Is the Smith Manoeuvre right for you?

Open this photo in gallery:

Good morning. If you’re looking for another uniquely Canadian financial concept to add to your vocabulary, let me introduce you to the Smith Manoeuvre. Let’s get into it.

Debt-à-debt

The Smith Manoeuvre recently caught my attention because I’ve been reporting on people carrying mortgages into retirement.

It’s a Canadian investing strategy that aims to gradually convert your regular mortgage debt (whose interest generally isn’t tax deductible) into investment debt. The latter may be tax deductible under Canada’s tax rules.

Every month, you make a mortgage payment part of it goes toward interest and part to the amount you borrowed. As you pay down the mortgage, you build more equity in your home.

The Smith Manoeuvre adds one extra step. It requires a readvanceable mortgage (which is a traditional mortgage that’s paired with a home equity line of credit). As you pay down your mortgage principal, the amount you’re allowed to borrow through the home equity line of credit (HELOC) typically increases by the same amount. You then invest the borrowed money in a non-registered account.

In Canada, the interest you pay on your mortgage generally isn’t tax deductible. But if you borrow money to invest with the goal of earning income, the interest on that investment loan may be deductible, provided you meet the Canada Revenue Agency’s rules. The tax deduction can reduce your tax bill, and that’s what makes the strategy attractive to some investors.

One important rule is that the borrowed money has to be used to buy investments that are expected to generate income, such as dividend-paying stocks. You generally can’t borrow to invest in a TFSA or RRSP and claim the interest deduction because those accounts are already tax sheltered.

But buyer beware: The Smith Manoeuvre doesn’t magically eliminate your debt. You’re really just replacing one type of debt with another.

Jason Pereira, a certified financial planner and partner at Woodgate Financial in Toronto, said that’s the first thing people need to remember. “It’s debt when you borrow,” he said.

While the strategy can make mathematical sense in the right circumstances, he said it’s more complicated than explanations make it sound.

For one, you’ll need meticulous records to show the CRA exactly how the borrowed money was used if you plan to claim the interest deduction. It also requires a long investment horizon and the ability to stomach market swings while continuing to carry debt.

The strategy tends to make the most sense for Canadians in higher tax brackets, since the value of the tax deduction increases as your marginal tax rate rises, he said.

“This is not something anyone should be doing for a short period of time,” Mr. Pereira said. “There’s too much volatility in the market.”

The Calculator

$1,523

Average asking price of a two-bedroom rental in Regina. That’s less than half the price in Vancouver, where the average asking rent for a similar space is $3,336.

More: The Globe released its second edition of Canada’s 100 best cities for renters, based on affordability, availability, livability and stability.

The Retirement Receipt

Open this photo in gallery:

Can Randy, 61, afford to help his niece and nephew?

The numbers: Randy, 61, has a net worth of $5.6-million, including a $2.8-million non-registered portfolio, about $1.5-million in registered savings and a $1-million home. He has Parkinson’s disease, is on long-term disability, and receives about $9,980 a month in benefits.

The situation: With no children of his own, Randy wants to know if he can afford to help his niece and nephew pay for postsecondary education (and potentially a future home), while still spending $125,000 a year in retirement. He also wonders whether he should convert his RRSP to a RRIF or buy an annuity.

Key take-aways from a financial planner: Randy can comfortably gift about $200,000 without materially affecting his retirement plan. Rather than converting his RRSP to a RRIF now, the planner recommends a combination of RRSP withdrawals and realizing capital gains during his lower-income years. Given his Parkinson’s diagnosis, an annuity is likely not the best fit, and the planner suggests considering a donor-advised fund as part of his estate plan.

Best of the Rest

🏠 Living with parents has become the norm for many young Canadians. In 2021, 57 per cent of Canadians aged 20 to 24 lived with their parents, according to Statistics Canada. Many families are navigating how to share household costs, including potentially awkward conversations on rent payments.

✈️ Before your next trip, check Ottawa’s travel advisory. Just 28 per cent of Canadians knew that changes to a destination’s risk level can affect the validity of their travel insurance, according to a survey commissioned by Global Affairs Canada.

🎨 For children receiving radiation treatment, a custom mask can make a scary experience a little less frightening. Edmonton volunteer Marilyn Kimura has spent the past seven years transforming rigid radiation masks into colourful works of art inspired by each child’s favourite characters and hobbies.

👴 Canada’s workplace pension divide is widening. While overall pension plan membership grew by 132,000 in 2024, the increase came entirely from the public sector as private employers shed nearly 26,000 plan members, according to Statistics Canada.

Try This

🧾 August is a good time to review your tax instalments. If your income has dropped this year or you’ll be claiming large deductions, financial planner Tim Cestnick says you may be able to lower your remaining payments because they’re based on this year’s expected tax bill, not necessarily last year’s income.