How to Avoid Capital Gains Tax on Rental Property Canada

I present to you… THE SMITH MANEUVER


If you’re a Canadian homeowner, you may have heard of the Smith Maneuver. It’s a strategy that’s been gaining popularity in recent years as a way to make your mortgage tax-deductible and build wealth over the long term. In this post, we’ll explain how the Smith Maneuver works and why you might want to consider it.

What is the Smith Maneuver?

The Smith Maneuver is a financial strategy that allows Canadian homeowners to convert non-deductible mortgage interest into tax-deductible investment interest. The strategy is named after Fraser Smith, the financial planner who developed it in the 1980s.

Here’s how it works:

1. Borrow against the equity in your home: First, you’ll need to take out a home equity line of credit (HELOC) against the equity in your home. This is essentially a loan that’s secured by your home. The amount you can borrow depends on how much equity you have in your home.

2. Invest the borrowed money: Next, you’ll take the money you borrowed from your HELOC and invest it in income-producing assets like stocks, mutual funds, or exchange-traded funds (ETFs). The goal is to earn enough income from your investments to cover the interest on your HELOC.

3. Claim the interest as a tax deduction: Because the interest you pay on your HELOC is used to invest in income-producing assets, you can claim the interest as a tax deduction on your income tax return. This means you’ll pay less tax overall.

4. Use the investment income to pay down your mortgage: Finally, you’ll use the investment income you earn to pay down your mortgage faster. By doing this, you’ll reduce the amount of non-deductible mortgage interest you pay over time.

For detailed information, check out this book dedicated to the subject:



Why should Canadians consider the Smith Maneuver?

There are a few reasons why Canadians might want to consider the Smith Maneuver:

1. Tax savings: By converting non-deductible mortgage interest into tax-deductible investment interest, you can lower your overall tax bill. This can save you thousands of dollars over the long term.

2. Faster mortgage paydown: By using investment income to pay down your mortgage faster, you can potentially save tens of thousands of dollars in interest charges over the life of your mortgage.

3. Building wealth: By investing the borrowed money in income-producing assets, you have the potential to earn a higher return on your money than you would by simply paying down your mortgage. Over the long term, this can help you build wealth and achieve your financial goals faster.

4. Flexibility: The Smith Maneuver is a flexible strategy that can be customized to your individual needs and goals. You can choose how much to borrow against your home equity, which investments to make, and how quickly to pay down your mortgage.

Concluding remarks: 

Of course, as with any financial strategy, there are risks and potential downsides to consider. For example, investing always carries some level of risk, and you may not earn a high enough return to cover the interest on your HELOC. Additionally, borrowing against your home equity can be risky if your home value declines, as you could end up owing more than your home is worth.

Overall, the Smith Maneuver is a strategy that can make sense for certain Canadian homeowners who are comfortable with investing and understand the potential risks involved. If you’re interested in learning more, it’s a good idea to speak with a financial advisor who can help you determine whether the Smith Maneuver is right for you.