the smith manoeuvre

continuing on my financial musings, the smith manoeuvre is simply a financial manoeuvre to make your mortgage tax deductible in canada. this is not a problem in the US where you can already deduct the interest on a mortgage. in canada, this is not possible. a portion of the interest can be deducted if you work from home or are self employed. most of us end up paying our house or condo 2-3 times its actual worth. the way to do this is to use the equity built up in your home to invest in the markets, in your own business or in real estate. this loan toward an investment is tax deductible in canada. for any money you pay off on your mortgage, your reborrow this money for investment purposes and end up with what we call only good debt. good debt is debt on which the interest is tax deductible. bad debt is where the interest is not.

the smith manoeuvre is used to convert bad debt into good debt. for most families, the smith manoeuvre can substantially reduce the interest payments. and using an all in one product like manulife one, you can save even further. an all in one product combines a credit line, a mortgage, a savings account, a chequing account and a credit. the main philosophy is to save as much as possible the daily compound interest that you pay on your mortgage.

though i would not suggest to invest the whole equity directly in the stock market, i do think that as long as the interest gained on the equity is higher than the interest on the loan (minus the deductible interest since this interest is deductible and you will get a refound from the CRA in proportion to your marginal tax rate) you are in good shape.

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Author: range

I'm mathematician/IT strategist/blogger from Canada living in Taipei.

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