax-deductible in Canada. Mortgage interest in Canada, unlike in the U.S., is not tax-deductible and must be paid with after-tax dollars. The Smith Maneuver was developed and popularized in a book of the same name by Fraser Smith, a former financial planner based in Vancouver Island, Canada. Smith calls his maneuver a debt conversion strategy rather than a leveraging tactic, with its benefits including tax refunds, faster mortgage repayment, and a growing retirement portfolio.

BREAKING DOWN 'The Smith Maneuver'

   
The Smith Maneuver takes advantage of the fact that while mortgage interest in Canada is not tax-deductible, interest paid on loans for investments is tax-deductible (this does not extend to loans taken for investments made in registered plans such as RRSPs and tax-free accounts, which already have their own tax breaks).
 
The strategy works as follows – obtain a “readvanceable” mortgage, which consists of a mortgage and a Line of Credit (LoC) bundled together. Every month, as the borrower makes a mortgage payment, the amount of the mortgage principal repaid that month is simultaneously re-borrowed under the Line of Credit. The net debt remains the same, since every dollar of mortgage principal repaid to the lender is re-borrowed back under the Line of Credit.
 
The funds in the Line of Credit are invested, presumably at a higher rate of return than the interest rate paid on the LoC. However, the advantage here is that the interest payments on the LoC are tax-deductible, and should result in a tax refund when the borrower files taxes in Canada. This tax refund can be used to further pay down the mortgage, thus accelerating the mortgage repayment schedule.
 
The strategy is not without its risks. The borrower’s net debt remains the same after many years, rather than being paid down as with a conventional mortgage, which may not be palatable to conservative investors. As well, the interest rate paid on the LoC may be higher than the return generated on the investment portfolio. The Canada Revenue Agency may take issue with the strategy. Finally, if the value of the house falls sharply, the borrower may experience the predicament of numerous U.S. homeowners whose mortgages are “under water” (i.e. the loan amount is higher than the market value of the house).

Are you interested in the Smith Maneuver? Check out our article The Smith Maneuver: A Canadian Mortgage Tax-Deductible Plan for more information!

RELATED TERMS
  1. Readvanceable Mortgage

    A mortgage feature that allows the borrower to re-borrow the ...
  2. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
  3. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  4. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  5. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
  6. Mortgage Accelerator

    A type of mortgage loan program popular in the United Kingdom ...
Related Articles
  1. Taxes

    Creating a Tax-Deductible Canadian Mortgage

    Find out how to get a tax benefit from your mortgage like your neighbours to the south.
  2. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  4. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  5. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  6. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  7. Personal Finance

    Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  8. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  9. Personal Finance

    Best 3 Mortgage Calculator Websites for Canadian Residents

    Understand the key features of Canadian mortgages, and discover a few of the best online mortgage calculators for Canadian home loans.
  10. Insights

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
RELATED FAQS
  1. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  2. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  3. I've come into a large amount of money. Should I invest it or pay off my mortgage?

    There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your ... Read Answer >>
  4. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  5. If my mortgage lender goes bankrupt, do I still have to pay my mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Sorry to disappoint, but there ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center