Smith Manoeuvre Explained - Make Your Mortgage Tax Deductible
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- Опубліковано 27 чер 2024
- My Smith Manoeuvre notes & Excel doc Google Drive link:
drive.google.com/drive/folder...
This is a great article on The Smith Manoeuvre:
milliondollarjourney.com/use-...
Smith Manoeuvre Website:
smithmanoeuvre.com/
Time Codes
0:00 - Intro
0:55 - Smith Manoeuvre Books
1:27 - Don't be a Chooch Hit the like button
1:45 - Smith Manoeuvre Explained
4:19 - Readvanceable Mortgage with different lenders
6:38 - CRA Investment loans
11:46 - Impacts on credit score
12:44 - Borrowell app
13:28 - Simplii bank
13:50 - Do not invest LOC funds in a registered account
15:46 - Servicing interest payments
17:54 - Debt Swap Accelerator
18:41 - Cash Flow Diversion Accelerator
19:18 - Cash Flow Damn Accelerator
21:25 - DRIP Accelerator
22:19 - Prime The Pump Accelerator
23:11 - Outro
Disclaimer: I am not a certified financial planner. This video is not intended as individual tax, legal or investment planning or investment advice, and is for educational, entertainment and demonstration purposes only. It is not a solicitation or an offer to buy or sell any securities.
Please do your own research and reading about the various topics prior to investing or implementing the strategies discussed. You are solely responsible for your investments. - Навчання та стиль
If you want a copy of my Smith Maneuver documents. Click on this videos description and there is a Google Drive link with all the documents available to download.
Hello myself lives in brantford Ontario and I come across your SM video. I have some questions regarding Sm . Can you please provide your email ID if you can . Thanks
@@kanavmahajan7787 simpsonpropertiesltd@gmail.com
As always, fantastic video with great information.
Thanks for the support 🙏🏽. It’s much appreciated.
Awesome info as always bro 👊🏾
Thanks for the support 🙏🏽
Great video bro. Sent this to everyone I know. I'll be using this video in a couple years for myself. Let's gooo
Thanks for the support Victor! I can’t wait for you to start implementing this strategy 👍🏽
Man, thank you so much... I was looking all over for a good Canadian break down. Subbing ASAP
I’m happy to help 🙏🏽 make sure you check out the Google Drive link in the video bio. There are helpful resources to use. Thanks for the sub.
Good stuff. Thanks for the explanation. I think I'll need to watch it a couple more times to get the gist of it.
No problem. Read the book, articles on the topic, videos etc. Dive deep and before you know it you will really grasp it.
It’s tough to comprehend at first then eventually it clicks.
Pimpin' ain't easy!
Great explanation!
Thanks Jeff!
Well explained thank you
Glad it was helpful!
This was like learning the Matrix is a simulation. Really appreciate your concise information. Such a major asset for any homeowner.
You have taken the red pill and can now harness that information and put it to work. Thanks for the feedback & watching 🙏🏽
First of all, thank you for this well done explanation! and the part of using rental income from the income property, using that to pay the primary mortgage and use the heloc to service the income property mortgage is mind blowing and intriguging. From the million dollar journey article " Although CRA only expects income from your investment portfolio, in 2003, the finance department declared that in order for investment loans to remain deductible, the interest/dividends must produce a profit. That is, the dividends must EXCEED the interest that you are paying on the loan. " At the average HELOC rate now for 6.75%, this means we need to find pretty high paying dividend funds/stocks to make this work?
Thanks! I'm glad you found the video helpful. I still have a decent spread on my portfolio. I would recommend you reach out to your accountant with that question.
Dividend payments can vary and so can HELOC interest rates. Espcially, when we are in a high inflation period like now. Trying to constatnly maintain that spread seems unreasonable in the short term. With a long term outlook I can see the profts exceeding the interest cost.
Liked 👍 Thanks
Thanks for watching!
Thank you for the video. Well done:) please forgive if this has already been asked:
I’d like some clarity on the different account used.
-from the line of credit you move to another account->
-what is this account ? A Scotia chequing account ? Why is this account needed? Then you move to the smith maneuver account->
-what is the SM account? A Scotia account? A smipli account? Then you move to your brokerage account->
-this part I understand. You use interactive brokers.
Thank you 🙏
Thanks! I move from the LOC to a Scotiabank account, then to a Simpli Bank account that I call “SM Account”, then transfer those funds to the appropriate investment account.
The Scotia account is needed for me to easily get the funds out of the LOC.
I hope that clears up your questions.
Great Job man! I wish you were in my inner circle.
Thanks! If you’re subscribed to my channel you’re in my inner circle. Im happy to help out and answer any questions.
Thanks for this break down! I'd be interested in hearing about why you went with Scotia Step instead of the other advanceable mortgage options.
Couple questions:
-is the match payment treated the same as the regular payment in that a % would go to principal and another % to intrest or is it all applied to the principal
-Is the non registered account a requirement from the CRA?
No problem! Here is a link to a video that does a great job of breaking down Scotia STEP:
ua-cam.com/video/9AHWYvmRRPc/v-deo.html
The match a payment goes 100% towards the principal payment. So all of it gets rolled over to the LOC.
Using a non registered account for investment loans is a requirement by the CRA. They don’t want you to double dip on tax savings.
@@simpsonpropertiesltd thank you!
thanks for the info.
amazing how knowledge can save a person .
you save me so much time.
question? how do you pay the interest on the (hloc) ?from your employment income?
thank you 1000 times!!!!
Great video. Did you need to do anything special for your Scotia STEP? I have my mortgage and a large HELOC that I split into 2. How does it truly re-advance? Is it automatic or does the bank need to set something up for that once principal is paid down it opens up on the HELOC side.
Thanks!
Thanks! Usually, you have to ask your mortgage broker or Scotia rep to set up “Automatic Limit Increase enabled”. If yours is not set up you can call Scotia and have it done easily.
Once that’s done it’s simple. Any principle payments re-advance automatically to your LOC.
Thank you for sharing such applicable knowledge. Speaking of legal duplex rental, do you notice that you can charge higher than average market rent since separate dwellings are legal?
I wouldn’t say legal vs non compliant provides higher rents. It’s provides piece of mind for myself (landlord) knowing everything is up to current building codes & safe for the tenants.
The finishes, location, market conditions, sound dampening etc. is normally what allows for higher rents.
@@simpsonpropertiesltd Piece of mind is definitely what I'm looking for. Thanks
Buddy, my life just completely changed because of this video. Because you shared this, I’ll be able to retire in like 6 years. Thank you so much!!
That’s amazing to hear Scott! It’s a mind blowing strategy that makes you say “why didn’t I know about this before” hahah. Reaching financial independence in 6 years is music to my ears.
lol, don't be so sure, Scott. There are no guarantees here.
Hey Dwight, Thanks for this very informative and mind blowing strategy. Did you manage your own investment or thru Financial planner/adviser?
No problem, I’m happy to help. I manage all my real estate and stock investments myself. I work with a professional accountant to do my taxes every year.
@@simpsonpropertiesltdwhich platform do you use to manage investment?
My brother, you cannot use Smith maneuver on a rental property because the interest expense of the mortgage is already tax deductible
The mortgage interest is tax deductible on a income property. If you have a readvancable mortgage with a LOC on a rental property. You could use that LOC to invest and deduct the interest paid based on your marginal tax bracket. That’s what I meant by using the SM on a rental property.
Question: Why didn't you just make the Smith Maneuver account a new, blank slate Scotiabank chequing account instead of making the separate Simpli SM account? Was it just the lower fees/online platform? I just feel like it'd be more convenient to keep the entire thing within Scotiabank, even if it meant a bit more fees.
Might be the best comprehensive SM video with visuals, well done.
I used the Simpli account to be frugal (save on fees) & in my case it is more streamlined. I already use Simpli for all my mortgages. Do what’s best for you. If it makes more sense to use a Scotiabank account then do that. KISS - Keep It Simple Stupid.
Thanks for the feedback it’s much appreciated 🙏🏽
Great video, thank you for explaining it to a dumdum like me! Quick question, how does this work with Manulife 1? Is Manulife one not already a HELOC? I have been able to utilize Manulife1 to my advantage so far but would love to add on the smith maneuver as well. Appreciate any feedback!
Hey, come on you’re not a dumb dumb. I have personally never used Manulife One. I can’t speak on the features of that specific product.
Any mortgage that is a re-advancable mortgage could benefit from the The SM.
Hi, Thanks for the info. Great explanation. I'm in the process of implementing the strategy and you said that you're using Simplii to transfer from your LOC. I don't know if Wealthsimple offed a checking accounts when you made this video but now they do and I'm wondering if you’re still using Simplii or you changed to the checking account in Wealthsimple and if you haven't switch, why not? Thanks
I use Interactive Brokers for stocks. It’s a much better platform compared to Wealthsimple.
Great video, For the Cash Flow Damn Accelerator, I have a few income properties in my personal name, does the rental income only work on going forward rent or can I use previously collected rent as long as its within the same calendar year? If I understand the summary correctly, you can take 100% of gross income generated in the year for that Income Property, directly pay down STEP mortgage on primary residence (Im with RBC so not sure what their equivalent is) and then will it "Automatically" increase the advanceable mortgage account or do you need to go to the bank to get approval to increase it? Last question, what is the purpose of there needing to be a "Smith Maneauver" account such as simplii, is it just to keep it clean for audit purposes or is there a specific reason for the SM account itself?
Thanks Evan!
1) I would run this question by your accountant. To my knowledge you can't use previously collected rent.
If you were audited you would not be able to prove those funds flowed through and paid towards your primary residnece.
2) Your summary of the Cash Flow Damn Accelorator is correct.
3) The STEP limit automatically increases each month. You have to set this up with your lender.
4) It's recommended you do all the transfers in/out of a "SM Account". So thta WHEN no IF you are audited by the CRA you have a clean and simplified paper trail. Once you start getting large tax refunds the likelyhood of being audited increases.
@@simpsonpropertiesltd thanks for the quick follow up. If I have multiple STEP mortgages on income properties can I use the cash flow dam accelerator to pay them down faster too or does it specifically have to be primary residence as I’m thinking RBC doesn’t have a similar product
@@TheTexasmurph yes you can apply the same accelerator to a rental property. It's has less advantages compared to your primary residence because the motrgage interest on a income property is tax deductable.
Hello again 😂 I am in the process of getting this going, when you mentioned the cash flow damn acceleration, I noticed one thing, so we both can agree you can take the gross rent, cycle it through (either primary or rental mortgage) and then take the bumped up readvanced heloc to put back in the rental account, how are you accounting or factoring in the interest on the heloc that you’ve now accumulated. If you are borrowing from heloc to put back into your rental account to service debts, there is now an every month increased heloc amount being borrowed at todays rates of 6-7%
Could the SM be applied to a garden suite as an investment property, or does it need to be on a separate lot / different address as the primary residence?
If you have a readvancable mortgage on the garden suite the same rules would apply. It’s treated like any other income property. This strategy is most advantageous on a primary residence since the mortgage is not tax deductible.
I’m guessing you will be renting out the garden suite which will automatically make its mortgage interest payments tax deductible against the income of that suite.
I hope to be doing the same thing with our new primary. @Melissa are you doing your garden suite at the same property your putting the SM on?
Hey Dwight! When are you going to post more videos?!
Hey Peter, I’m sitting on tons of footage but have not been prioritizing making new content. I plan on getting back into it this spring.
Great video! Your section on "Servicing Interest Payments", it seems that it could work for a while but it'll get to point where all of "$2000" would be used for servicing interest payments rather than investing? More money you take out of LOC, more interest payments you'll have to make. Is there another strategy for servicing the interest payments where you don't have to pay the interest cost with your after tax dollars? Perhaps make the interest payment from another LOC and I think we can claim the interest cost on the 2nd LOC as well, if I am not mistaken? Complicates things for sure... any thoughts?
I would not use another LOC to service those interest payments. This strategy works better when you’re in a high marginal tax bracket.
Don't forget the amount of principal you are paying on your original mortgage is also increasing over time and in theory should cover the increasing HELOC costs
It does not stay the same any two months in a row, so that 2k example is only ever exactly that one time
Hi
Thank you for this great information. I kinda understand most of it but I have questions.
If you take all the capital put into your HELOC (LOC) to be invested. Yes, you are building a nice investment portfolio but you will never be ending paying your house ever by just paying the interest? Especially that you want to leave those investments to your kids later. I noticed that Canadian banks now hold a portion of the repaid principal to be used to gradually reduce your global credit limit until the loan-to-value ratio (LTV) reaches 65% of the value of your property. It means that we would have less capital to use to invest which means less profit and less tax deductions (interest). Would the Smith maneuver still effective with these new rules?
Thank you
No problem!
1) You or your kids down the road always have the option to pay off the debt. You could sell some of your investments or use other capital to do so. In most cases when you run the numbers it makes more sense to keep the debt and get those tax deductions. This will vary depending on your income and marginal tax bracket.
2) The SM is still a great strategy to use it just means your LTV will be lower and you will have less capital to invest like you mentioned.
LOC debt usually has a higher interest rate than your mortgage.
Would you subtract your marginal tax rate from the higher LOC % to determine if it's worth doing this manuever?
Ie. Mortgage is 1.5% but LOC is 3%. I wouldn't want to pay twice the interest just so I could write it off. However if I was in the 54% marginal tax rate I would save money overall because the effective LOC % would be less than 1.5%.
That's correct. LOC interest is higher than mortgage interest rates. It comes down to interest rate arbitrage. In my scenario my LOC interest rate is 2.95%. I'm looking to have my investment loan exceed a 2.95% return. The S&P 500 has returned 8.4% annually on average since it's inception. Some years returns will be higher & others it will be lower. The key is I have a long term investment horizon. I'm looking to preserve & grow capital slowly but surely.
You would get a portion of the interest paid back based on your marginal tax rate.
Let's say you paid $10,000 in LOC interest in one year and your marginal tax rate is 54%.
You would get a tax credit of $5400.
Thx for the video. I have a couple inquiries. I have started this with a STEP mortgage. Though, I only have one year worth of pay-down available in the LOC. but before I got that LOC, I still had to add that to my STEP. Also each weekly payment I am paying the mortgage does not automatically go back into the LOC. it sits there until I tell the bank to add those funds into my existing LOC. but the bank states I will need to have a new LOC which will be part of my overall STEP. Does this seem to be right? Multiple LOC’s tied to the original mortgage?
Next, my LOC funds can go directly to my iTrade account. Is this ok, or do you suggest that I should still have a separate chequing acct for this SM procedures? I have divided stocks. Now for the payment of the monthly LOC interest payments, I need to take those dividends from my iTrade acct and put them back onto the LOC acct and not wash it through the mortgage as again those available funds will sit in the STEP part of the mortgage and so I still need to pay the interest of the LOC. It seems that I cannot utilize the DRIP method like you explained it in this video. Am I missing something here? And yes due to the higher interest rates, my dividend generating stocks need to be higher that the now ~6% LOC rate that I am getting charge in order for me not to be paying additional funds from out of my pocket. LIF.TO is one stock that is paying a great dividend but it is also a risky stock. Thx.
Hey Jamie, it would be easier to address your questions over a quick phone call. Shoot me a DM on Instagram and we can set up a free 30 min call. Thanks
It sounds like you may not have set a bunch of things up correctly.
You needed a readvanceable mortgage from the start to do the SM
You should just be using the HELOC portion of the readvanceable mortgage to invest.
Your new room generated by your regular mortgage payment is what you use to pay the interest... Not dividends. You should not require any additional cashflow to run the SM
Thanks for the video. A question from me is since your banking with Scotia why not use Itrade and their $30 chequing account has another basic chequing acc. Just to amalgamate everything.
Thanks for watching. The brokerage I use to invest in stocks is Interactive Brokers. That’s why I don’t use a Scotia Itrade account.
@@simpsonpropertiesltd is it because of the commission and as I asked the ultimate account from Scotia has 2 Chequing. Why open from simply?
@@brielleandquinn3281 I don’t use Scotia bank to do my baking. I only use them for mortgages. Do whatever makes the most sense for you and your personal situation.
@@simpsonpropertiesltd I see. Thanks for this video. Explained it very well
Hi. We are currently with Manulife bank. Is this smith’s already? The concept is the same as what you are explaining. My question is. How to start. What to do first? Thank you.
I believe Manulife has a readvancable mortgage product that can be used to implement this strategy. I would recommend you buy a read The Smith Manoeuvre book. Watch my video a few more times. Let the information really absorb. After putting in your study you will be able to figure out how to start. I don’t offer consultations.
It’s pretty straight forward once you understand how the concept works. Let me know if you have more specific questions after you do some homework. “Where to start” is kind of a broad question.
Hey, Very, very good video. I do have some questions for you. If I already own rental properties in my own name, can I use the re-advanced loc money somehow with those properties? (for ex. applying directly on their mortgages.) Or, would the new funds have to be used on new investment properties? If so, can I let the advanced money build up until I have enough for a downpayment/Renos etc, for a new property? Lastly, I understand needing a brokerage account for stocks, is there anything special required if investing in real estate? (Not Reits)
1) Yes you can use a LOC attached to a income property and invest those funds. Which turns the LOC into an investment loan allowing you to deduct interest paid based on your marginal tax bracket.
2) That money can be used to invest with the intent to generate income. So yes it can be used to invest in other income properties or towards renos on a income property.
3) There is no special account that is used to purchase real estate. You would buy it like any other property. What’s important is tracking the funds. Don’t use the investment LOC for personal expenses.
@@simpsonpropertiesltd Thanks for your response.
@@robdoyle977 no problem. I recommend you read The Smith Manouvere book, read my notes & watch this video a few times. It will all come together over time. Then you can put the strategy to work!
Sorry for all of the questions. I actually have the book and just completed the homeowner's course. It is just nice to have someone knowledgeable to bounce some questions off of, who is actually using the process. One thing that I'm still not clear on is, for example: If I have $50,000 of available readvanceable HELOC and my lender permits $40,000 to be prepaid yearly, am I able to prepay it all at once using the Smith Maneuver or do I have to do it monthly? If so, Is there any advantage for me to use the HELOC to prepay it all at once, or am I better off doing it monthly? (Keep in mind that I would be maxing out my total usable amount of prepayment allowance if I pay it up front and won't be able to make any additional monthly pre-payments as per the lenders policy. )
@@robdoyle977 send me a DM on Instagram (simpsonpropertiesltd) or an email to simpsonpropertiesltd@gmail.com. We can set up a free 20 min call to go over your questions.
Question for you - wouldn’t the expenses on the income property already be tax deductible? Would that mean that, come tax season, you’re claiming the same expense twice?
You are correct the interest paid on the mortgage of an income property is tax deductible. You can have a readvanceable mortgage on the income property and use those funds to invest. That would be an additional tax deductible loan.
The part I struggle with this is the interest payments on the LOC. I see that in your example you deposited 1800 into the investment account and held back 50 for the interest on the LOC, but that 50 would only cover the first payment. Each withdrawal from LOC would be creating a larger interest payment due and leaving less to invest, and I only assume eventually the interest would outweigh what's pulled to invest. How do you get around that portion? Forgive me if I have completely missed something here, just trying to learn. Thank you
I had difficulties wrapping my head around this as well. The interest payments will grow as time goes on. The idea is to make interest only payments each month. Those are made with the increase in the LOC.
In my personal situation I transfer from the LOC to a bank account with Scotia. Leave enough in that account to service the monthly bank fees and interest. I set up interest only payments to automatically happen each month. Then I transfer from the Scotia Bank account to Simpli (Smith Manouvere account). Then from that account to my brokerage. To keep my paper trial clean and show the funds are used for investing only in case of an audit.
I hope that answers your question.
The interest will not even come close to outweigh what’s pulled to invest. Run some numbers and what interest is on say $100k at 3-5%. It’s not much averaged out over a calendar year.
@@simpsonpropertiesltd I think my personal issue with it is that I don't have a primary income source that is large enough to do double payments on my mortgage and that switches the numbers abit. But, I do have a fair amount of equity built up and think this method will work out in the long run. Thabk you for all the info and the quick response, truly appreciated.
@@jcunningham2rcr I’m happy to help. Best of luck to you on your investing journey. Remember to pick safe and reliable investment’s. Otherwise, implementing leverage with a strategy like this can back fire.
You mentioned a "Smith" account, but can you not go straight from HELOC into a brokerage account?
You can but I prefer to use the SM account so that the paper trail is clean if I’m ever audited by the CRA.
Would the Cash Flow Dam accelerator work if the rental property is generating negative cash flow? Due to variable rate increases, I am now paying approx $500 out of pocket every month till the rates drop again I guess... Would SM be a suitable strategy in this case?
Cash flow damn accelerator utilizes gross rents from a rental property to pay down (convert your mortgage into a LOC) more quickly. If you’re a high income earner (higher marginal tax bracket) this strategy becomes more useful.
It’s suitable if you’re a good investor and can put that money to work. It’s even more advantageous, if you’re in a higher marginal tax bracket. You get more money back at income tax time from the interest paid on your investment loan.
I hope that helps.
@@simpsonpropertiesltd wow... thank you for a prompt response. I have placed this inquiry on multiple sites days ago and haven't received a response yet but you've responded so promptly and that too on a weekend... this deserves a subscription to your channel lol. I am assuming the interest paid on the withdrawal from the LOC to pay for rental expenses would also be tax deductible? Doesn't CRA have an issue with this? I am claiming the mortgage interest on the rental property and then again interest expense on the LOC for withdrawal for the rental expenses? isn't this sort of like double dipping?
@@amarkhan3936 I’m here to help and happy to have you as a new sub 😬. Nope it’s not double dipping. If you own the properties in your own name and not in a corporation it’s added to your gross income. What you do with those funds is up to you. I’m this scenario that money is being used to pay down your principal residence mortgage. Then the loc money is being invested in a income property. Making it a tax deductible loan. Always double check things with your accountant to make sure your system and strategy is used properly.
Sorry, forgot to ask this question, can I use the readvanced money to invest in my own small business, if that business is held in a corporation?
I’m not sure. Check with your accountant on that one.
@@simpsonpropertiesltd k, thanks
So I have one apartment paid off and with step there’s $130K loc can I use this amount for a down payment or a new investment property rent it out and use this smith maneuver method today in 2024?
That’s correct.
What if your mortgage rate is 2.65% and the line of credit is 8%.. is it worth it to do this maneuver? Are re advanc. Mortgage rates the same interest rate as your current Mortgage ?
Fraser Smith who made The Smith Maneuver main stream made the strategy work when interest rates were in the double digits. If you are a high income earner and are in a higher marginal tax rate it’s more advantageous. It all comes down to math and how good of a capital allocator you are.
There are lots of great companies with decent yields where you can make money on the spread. I hope this helps 👍🏽
I guess this only work with a STEP account ... since it is always growing with each payment which provides the debt to use
In order to implement The Smith Manoeuvre you need a readvancable mortgage. At 4:18 in the video I listed some of the larger Canadian banks that offer that product. My personal favourite is Scotia STEP.
@@simpsonpropertiesltd ahhhhhh dope ... will revisit that part ... thanks !!!
So when you follow this and it comes Tax season. What are you filling out to get the tax refund?
Line 22100 - Carrying charges, interest expenses, & other expenses.
Here is a link to the CRA's website:
www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22100-carrying-charges-interest-expenses.html
@@simpsonpropertiesltdhow much tax benefit did you receive when you first implemented SM?
@@californiastudents sorry that is personal information. Your tax benefits will vary based on your marginal tax bracket and total amount invested.
What is your "sm" account. You take out of the line of credit and put in what ? Can't you just put it directly into a brokerage account ?
It’s a bank account that is only used for the SM. I transfer from the LOC, to the bank account (SM account), then to the brokerage. I do it this way so there is a clean paper trail if I ever get audited by the CRA.
You can do this way as well. I have been doing this way and believe it is even more straigtforward and clearer if CRA audits it.
You need to talk abt the risk. What is the investment vehicle that can return more than the LOC interest rate in current market. Current hel0c rate is around 5-6%. so bare minimum the investment need to earn 7% and more consistently.. any comment ?
Risk goes without saying when it comes to investing. Remember that you get a percentage of the interest paid based on your marginal tax bracket. Which makes this strategy more beneficial to higher income earners. If your marginal tax bracket is between 40%-50% it almost halves your LOC interest paid.
The S&P500 has returned between on average between 8-12% with dividends reinvested. Or you can put those funds to work in cash flow producing income properties.
Let’s put some numbers. On $2000 mortgage pymt with $1000 principal, I cAn withdraw max $1000 from LOC to invest.
So in a year, $12000 in loc will cost me apprx $840 interest pymt which wo be tax deductible making effective cost of borrowing 840x0.7=$580 (in 30%income tax bracket). And this $ 12000 investment need to earn at least $580 or more in order to make this sense. Also the investment earning on this 12k is also taxable as it is earning. That means I have to earn more than $840 , so that after paying HELOC interest pymt and income tax on this amount, there will be some profit.
Thus, there had to be an jnvestment vehicle that need to earn more than HELOC interest rate consistently to make this concept work. And in an high interest era like this, the concept will not work. Pls comment…
@@pranayadash9901 As I stated previously this strategy is more beneficial for high income earners. The higher your marginal tax bracket, the more spread you have. Fraser Smith who pioneered this strategy made it work when interest rates were in the double digits. If you’re not a good capital allocator, have a low marginal tax bracket and a short term investment horizon the SM is probably not suited for you.
When interest rates go up, companies that pay dividends increase their yield, or their stock price drops which also increases their yield. This allows me to buy shares through a DRIP (increasing position sizes) and I get bigger refunds come tax time from the increased borrowing cost. Which pays down my mortgage (bad debt) and increases my LOC (investment loan, good debt). I’m playing this game for life. Based on historical data it’s a winning strategy over time and through various parts of the business cycle.
If the numbers are not working for you based on your loans, marginal tax bracket, and investments than I would listen to your math.
What kind of account is the sm account
Im really interested in this im already investing in the stock market im just missing that piece and we’re do I claim and what do I claim on my taxes
The SM account is a regular bank account. Any money transferred from the LOC always goes to your SM bank account. That way your money trail is easy to follow if you’re ever audited by the CRA.
Then from your SM account to the appropriate investment (brokerage account, real estate investing etc.)
I track everything in an excel doc for bookkeeping. That Excel doc is attached in my Google Drive link (see description tab). I have the section that you claim on your taxes in that doc. Always consult with an accountant first. To make sure you’re doing this properly. Most accountants call this strategy cash damming.
Thanks 🙏 knowledge is the key just like you i m pushing in every direction with baby on the way ,houses, work ,investments , move to Alberta just to save on my taxes thanks
@@gabrieldimanche8458 keep on the path. All the hard work will be worth it.
VFV payouts include ROC, which really messes up the interest write off. You should not be in this fund if you want to keep the accounting simple. Stick to solid cdn dividend stocks, bell, telus, fts, enb, bns, ry, etc. No REITs or ETFs!
When you say it helps keep the accounting simple are you referring to the dividend income? Paying a little more in witholding taxes for holding US equities doesn't bother me. Buying REIT's or ETF's should't impact deducting the LOC interest right?
@@simpsonpropertiesltd My mistake.... Its ok as long as you dont withdraw it from your non reg account. If you lookup the content of the payout and there is any ROC, you cant withdraw it, as you are then withdrawing a small portion of the original investment. I like individual cdn stocks that pay a decent dividend, because you can circuate the dividends thru your mortgage and keep the Heloc 100% tax deductible. Also cdn dividends are taxed more friendly than US dividends, and we have some nice solid choices like cdn banks, telus, bell, Enbridge, fortis, etc.... Can easily average 4.5% dividends.
@@markvanderhelm922 thanks for the clarification. I don’t withdraw any of the funds the non registered account. They will be invested for years and untouched.
@@simpsonpropertiesltd If they pay a straight dividend, you can withdraw the dividend, put on your mortgage, which frees up more Heloc room (and pays mortgage down faster), then take the same $ from heloc and buy more shares of same stock.... Several advantages compared to just letting it DRIP.
@@markvanderhelm922 you bring up a great point in utilizing the DRIP accelerator. Thanks for sharing your insights. It’s much appreciated.
Hi Simpson, it is interesting. I have few questions as follows;
Question 1 Can I do the same with normal LOC? Like if I invest from there can I still claim tax deduction for payment of interest of the LOC ?
Question 2 As the balance on the LOC increases do I not need to pay a higher rate of interest than my mortgage?
Question 3 At last say when my mortgage is paid 100K and I have 90K of LOC balance how am I suppose to pay the interest payment ? LOC interest is higher than mortgage right?
Question 4 For the Cash Flow Dam for Rental Property- after the movement of rent , I can pay for the mortgage of the rental property right as expenses?
Question 5 Is there any separate account named as SMITH MANOUVER a/c in bank or it can just be a normal bank account?
Can you please help answer them.
1)Yes. This strategy can be done with standard LOC. As long as the funds are being used to invest with the intent to generate income.
2) As the balance increase your payment amount will increase. The interest rate on a LOC is generally higher than a mortgage interest rate.
3) This is the part that most people have a tough time wrapping their head around. Including me when I was learning about the strategy. Watch 15:46 again. I cover how the interest payments are services requiring no extra money.
4) That’s correct. All those funds go back into the rental property bank account to service costs with that property.
5) It’s a normal bank account. I refer to it as SM account because it’s only used for this strategy in case I am ever audited by the CRA. Keeps my paper trail clean.
Overall, it's a very good video. Thank you. However, you should emphasize that if the interest on your loan that you are using to invest is higher than the rate of return of your investment, then it's better to just not do it at all
I mentioned this because right now interest rates are very high, especially online of credits. Lo Credit generally have higher rates than fixed portion of the mortgage
That’s common sense. This strategy was implemented when interest rates were in the double digits by Fraser Smith. They made it work then. It all comes down to how good you’re at allocating capital. This strategy is not for the majority (95% +) of ppl.
Dont forget that you should compare the after deduction interest rate to the investment performance... So even at 7% after the deductions (50% tax rate) an effective rate of only 3.5% is not that hard to beat in the stock market
You didn't explain this very well. When you make payments on your mortgage, it doesn't "roll over" into your LOC. Your LOC is what's left in the worth of your house. If your house is worth $500,000 (regardless what you paid for it), and you have a mortgage of $200,000, then you have $300,000 available in your HELOC (Home Equity Line Of Credit). As your mortgage goes down from paying it, your LOC max goes up. IE if I have a mortgage payment of $2000 and $1500 of that is principle, now my mortgage is $198,500 and the money available in my HELOC is $301,500.
You could make a video on this topic and share your knowledge with the world 👍🏽
@@simpsonpropertiesltd No, that's okay. I'm sorry if I came across rude. There was a lot in your video I did like, for instance the 90% sweet spot is huge advice and great to know. I just thought some parts could be made a little simpler. Like what do you mean by put your money in a Smith Maneuver account? Is that a special type of account, or you just mean a stock or something?
Are you still replying to messages?
Yes