The Truth About Tax Deductible Mortgages - Smith Manoeuvre Canada
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- Опубліковано 6 січ 2021
- Is there such a thing as a tax deductible mortgage in Canada? Are tax deductible mortgages a good idea? How do I make my mortgage tax deductible? These are all great questions, and ones that I discuss in today's video. While this video is generally a video about the risks of leveraged investing, I discuss a broad range of topics around borrowing money against your home to invest, including the Smith Manoeuvre Canada.
There are many ways to make a mortgage tax deductible in Canada. All of them involve using a mortgage for the purposes of earning income. You can use a mortgage to buy a revenue property, invest in a business, invest in your own business, or invest in an income producing portfolio of stocks and bonds. However, the most popular form of making a mortgage tax deductible is by using the Smith Manoeuvre. The Smith Manoeuvre is a process where you re-borrow principal from your home using a re-advancing mortgage, and you invest that money into a stock portfolio. It is a great strategy for a sophisticated investor, but it does come with risks, and that is what I discuss in this video.
The presenter has taken great care in preparing
this video, however makes no representations or warranties with
respect to the accuracy or completeness of its content. The contents
of this video should not be considered a substitute for
professional financial advice. Please consult a financial professional
before implementing any of the strategies described in
this video. The presenter shall not be held liable
for any loss of profit or any other financial damages, including
but not limited to special, consequential, incidental, or other
damages. - Навчання та стиль
Hello, I have a questions? Why are you counting the rebate twice: once on the interest paid and once on the return? I would have thought that the Math should look like Return-tax-interest+"tax rebate". Let me know what you think.
Good catch, you are absolutely right. I tried to make the explanation as simple as possible and as a result oversimplified it and made an error. The return is actually 3% not 4.2% 🤦♂️
@@NolanMatthias I actually thought it would be a total return of $4600 since capital gains are taxed at 50% and therefore the After Tax return is $6400 (instead of $4800). And $6400 - $1800 for Interest Cost will be = $4600.
But I totally agree with your point that the risk factor is something to sweat about with borrowed money....
@@pouyajabbari3912 I thought it was that capital gains are viewed as being 50% towards ones income and the rest taxed at 25% (capital gains tax)?
@@pouyajabbari3912 i agree with what your saying... also the interest that your are paying on the ILOC or Borrowed money it is not coming out of your own pocket. When the payed down principle gets transferred over to ILOC/HELOC you leave some money out of that payed-transferred-principle amount in your account to service the ILOC/HELOC interest. Hope this makes sense.
@@NolanMatthias I also found the issue, the return should be 3%
Love the video, but I think for the 8k return example, since capital gain it is taxed differently (50% of income tax bracket), so the after tax return of 8k should be 6400 not 4800. The total return is 6400 + 1200 rebate - 1800 interest cost = 5800
Thank you, Nolan! I was thinking of doing a Smith Maneuver and I am glad I saw all it's pros and cons on this very easy to understand video of yours.
Great discussion on this! Really enjoying the content.
Thanks Neil!
Really appreciate this video. Thanks.
The 8000:return in year one is only taxable at 40% if it is interest income, most etc returns are either dividends or capital gains and no one using the Smith maneuver will realize capital gains every year.
Totally sensible opinions on leveraged investing.
I mean you bring up a good point, but it’s the compounding that is the real opportunity we miss out on. $4,200 compounding YoY is another story. Very good to be aware of though! Thank you for the video
The biggest misleading about this strategy is: we are not choosing between tax deductible mortgage and non tax deductible mortgage. we are actually choosing between no mortgage and tax deductible mortgage!
Nolan. Thank you for this video. It's important that the entire risk be explained, which has been missing from other YT channels who have had Fraser on their show. People are too flippant about this and don't realize what is at stake and the chance they are taking. This is TRUE financial advisement in it's ideal state.
Really helpful. Thanks
Great video!!
Good stuff! 👍
A better concept is to pay down your mortgage with the annual returns from the investment prior to reinvesting them. That investment can be dividend paying Canadian stocks for optimum tax considerations, (even stock in the bank you get the mortgage from). The mortgage interest savings would be significant. Would love to see Robinson Smith on the channel.
One point I often see missed in all of these UA-cam explanations, is the huge interest savings you get when paying down that mortgage faster, especially with rates now over 5%, the savings are massive and they have to be taken into account when weighing up your risk.
Great point. I agree with you 100%
I'd be really interested to see that interview.
Going to see if we can make it happen. I'm sure we will
What about inflation, maintenance, property taxes and utilities? How does all of this now factor into overall returns as a function of using one's money?
Great unbiased opinion.I guess what kills this strategy is the high interest rate.
The higher interest rate increases the tax deduction. You don't need to make a positive return immediately as this strategy requires you to hold on to the investment vehicle for at least 5 years. If you buy ETFs and Mutual funds that have Return of Capital, then you must use the RoC to pay down the original debt in order for the investment loan to remain tax deductible. Also, there must be an expectation of income from your portfolio. A dividend portfolio paying about 4 percent should be good enough since your expected return is 30 percent over the next 5 years at 6 percent a year. Using a fee based advisor is tax deductible as well so you could purchase a low management fee mutual fund and have an advisor manage the account. $100k borrowed money should be good enough without taking a huge risk. No need to turn the entire mortgage into a tax deduction.
I just read your Mortgage Secrets book which is great but why does your opinion on floating, or variable rate, mtgs differ from that of Dave Ramsey?
Good sensible video.
The SM makes sense to an investor that has an RRSP and TFSA portfolio risk adjusted to work together with a non-registered leverage account. I’d be curious where an investor can get 4.2% in the bond market.
Also you would be still 40% tax at bond market since we’re comparing after taxes.
So realistically that’s suggesting a 7% bond.
To summarize, if you're the kind of person that wants to buy a brand new car financed on 5 years or you have a risky job that you could lose anytime, don't do the Smith Maneuver. If you have a stable career AND you manage your finances very responsibly, it's a good thing to do.
Your example showed the Smith Manoeuvre having a 4.2% return. If my mortgage interest was 3%, then really Smith is only 1.2% better return than paying down my mortgage for a guaranteed 3% return?? Is my understanding correct? So it's like risking your home for an extra 1.2%?
If you are invested in stock market, are your capital gains only taxed when you go to sell the shares? so that 8% return gets compounded untill you decide to sell the shares. which you can then use your rebate to make a principal payment on your mortgage and use the newly available LOC to invest in more stocks. example you $100,000 gains $8,000, then you add your $1,200 rebate on for a total of $109,200. then let compound interest take a hold and the next year your gains are (8%) $8,736, your loan is still $100,000 so another $1,200 rebate which brings your investments to $119,136. repeat and pray the stock market doesn't crash ;). I do really like the example you gave because there are so many stratagies online that seam too good to be true and you highlight the possible downside/risk that this stratagy involves. Thank you for your educational content!!
For clients who already invest and ALSO have a mortgage, the Smith Manoeuvre IMO, is absolutely the right thing to do. It’s just restructuring the steps you take to invest anyway but you get the added benefit of the tax deduction. If, on the other hand, you normally don’t invest in a non-reg account, then yes, it does increase your risk.
it increases your risk either way. Investing in a non-reg count doesn't necessarily involve leverage.
Good video
I think your calculation may be wrong, isn’t investment profit in a non registered account subject to capital gain tax, so only 50% of your profit would be taxed?
I disagree on two points. It is indeed risky but this is "additional" 4% plus appreciation on your property. So this strategy reduce your opportunity cost by buying your real estate instead of investing on riskier equity. That is, 4% plus X% from the property would be your final pay off. Not this loan alone. Of course, this math would make sense only when this investment strategy is for long term, more than 10 years. Second, having this setup, most of participants are more aggressively paying off their mortgage faster via its dividends + its tax refunds. So, basically there are additional interest savings by paying regular mortgage off by 5 to 10 years.
Good video. I'm generally in agreement with your views on mortgage borrowing to invest. My view was that the reward should greatly exceed the risk. For me it only works in my RRSP account so long as I'm still paying down my mortgage since I would have lost about 40% of the money invested through taxes regardless.
In a few years once the house is paid off I'll start using my TFSA again which has laid empty since my house purchase about 4 years ago.
You can't do the Smith Maneuver with a registered account, it must be a margin account or you won't be able to use it as a tax deduction.
Great video! If you don't have the right mindset when it comes to investing The Smith Manoeuvre probably is not for you. Most people don't have the courage and proper plan to successfully implement the strategy.
Not doing it doesn't make someone a coward, bro. Makes them more sensible, arguably, especially in this high interest rate environment
@@rickallen9099 I never said it makes someone a coward. I said it takes courage to be an investor. In high interest rate environments it means bigger tax deductions on investment loans come tax time 😬
@@simpsonpropertiesltd almost bigger interest payments to service the loan, and once the loan accrues to a high level, those interest payments will be substantial and uncomfortable for many.
Purchase a rental property, start a business, invest in stocks. The smith maneuver, advance on your mortgage, use the loc to invest, then write off the interest. Non tax deductible mortgage become a tax deductible loan, use the returns of the investment to pay down the mortgage. If you borrow more than you have capacity to pay back from other means (income from a job), the risk is very high. Particularly if you invest 100% of the money borrowed on the LOC. You have borrowed against you primary residence, the risk is the very place that you live. Debt is dangerous as many people are finding out with the current interest rates. The Smith maneuver is for people who can afford the catastrophic failure of the investment.
Net Return on the borrowed $100,000 @ 3% cost 8% gross return and marginal tax that is 40% is (8000-3000)*.6= $3000 not $4200
Scared to even think about how dangerous this could be, For my situation I woildnt dare risk the only roof thats over my head
thoughts on home equity loan vs home equity LOC
Who is watching this after watching Nolan's video with Mr.Smith? 🤚
Haha, that’s awesome
One thing that is not mentioned is how the return on investments is taxed. If you get eligible Canadian Dividends, that same $8000 of return would be yield better than non-eligible dividends.
Let me see if I got this right:
You pay your mortgage with whatever interest rate you got, let’s say 2% variable and the money you used to pay your mortgage you can use through a LOC from your bank with 3% interest of cost of borrowing? The money you borrowed at 3% needs to perform in a such way you can pay the LOC and generate profit so after a couple of years you can pay off your mortgage entirely in advance? Thanks Nolan
Yes - pretty much. There is a book called the Smith Manouvre that you can buy if you want to look into it more. The only thing that I might add that the book ignores is that leveraged investing increases your risk substantially so be careful if you go down that road.
@@NolanMatthias sounds great, this is awesome. It is true that risk is a big factor, but this actually makes a lot of sense for people like me that is used to do self-investments and use drips or dividends to manage the money in the long run. For people who rely in their banks for investing their money for them this wouldn’t work very well due to the high MER fees. I will definitely buy this book & learn more about if before moving forward . Thanks Nolan, very helpful.
Thanks for the good advice!
My pleasure
I’m about to SM my new primary with a readvanceable mortgage. I’m just wondering about cash damming. If I leave the entirety of my rents collected, can I leave the remainder in to offset my own mortgage?
I wish I could help. I’m not the guy to ask about SM. I believe leveraged investing is inherently risky.
@@NolanMatthias I know how you've changed your position on the SM publicly in your videos, but I don't doubt you still have some readvanceable mortgages on properties in your portfolio. I don't mean to call you out, but I'd love to hear your thoughts
A bit confused on the math... don't you pay only 50% on the capital gain? So for $8K, you only pay tax on the $4K (50%), meaning at 40% tax margin, shouldn't you still be up $6400?
Another question.. suppose you are own your company (sole proprietor or incorporated), and you leverage your home as home office, then is a portion or all of the mortgage interest tax deductible?
yeah I think he's missing that 50% of the value of any capital gains are taxable
I don't believe this strategy will work if your personal residence, or your income is from or through a corporation. It all has to be personally owned.
I think that would classify it as business if you're taking a loan to make money with it. Therefore, it strengths his argument because you would only pay cap gains if you don't try and write off interest payments for investment (business) purposes.
I have always wanted to do this but been nervous and risk adverse
Risk aversion is a gut instinct that one should follow. It keeps you from panicking and making bad decisions
What if you invested in bonds or gic's ? Would the return not be worth it ?
Not likely. The interest cost would exceed the returns.
I’m glad to hear a voice going through how risky the smith maneuver can be. All I hear is positives of this scheme, and I understand it well enough, but my gut says this is crazy.
Question: I have a home with a rental suite. I took out a HELOC and use a percentage of the HELOC to do upgrades to the rental suite. (New windows, heat pump, hot water tank etc). Can I claim a part of the interest of the HELOC?
A good strategy would be to refinance now that you’ve completed your renovations, and get the evaluation on your house at a higher amount. You may be able to depreciate those capital items (heat pump, hot water tank, etc..). Regarding the interest on the HELOC, that’s a great question. I hope someone answers that directly.
Yes that would be deductible interest since it was used for an investment/rental property.
You should have Smith on to explain it. You’re missing some key concepts about the strategy. It’s not just borrowing one time - the point is to have a readvanceable mortgage and you use the heloc to service the line of credit.
Use the Heloc to service the line of credit? The Heloc is the line of credit. I’m not following what you’re saying.
@@NolanMatthias there are other videos where he talks about it. Each mortgage payment increases the heloc by the amount of principle paid off. Eg first payment is $1000 interest and $1000 principle. Heloc then has $1000 available to invest. Next payment is $998 interest and $1002 principle (numbers representative but calculator will give real split). $1002 now available in heloc w/ balance of $1000 from previous month subject to interest. Invest $1000 again and the $2 left services the interest. Again, numbers not accurate but that’s the concept. No new personal cash flow needed and he argues no new leverage as you already accept the risk by getting a mortgage in the first place. Your level of debt remains constant and doesn’t increase.
@@stevet7642 gotcha. I’m very familiar with it and will have Robinson on in the near future. I got to spend some time discussing the whole thing with his father about 10 years ago when I wrote my own book. His father of course being the one who popularized the Smith Manoeuvre. If I remember correctly my points in this video have more to do with the risk of leveraged investing in general.
@@NolanMatthias yes but the video isn’t titled “the risks of leveraged investing”
Totally agree with you Steve, he is missing some key concepts plus you don’t just borrow to invest in the stock market. You can invest in private money deals, rental properties etc. SM if executed properly can result in good income and awesome tax savings
You can invest borrowed money to generate consistent returns from the leveraged portfolio. It only works for people who are financially literate.
Is the entire mortgage of a rental property tax deductible or only the Interest portion of it?
Interest only.
Only the interest, and only the funds borrowed to earn income. :)
@@NolanMatthias Only the interest of original mortgage loan for investment property, but, I believe when you borrow off your personal HELOC to service that mortgage and operating costs, 100% of that 2nd loan is deductible. Please advise.
What if I wanna sell the property? Do I sell all my stocks and pay capital gain taxes?
No, not necessarily- in most cases the value of the property will cover the debt, so you can keep the stocks but you will lose the equity in the home.
Between my wife and I we haven’t used any TFSA amounts. So can I borrow on my credit line to put 100K in TFSA investments, get the 8% return, and claim the interest on the borrowed 100K?
Those comments following mine are correct, interest are not deductible for registered funds. Thanks for correcting me.That leaves one more reason for me not to do the Smith meanouver as it does not worth it.
The interest is only deductible if it is used to purchase non registered investments. The TFSA is a registered account and the interest would therefore not be deductible.
You can't deduct interest on loans used to fund registered accounts.
@@jimschwartz511 thanks for the correction.
@@MichaelSaull thanks
I think you didn't mention that you need you take the investment distributions to make additional payments toward your mortgage. That's the difference between borrowing to invest and smith maneuver.
That’s not an overly relevant distinction
@Nolan Matthias of course it is. If you only borrow to invest and do nothing to accelerate your payments, then you will just end up paying all of the mortgage interest for the entire term. What completes the maneuver is the acceleration of payments and using the additional capital freed up on the investments and then further accelerating your payments.
@@NolanMatthias thanks for the discussion btw
Of course, there are many other variables. You don't have to use all the line of credit, you can dollar cost average into the stock market. And like he said, your tax bracket matters too.
Looking forward to the interview with Robertson
Nice to see this presented objectively. It's not all unicorns and rainbows.
Is this for me ?
important to mention also that the smith manoeuvre should only be considered after maxing out your TFSA.
Why is that?
@@NolanMatthias because income in a registered account is tax free....it wouldn't make any sense for people to open a non-registered account and pay tax on the income before taking advantage of your TFSA.
If you were going to start the SM, why would you wait until after maxing out your tfsa, why wouldn’t you use the tfsa while doing it?
@@NolanMatthias you can’t use the SM on investments held in registered accounts, interest is only tax deductible if the investments are being taxed. Why would you wanna pay tax and receive less net investment income when you could take advantage of your tfsa.
@@RandallTruscott6 So what's stopping you from taking the loaned money (which is tax deductible) and putting it into a TFSA so that the investment returns are not taxed? That way you benefit from both....
Thanks for this video, I think I understand a lot of things. I suspected but wasn't sure, my inlaws did this in...2008. Really screwed them up and I think they pulled whatever it was invested in out. I believe the found out that the guy they did it through had no idea what he was doing either and invested the money in something extremely poor. I think my wife's father is 55 or so and told me he would be 80 when he paid it off if everything goes like it is right now. I understand how defeating all of this must have felt when it happened but that was over 10 years ago. I'd expect some feeling of urgency from them and hope to see them living a much different life. So sad they didn't understand and followed bad advice.
Also, meant to say, I follow Dave Ramsey. I'm not really a baby stepper per se, but I agree with most of his stuff. My wife and I are on tracker to be debt and mortgsge free in 10 years or so at 42. To me nothing competes with that.
@@DiscipleSteven I get it. I’d be hesitant to go all in on the Smith Manoeuvre in today’s volatile world. There is certainty in paying off debt, but big potential upside in investing. I think it’s a balancing act.
Calling this a "tax-deductible mortgage" is absolutely ridiculous. At most you can claim that the interest on the HELOC is tax deductible, but you are still paying non-deductible mortgage interest outside of your HELOC.
Agreed! 100%
🍺
Hope I win💁🏼♂️💃🏼
It is funny that you say that "often the math is misleading", and then immediately follow that up with some very misleading math.
1.
People doing this are generally investing in Canadian dividended stocks. The dividend payments are NOT taxed at their income tax rate.
2.
People doing this are investing in diversified portfolios, not YOLOing on pennystocks. They are not risking their houses for a 4.2% return. That's a hysterically silly thing to say. Even if the stock market dips for a few years, they aren't going to lose their homes.
Not sure if you are confused, or if you are intentionally using a straw man example.
I'm just a layperson looking into this for the first time, and even I can see how your example is very flawed.
The example I gave didn’t say anything about it being dividends as returns. I was more referring to investing in ones own business or revenue properties which are taxed at the normal rate. I don’t think the math was misleading, I think you may have read a little more into the example than was intended.
@@NolanMatthias Yes. That is my point. You chose the least effective option as your example.
Combined with the thumbnail of the upsidedown house and the doomsday scenario of risking losing your home, it's all a bit silly.
@@danjames5129 shoot sorry 😉
I think your maths might be wrong here
Smith Manoeuver is not adding leverage to your situation. It's debt conversion. The leverage already occurred when you signed the mortgage and there's already a lien on your house via the mortgage agreement. If executing the strategy correctly, you're putting your equity to work 25 years before completing the amortization period taking advantage of compound interest and tax refunds. This strategy is for consistent and disciplined people who have an interest in their personal finances. More importantly READ every word of the book.
Why not tell people when and how they are putting their house at risk, rather than fear mongering.
and this is why he's "Broke"r
But isn't a 3% Return good considering that you did not have to inject any more of your earned income for paying down your current personal mortgage and making a forced investment account averaging 3%? All you have to do is re configure the route of all personal incomes through your mortgage 1st before servicing any of the investment loans interest dept. I am on the edge of my seat ready to meet with my accountant and lender this next week. I am planning to redirect all of my rental income from my rental houses through my $2500/ mth personal STEP mortgage @ 1.95% first, then borrow that same amount back at P+1/2% (2.95% currently) to service those investment loans and operating costs, then I will only have a few hundred left over to invest into new equity's or PL mortgage lending. My question for my accountant, or one on this forum, is that as 80% of mine and my wife's combined personal income is from a self employed Inc. company, and my 7 rental houses are titled through our Inc. Holdco account, is it still worth it for me to transfer all the properties from my Holdco to me personally where I would have to pay the tax on the capital gains sale of each. My thought was to redirect the 11K gross rent checks each month onto my personal mortgage 1st, using the Rent Dam Strategy, and effectively have my 600K mortgage paid off in 4 years, then I would have a 600K investment loan at P+1/2% (2.95% currently) Interest only, which is currently at around $1000/ mth Interest amount. So I would owe $1500 less each month, as the Principle portion would now be paid off, but then I could use the equity from a few of the income properties to pay off that loan tied to my personal mortgage, so in effect transfer the loan balance and risk from my personal property to my investment properties, where I would still have a 600K investment loan tax deduction, but no longer have my personal house on the line as collateral. I thought I had it all planned out, but I may be missing some key points, so I definitely have to get some good professional accounting advise. If anyone on this thread has experience with similar circumstances and wants to share I would appreciate it.