Tool - Refinancing vs Maneuver de Smith

Tool: Refinancing vs Smith Maneuver 

A simple tool to understand the Smith Maneuver. The Smith Maneuver is the process to create a loan against your house (ie: a HELOC) and invest it in the market in a non-registered account. While your mortgage is not tax deductible, the HELOC is tax deductible. Hopefully, the market return at least the interest on your loan.  

To access the file, clic above for a link to an Excel file without macro. 

See at the end for other information to navigate the file.  

Analysis :

Often referred to your greatest asset, the greatest purchase of your life, is there a way to use it? Yes, leveraging your home is great way to get some truly passive income. You can refinance up to 80% of your home market value less your mortgage. At a high level by refinancinig or using the Smith Maneuver will provide the difference your investment return and your mortgage rate/HELOC interest rate. Say you earn 7% from the market and pay a mortgage at 4%. Over $100k that is $3k return return per year! If you refinance it in your TFSA, RRSP or RESP, that's it.  

The smith method come in to reduce the fiscal burden if you invest it in a non-registered account. Without it, return in a non-registered account is taxed at 50% of your Marginal tax rate (Dividend are taxed slightly differently).  For example say your marginal tax rate is 50%, then this would reduce your gain by $7,000*50%*50% = $1,750 in tax. 

The Smith method have many wrinkles and a few pitfall. You first get an HELOC on your house. Usually the rates are 1% higher than your mortgage (say 5% in our example). Then you need to transfer from the HELOC to an empty  non-registered account (NREG). Then you invest your NREG. Then when come tax time, you report your "Interest Expense" (the HELOC you have repaid)  as "Investment loan" under Schedule 4 Part IV Line 221. You will then get a tax deduction of that amount. Using the above example that is a tax deduction of $5,000 which provide $2,500 less tax. 

  

Conclusion: 

In most situation, refinancing your mortgage in a TFSA, RRSP or an RESP is better. If you are already maximizing everything else the Smith Maneuver is better than just refinancing it in your Non-Registered Account.  

Warning if you refinance in RRSP: You may want to report some of the RRSP tax credit if you refinance a large amount in your RRSP. If the tax credit push you in a low tax bracket, you will lose some credit instead of delaying into future year.   

Warning if you use Smith method: In Quebec you may only declare your HELOC interest up to your investment gain.

Warning if you use Smith method: You cannot use a TFSA, RRSP or RESP for this method. 

Warning if you use Smith method: You may not use your HELOC or your NREG account for anything else than to pay the HELOC or invest. If you did use any of it for other purpose you will not be able to fully declare the HELOC interest for tax deduction. Keep a lot of documentation of all transaction. 

How to use the tool:

• Save the file on your computer.
• Go under the tab EN and modify the input cell in green. 

Tabs:

• EN : Main tab to explore. 
• Rules : A french summary of the Smith rules
• Hypothese: Some returns statistic
• Impot ref: Tax reference

Lexicon:

HELOC: Home Equity Line Of Credit is a loan against your home. 

RRSP: Registered Retirement Saving Plan is a tax deductible account that grows tax free. However, it is tax when withdrawn.

TFSA: Tax Free Saving Account is not tax deductible. It grows tax free and is not tax when withdrawn.