Tax Tip Thursday

The Smith Manoeuvre

We survived the 1st tax deadline of 2023!

Despite some Major personnel problems, we made it through!  My apologies to people that we took a lot longer to finish their taxes. Still really busy and our next tax deadline is June 15.

Today, I want to talk about something called The Smith Manoeuvre. If you have non-registered investments (things that are not RRSPs, TFSAs, etc.), you are going to want to hear this!

The Concept

The concept is quite straightforward.

If you are paying interest on a personal mortgage or loan that is not tax deductible and you have investments outside of an RRSP or TFSA, you may be able to convert some of that non-deductible interest to tax deductible interest. If you borrowed money on your home to buy a rental property, that could be a deduction that you are missing. This means that you will get a tax deduction for a payment that you are already making, just by restructuring your debt. Therefore, you will pay less tax!

A Simple Example

Let’s say these two things apply to you:

  1. You own non registered investments.
  2. You also own your own house, worth $800k, that does have a mortgage on it.

Let’s also say your mortgage on your house is $300k and your investments are worth $300k. In basic terms, here are the steps you would take. Ideally you are working with a line of credit!

  1. Cash in your investments
  2. Pay off $300k of your mortgage
  3. Borrow the $300k back
  4. Invest the $300k
  5. The interest on the $300k is now tax deductible against any income from the investments!

With a 5% interest rate, that would provide you with roughly a $15k interest deduction (depending on how the debt is structured), lowering your taxes by $5k- $8k depending on your tax bracket!

This could also apply to you if you have a rental property, but you have to be careful on how the money is moved around.

If you borrowed money from your house to purchase the rental property, that is tax deductible and most people do not know that.

Get Professional Help For This!

You definitely need to seek out professional advice before you endeavour to orchestrate these transactions.  If they are not done correctly, they could end up costing you a lot of money, without the tax benefit!

Documentation is key to this transaction. The best time to set this up is BEFORE you make the investments or before you buy the rental property.

There are many circumstances where this situation could apply. The opportunity lies in the fact that you have an investment that does not have debt associated with it (or less debt than your principal residence).

There is risk associated with the Smith Manoeuvre and you need to carefully evaluate all aspects of the transaction before taking action.

Interested?

We will be happy to help you decide whether this applies to you and, if it does, help you set it all up so you can pull it off. Book your appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.