How to make your mortgage tax deductible
How to Make Your Mortgage Tax-Deductible
Unlike our neighbours in the U.S. who can write-off mortgage interest on their taxes, we Canadians cannot. However, there is a technique that can make all or part of your mortgage interest expenses tax free. This technique is known as The Smith Manoeuvre .
The Smith Manoeuvre is a technique that converts regular debt into tax-deductible debt. In the process, it affords the opportunity to pay off one’s mortgage significantly faster, while allowing them to invest at the same time.
The Smith Manoeuvre works basically as follows:
- Find a readvanceable mortgage – one that let’s you re-borrow the amount you pay off each month into a line of credit (LOC).
- Sell your non-registered assets (like stocks held outside of an RRSP).
- Use the proceeds to make a lump sum payment on your mortgage.
- Make your mortgage payments like normal.
- As you pay off the principal, re-borrow that principal
into your line of credit (LOC).
- Invest this re-borrowed money at a higher rate of return than the interest you pay on the line of credit (stocks, bonds, mutual funds, real estate, etc.).
- Deduct your investment loan (LOC) interest and use the tax savings (refund) to pre-pay your mortgage.
- Repeat steps 3-7 until your mortgage is fully paid off.
Fraser Smith. who the Smith Manoeuvre is named after, states that the strategy can cut your mortgage payoff time in half, while helping you invest more, sooner.
The Smith Manoeuvre is indeed a powerful strategy, but it’s not for everyone. There are both investment and tax risks. Your returns could be insufficient, CRA could invalidate your application of the strategy, or you could wind up in a negative amortization scenario if your house value falls.
Therefore, always consult a licensed financial and tax advisor before considering it. Find an advisor that will work closely with your mortgage broker.Source: mymortgageshop.ca