Smith Manoeuvre: Tax-Deductible Mortgage

Wednesday Oct 04th, 2017


The Smith Manoeuvre is essentially just borrowing the available equity from your home with each mortgage payment. This follows all the tax rules.  I should also mention that this isn’t for everyone.

Five-Step Process
Step 1 You need a re-advanceable mortgage, like a home equity line of credit (HELOC).  They are commonly called STEP (Scotiabank), All-in-One (National Bank), or Homeline (RBC).

Step 2 Access your home equity and invest in an income-producing asset (e.g. rental property, preferred dividend paying shares, or ETFs).  Remember: your HELOC increases with every regular mortgage payment applied.  More money in = more money can be taken out.

Step 3 The loan interest you pay is tax-deductible.  When you complete your tax return, deduct the interest paid from your HELOC.

Step 4 Apply your tax return and investment income (rent, dividends, etc.) against your non-deductible mortgage.  You can then invest the new HELOC money available.

Step 5 Rinse.  Recycle.  Repeat.

The Smith Manoeuver and Real Estate
If you ever wondered how some real estate investors achieve multi-million dollar portfolios, this is certainly one way to reach that goal.

Some people use their HELOC on improvements to their property.  The idea is to potentially increase property value when the time comes to sell.  Idea: don’t sell.  Investing in your first rental property is all it takes to get started to building your real estate empire.

After using your HELOC to buy your first rental property, you begin receiving a rental income.  The income should allow you to cash flow.  When you do your taxes, you can deduct the interest paid on your loan.

Your tax refund can be used towards your primary mortgage (the one you took the HELOC from).  Doing this, you end up paying a similar amount of interest, but now that interest is tax deductible.



  • You become an investor without any money used out-of-pocket.
  • The investments will not be cannibalized by the taxes you pay, as in the case of RRSP’s and pension.
  • Your net worth increases assuming you are able to maintain the same annualized return in your investments as your borrowing rate.
  • Your tax refunds increase year over year, as the interest on your investment loan is tax-deductible.
  • It’s completely legal

As I mentioned at the beginning of this article, this isn’t for everyone and risks are inevitably involved. There is a misconception of how easy this is to do.  This method takes time and patience.

A tolerance for debt is also required if your plan is to apply this method to real estate investments.  However, like as you may already be aware, real estate can yield a greater ROI that outperforms other investment types.

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