The Smith Manoeuvre
Every mortgage payment frees up room. The Smith Manoeuvre puts it to work.
With a readvanceable mortgage, the principal you repay becomes available again on a linked line of credit. The Smith Manoeuvre borrows it back and invests it, so personal-use debt is gradually replaced with investment-use borrowing.
We design the strategy and help you set it up, implement it and track it. You run it, with our guidance.
01 The Problem
For most homeowners, the mortgage is the largest debt they carry.
You pay it with after-tax dollars, and the interest buys you nothing but time.
Meanwhile, the equity you build sits still. Many homeowners pay down the mortgage for twenty-five years and start investing seriously only once it is gone.
The Smith Manoeuvre asks a different question: what if every dollar of principal you repaid could start working the month you repaid it?
02 How It Works
Pay down, borrow back, invest. Every month.
It starts with a readvanceable mortgage: a mortgage and a line of credit under one registered limit. As the mortgage balance falls, the room on the line rises by the same amount.
- 01
You make your regular mortgage payment
Part of it is interest. The rest reduces the principal. - 02
The repaid principal becomes available on the line
The lender readvances it to a line of credit linked to the mortgage. - 03
You borrow it back and invest it
The money goes straight from the investment line to a non-registered investment account. Apart from paying its interest, nothing else is paid from that line. - 04
Borrowed funds pay the interest
Part of each readvance is borrowed and set aside to pay the interest on the line each month. The rest is invested. The interest grows as the line grows, so a little less is invested each month. - 05
Repeat
Over time the mortgage shrinks, the investment line grows, and total debt stays about the same.
03 Why It Matters
Same total debt. A different job for it.
A mortgage used to buy your home is personal-use borrowing. A line of credit used only to buy income-producing investments is investment-use borrowing.
The Smith Manoeuvre moves your debt from the first kind to the second, one readvance at a time. Along the way you build a pool of investments you would otherwise have started decades later.
It is also leveraged investing. That cuts both ways, and it belongs in the decision from day one.
The risks, plainly
Leverage. Gains and losses are both magnified. You owe the full line of credit whatever the investments are worth.
Market declines. Investments can fall, sometimes for years. Selling in a downturn can lock in a loss while the debt remains.
Rate changes. Investment lines are usually variable. If rates rise, the interest you carry rises with them.
Rising interest. The interest grows as the line grows and is paid with funds borrowed from the line, which leaves less to invest. If rates rise or the available room runs short, it has to come from your budget instead.
04 The Rules and CRA Guidance
What the borrowed money was used for is the whole question.
Section 20(1)(c) of the Income Tax Act deals with interest on money borrowed to earn income from a business or property. The test looks at the direct use of the borrowed money, not at what it indirectly made possible.
CRA's Income Tax Folio S3-F6-C1, Interest Deductibility, explains how CRA reads that test. Paragraphs 1.29 to 1.34 discuss direct use and tracing borrowed money to the use it was put to.
So interest on investment-use borrowing may be deductible, depending on the requirements of the Income Tax Act and your circumstances. You should always seek independent tax advice if you are thinking about implementing these strategies.
Ludco Enterprises v. Canada (Supreme Court of Canada, 2001)
How it is cited. Commonly referenced in discussions of borrowing to invest, including the Smith Manoeuvre.
The principle. Earning income does not have to be the main purpose of an investment, as long as there is a reasonable expectation of income. Income means income, not net profit.
Lipson v. Canada (Supreme Court of Canada, 2009)
How it is cited. Often raised as a reminder that a clean money trail is not the end of the analysis.
The principle. Borrowing that can be traced to an income-earning use can still be reviewed under the general anti-avoidance rule (GAAR). Tax planning and abusive tax avoidance are not the same thing.
These summaries describe how the cases are commonly discussed. They are not legal or tax advice about your situation.
One practical rule follows from all of this: never mix. A single personal withdrawal from the investment line muddies the trail for every dollar after it.
05 Implementation
The idea fits on a napkin. Running it cleanly for years does not.
Most Smith Manoeuvre problems are not about the concept. They come from a line used for one personal purchase, interest paid from the wrong place, or a readvance that sat in chequing for a month.
- 01
Confirm the mortgage structure
Your mortgage representative handles the mortgage. We coordinate with them to confirm the product and its segments support the strategy. - 02
Separate the accounts
A dedicated investment line and a dedicated non-registered investment account, used for nothing else. - 03
Set the rhythm
We help you decide how often to readvance and invest, and how much of each readvance to set aside for the interest. - 04
Keep the trail
Each readvance and each purchase is recorded on a tracking sheet you keep, so the source and use of every borrowed dollar is easy to show.
You get twelve months of support: up to three 30-minute calls a month for the first 90 days, then one a month. At tax time we spend up to an hour with your accountant walking through the records.
The Smith Manoeuvre Certified Professionals on our team design every plan around your numbers.
Who handles the investments
The investment side is handled by a licensed financial advisor. We work with advisor partners we trust and can introduce you to one, or you can use your own. If you work with one of our partners, Freedom10 may receive a referral fee.
You are never required to use one of our partners. What you buy, and whether it suits you, is decided by you and your advisor.
06 Who Does What
Five roles. Each one stays in its lane.
You
- Make every transaction yourself: each readvance, transfer and purchase
- Keep the investment line and investment account separate from everything else
- Give complete, accurate and current information, and tell us when something changes
- Make your investment decisions with your advisor
Freedom10
- Design the strategy, the sequencing and the account structure
- Help you set it up, implement it and track it
- Provide the tracking sheet and twelve months of guidance
- Spend up to an hour with your accountant at tax time
Your mortgage representative
- Handles the readvanceable mortgage and its line of credit
- Works with us to confirm the structure supports the strategy
- Freedom10 receives no mortgage referral fees
Your independent tax advisor
- Advises on the tax treatment of the interest
- Advises on what you claim on your return
- Advises on any tax consequences of selling investments
Your investment advisor
- Licensed to advise on investments
- Recommends what to buy and whether it suits you
- Can be your own advisor or one of our partners
07 An Illustration
Five years of readvances, month by month.
A simple example with every assumption shown, worked out month by month. Your own mortgage, rates and timing would give different numbers.
Assumptions
- Home mortgage at the start
- $500,000, readvanceable
- Mortgage rate and amortization
- 4.5%, 25 years ($2,767 a month)
- Principal readvanced
- Every month, on the mortgage payment date
- Rate on the investment line
- 6%
- Interest on the investment line
- Calculated daily, charged monthly, paid with funds borrowed from the line
- Investment returns
- None assumed
What changes
- Personal-use mortgage after five years
- $438,982
- Investment-use line after five years
- $61,018
- Total debt
- $500,000 (unchanged)
- Line of credit interest in year five
- $3,294
- Line of credit interest over five years
- $8,976, paid with borrowed funds
- Invested, at cost
- $52,042
The illustration says nothing about what the investments will be worth. They could be worth more or less than $52,042, and the line balance is owed either way.
Your numbers, your facts
Our analysis is built on the information you give us, and on what your advisors, lenders and financial institutions provide. You are responsible for making it complete, accurate and current.
We will ask when something looks inconsistent, but we do not independently audit it. If your facts change, the analysis may change with them.
FAQ
Smith Manoeuvre Questions
Next Step
See what your mortgage could be doing.
A two-minute application tells us whether your mortgage and cash flow are a fit. If they are, we model the Smith Manoeuvre on your numbers and walk you through it on a 30-minute video call.