This post was originally written in 2007. It discusses the controversial tax strategy known as the Smith Manoeuvre. This method makes your mortgage interest tax-deductible by converting it into an investment loan. While interest rates were low for many years following this article, they’ve since risen sharply post-2022, changing the risk/reward dynamics of this strategy. The fundamentals of the Smith Manoeuvre remain the same, but its appeal (and risk profile) have evolved significantly, especially in today’s uncertain economic climate.
Updated insights at the end.
Our amigo over at the Canadian Capitalist gave an update on Friday. He mentioned that the Star has an article about the “infamous” Smith Manoeuvre. This article talks about Frasier Smith’s method for getting the interest on your mortgage tax-deductible. If you remember, I spoke of this “risky” trick a while back here.
This is a risky game to play. It assumes you can invest intelligently enough not to lose your stake. So be careful. 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.”
What Insiders Joke About (That Outsiders Don’t Know)
Among financial insiders, the Smith Manoeuvre is often jokingly referred to as:
- “Leverage Lite”
- “Mortgage Roulette”
- “Betting the House... Literally”
Why the sarcasm? You haven't read a lot of my stuff have you? It seems straightforward on paper. First, use a re-advanceable mortgage to borrow against your paid-down principal. Then, invest the borrowed funds. The mortgage interest becomes tax-deductible, and your investments (in theory) grow over time.
But insiders know the dirty secret: most DIY investors don’t follow through on the investing side. They often panic and sell low. This defeats the whole purpose. Plus, CRA rules require strict documentation — and not every bank product qualifies.
🔗 Learn more: Official Smith Manoeuvre site
🔗 Advisor caution: Moneysense.ca – Should you borrow to invest with the Smith Manoeuvre?
One seasoned financial planner once joked:
“The Smith Manoeuvre is the CrossFit of personal finance — you only hear about it from people doing it loudly and badly.”
What Do I think?
I would never try this. It is far too risky, and with lower interest rates, is this even worthwhile?
Other Smith Manoeuvre Articles
- From 2005 The SMITH Manoeuvre my initial view on this interesting investing concept.
- In 2007 we have The Smith Manoeuvre a follow on discussion
- Another perspective on it would be The Smith Manoeuvre (revisited )
Cool that this has the same name as me, but has anyone really used this system? Seems kind of risky to me.
As I said previously, it is not my cup of tea, but some folks swear it has worked for them.
Hi C8j,
Just stumbled upon this post. I definitely agree that this strategy involves some degree of risk (in the short-to-medium term at least). We get a lot of inquiries about Smith Manoeuvre compatible mortgages and always suggest people first talk to a competent financial advisor about ALL their options.
If you do plan to implement this strategy you better have a darn good investment approach (or an exceedingly good financial planner). Ask your planner to run some numbers though. Have him compare these three approaches:
1. Implementing the Smith Manoeuvre
2. Simply paying down your mortgage as fast as you can
3. Investing your free cash in your RRSP (and using any tax refunds to pay down your mortgage)
Make sure you understand your advisor’s assumptions and then pick the approach you feel has the best risk/reward for your circumstances.
Have a wonderful day,
Melanie 🙂
I am not interested in this strategy, this amount of risk I think is fool hardy, and asking for trouble. I think a solid debt reduction plan works just as well, if not better than this and carries much less risk.
C8j