Canadian Personal Finance Blog

Archive for the ‘Smith Manoeuvre’ Category

For two days week we had been talking about where Risk fits in our day to day financial decision points, and I have been adding in examples of Risky Business in my life, today (finally) we wrap this whole thing up.

Previous Posts: Risks in Life I and Risks in Life II

When to Sell?

Yup this one is the big risky one that, I can assure you, I have no idea of when the best time to sell a security is, blind luck has been my best methodology. Most of my “great” financial decisions have been forced upon me (i.e. I needed to sell to get the money in question), so deciding that a security should be sold is something I am not very good at prognosticating.

I have read many books who state unequivocally that if your investment decisions are made emotionally, you will lose in the long run. Going with your “gut” is a dangerous game to play in poker and also in investing, the danger is that if your “gut” is right once, you may rely on it far too much in the future.

Take your profits is the best methodology I have heard (e.g. re-balance your portfolio) in the world of investing. If your portfolio has one area that is doing great, maybe it is time to take your profits and lock them in, instead of “letting it ride”? Maybe you are very risk averse like me (i.e. burned so many times, I have very little nerve left), if that is the case taking your profits, when you see them might be your best decision point.

Am I espousing a specific investment methodology? No, my regular readers know me better than that, you need to find a methodology that fits your needs and I am NOT in any way shape or form advising you on what to buy, what to sell and when to do either, I am simply pointing out in my case, “Take the Money” has worked. I’ll let the REAL investment blogs talk about that kind of stuff.

The risks in this scenario is obvious, take your money now, or will you have more later?

RRSP or Mortgage?

Is this a risk area? That’s a good question, I don’t think it is a high risk area, unless you are doing something whacky like the Smith Manoeuvre or something like that, if you do either of these (pay down mortgage or build up RRSP), you are doing OK.

I have seen a few different models done about the optimal model for paying down debt/mortgage and RRSP contributions, but I am very debt averse right now, and also am in a relatively stable pension situation, so my decision has been to attack debt as much as possible (with a little success).

The risk again comes down to present money value vs. possible future gains. Get a plan for how you want to deal with it and then stick to it.

So What About Risk?

As we have seen the past few days, risk comes into most major (and a lot of minor) financial decisions but you need to weigh risk against the benefits and make your decision in a calm and rational manner.

Analyze the risks, weigh them in your decision, and you should do just fine.

Well our amigo over at the Canadian Capitalist mentioned in his Friday update that the Star has an article about the “infamous” Smith Manoeuvre which talks about Frasier Smith’s method for getting the interest on your Mortgage tax deductible. If you remember I talked about this “risky” trick a while back here.

This is a risky game to play, since it assumes you can invest intelligently enough to not lose your stake, so be careful, and I am NOT recommending this strategy either.

A good quote from the Star Article articulates some valid concerns.

David Trahair, a Toronto chartered accountant, wrote a book urging Canadians not to invest in RRSPs before paying off mortgages and other non-deductible debt. He disapproves of swapping one loan for another.

“I recommend the total opposite, paying off your principal residence and not borrowing against it,” he says.

“It’s a high-risk strategy because you’re betting the farm that some investment adviser can do better than you can. You have a guaranteed return from getting rid of the mortgage.”

A while back I put up a post about the Smith Manoeuvre which seems to have caused a lot of hits for my site (I have figured out how to do that, so it is kind of cool to see what folks really think is interesting on my site). I do not condone this “tax twist” for Canada (those in the states I am sure are going, what do you mean you can’t write off your mortgage interest payments), but I was quite interested to see I get a lot of Google hits from this one little post. I have included the text for those who are too lazy to follow my link on top as well.

Folks,

Now here is a wild and scary way to try to hood-wink our tax collectors. Go to this site, but for the sake of everyone, don’t do this! Take the book out of your library and read what it entails, make your decision after consulting with folks who know what is going on (not just some nut bags BLOG!).

It sort of starts out oddly, assuming you have $20000 hanging around, but ok, I’ll bite, I have $20,000 hanging around (don’t tell my kids, please). Instead of taking that money and PLUNKING it down on my mortgage (or Line Of Credit in my case), BORROW $20,000 dollars to purchase some Equities (presumably stock), THIS you can write off the INTEREST on the loan, because you are INVESTING. Take the $20,000 you had and plunk it down on your mortgage, now suddenly $20,000 of your mortgage’s interest is now TAX DEDUCTIBLE! Wonderful eh? Well, what happens if you choose the wrong EQUITY (the way I am apt to do)? Evidently the government are looking into this as well, where if you take a loan out to buy EQUITIES they must make MONEY to be able to deduct the interest.

Anyhow, very scary stuff by me. Just plunk your money down, and save the $20000 up front! Just my opinion –C8j

Interesting, but again, please don’t run out and do this thinking I am saying it is a good idea, it is VERY risky!!!! –C8j