Are you looking to supercharge your financial future? In this episode, we dive deep into The Smith Manoeuvre, an ingenious method that can help you convert your non-deductible mortgage into a powerhouse of wealth. Joining us is our esteemed guest, Robinson Smith, the founder of Smith Consulting Group. Robinson expounds how The Smith Manoeuvre empowers Canadians to leverage debt, minimize non-deductible debt, and maximize tax-deductible debt, ultimately propelling them towards financial freedom. Don’t miss out on this chance to gain financial freedom and secure your future. Tune in now!
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About Robinson Smith
Robinson C. Smith, with degrees in Chinese Studies, Economics, and an MBA, is the founder of Smith Consulting Group. He created The Smith Manoeuvre Certified Professional Accreditation Program and authored “Master Your Mortgage for Financial Freedom.” Having worked in China and with notable figures, he’s dedicated to helping Canadians make their mortgages tax-deductible.
The Smith Manoeuvre – Turn One Of Your Biggest Liabilities Into One Of Your Biggest Assets With Robinson Smith
We have a very interesting show because we are based out of Canada. Soon to be based out of Florida, but we partner with Canadian LPs. That’s our terms for passive investors to buy US multifamily, one of the best-performing asset classes. We also partnered with US investors as well. We have Canadian and US LPs. One of the reasons we invest in the US is because of the tax advantages that exist in us like the 1031 exchange. You have depreciation cost seg, bonus depreciation, and many other benefits. There is also professional real estate status, which gives you another set of tax advantages. The US is made to be a tax-advantaged country.
Unfortunately, the Tax Code here in Canada doesn’t recognize the same Tax Codes that are across the borders in the US.
One of our Canadian LPs is trying to utilize those tax advantages that exist. In that case, it doesn’t. Canada, we are one of the highest taxed countries in the world, particularly for high-income earners. If there are any type of tax gambits or any ways to reduce taxes compliantly, everybody is for it. Now we have the man to talk about that.
His father and he have written books on how to create this tax gambit, as I call it, or as they call it a tax maneuver. The Smith Manoeuvre, as is known. I have heard about him for a long time. I have connected with him. I had some great conversations with Robinson. We have him on the show. We are going to do it. In the research for this show, I also watched a bunch of talks that he had in the past, and I don’t think the interviewer pressed him for a lot of points. We are going to press him on the show. We are going to be pressing him to fully understand it.
By the time this episode is done, you are going to fully understand what The Smith Manoeuvre is.
Hopefully. Maybe we can tell our audience a little bit about Robinson Smith and we can go from there. His credentials were so long that we had to reduce his bio.
He’s an interesting man and we are going to talk a little bit about his background on the show as well. Here’s a little bit about his bio. Robinson Smith operates Smith Consulting Group. Robinson has a double major in Chinese Studies and Economics from the University of Victoria and an MBA in International Business from Simon Fraser University.
Robinson has also established The Smith Manoeuvre Certified Professional Accreditation Program, whereby financial professionals from across Canada earned accreditation as Smith Manoeuvre-certified professionals in order to best serve Canadian homeowners. He’s also the author of the Master Your Mortgage for Financial Freedom. There’s going to be a lot to break down on the show. We believe this interview with Robinson will bring great value to Canadians looking to learn how to make their mortgage interest tax deductible. Welcome, Robinson. Thank you so much for being with us.
Thank you very much. It’s a pleasure. I do enjoy talking about this stuff, so I appreciate the invite.
Before we dive into things, why don’t quickly tell us about your background and then your start in real estate, please?
Whatever we didn’t include any great stories and any additions you want to give to us, please.
It was a pretty normal upbringing out on the West Coast here, but where things started to get interesting for me was when I was trying to decide what I was going to take in my first year of university. I knew I wanted to go into business, but I had one elective left to pick. I asked my dad, “I got one left. What do you think I should take?”
He says, “What are you interested in?” “I’m interested in languages. I think I might take Japanese.” He says, “Why are you going to take Japanese?” I said, “It’s because everybody is studying Japanese.” He said, “Why don’t you study Chinese then? No one is studying Chinese.” I enjoyed studying a language. I took a year off. I went and studied in Beijing for 4 months back in 1990, and subsequently got a scholarship to Shanghai.
I did a lot of studying in China and I worked in Beijing for 6 to 7 years. It opened my eyes. That MBA in international business helped me get some interesting positions in Beijing. International banking, I worked at the Canadian Embassy for a while. It was quite a bit of a diverse background there but moved back to Canada in 2006 because, in a place like Beijing, you can only live there for so long without pining for friends and family in the clean air back home.
At this time when you made the decision to go overseas, had your father already written his book about The Smith Manoeuvre at that stage or it hadn’t been done yet?
No. On my first trip to China, I was 18 or 19 years old. Being that age, I wasn’t interested in what my dad was doing professionally so I didn’t have any idea what he was up to. He wrote his book The Smith Manoeuvre which came out in 2002.
Did you guys amalgamate at some point? Did you guys partner up at some point?
I left China in 2006 after having a conversation with my dad. It was time for me to leave and he said, “Your mom misses you, so it’s time to come back to Canada.” That’s what I did. He retired from financial planning in 2000 so that he could concentrate on writing his book, which came out in 2002. He came out of retirement in 2005 and he suggested I join him in 2006. That’s what I did.
I trained under dad. I became an investment advisor. We were both investment advisors. We shared office space here in Victoria but had our separate practices. That’s when I started learning about what dad had been up to for all of these years professionally. That’s when I became an investment advisor for a dozen years working with Dad until he passed away in 2011.
He’s an investment advisor. He figures out that this tax maneuver or tax gambit can be utilized. Has he now utilized it before writing the book for his clients?
He first became a financial planner in the mid-’80s in Vancouver. At that point, he read the tax act, and his primary interest when he became a financial planner was the fact that Americans could deduct a good portion of their mortgage interest from their income and we Canadians could not. Thinking that not terribly fair, he said about developing what he subsequently called The Smith Manoeuvre, whereby a Canadian homeowner does have the ability to convert their mortgage from non-deductible interest to tax-deductible interest.
Once that process begins, we are better off than our American cousins because, here in Canada, based on the way the Tax Code is written, the way everybody is taking care of their mortgage paying it off, we can’t deduct the interest, but we get capital gains exemption when we sell the principal residence. In the States, they get to write off a good portion of their interest, but they do not get a capital gains exemption.
They do. It’s just capped off at a certain number.
There are these two differences in the Tax Codes, but now once we Canadian homeowners are able to make our mortgage tax deductible, we get that benefit plus the capital gains exemption.
Is it fair to say he was utilizing this tax structure prior to writing the book?
Back in the mid-’80s, he started putting his private clients into it for about fifteen years before he retired to write the book.
I was going to ask this question later on in the show, but it’s important to ask it now. This idea of creating a proprietary process to train others to also utilize The Smith Manoeuvre was something that you initiated. Was his reasoning for writing the book more to add value to his peers and others in the space and Canadians? When did having The Smith Manoeuvre specialized advisors come into play? Was that his plan from early on? Talk to us about that idea.
When dad came up with the strategy, he put his private clients into it. That was his business until he retired in 2000 to write his book. He came out with that book. He was retired from advising. What he and I wanted is for every Canadian homeowner to at least have the opportunity to say yes to the question, “Do you want to make your mortgage tax deductible?”
He wanted the home-owning public to be very aware of the strategy. At least know about it so they could look into it. At that time, he wanted to make the professionals who could help these Canadians implement the strategy widely available. He came out with his book. He sold books by the cases to financial professionals and mortgage brokers. He sold lots of books to Canadian homeowners.
When he came out of retirement in 2005, I joined him in 2006. We were both advisors. That’s when we started back in the industry hearing a lot of cases about Canadians. I was speaking with an investment advisor in Ontario, Saskatchewan, Nova Scotia, Calgary, or whatever it is. They were talking about The Smith Manoeuvre, and here’s what they said, and we’d be like, “Hold on a second. That’s not The Smith Manoeuvre.” There were a lot of people getting put into The Smith Manoeuvre. They thought, but it wasn’t the Smith Manoeuvre. It was either a little bit wrong or a lot wrong. It’s a case of it’s not a hugely difficult concept, but there are moving parts to it, just like anything.
Why don’t we do that? Why don’t we go ahead and ask the next question here?
Could you give us a quick crash course on the Canadian mortgage interest tax and how The Smith Manoeuvre could be used to reduce taxes?
The tax act says when Canadians borrow to consume, they cannot deduct the interest from their income. If I borrow to buy a car, buy my wardrobe, and go on vacation, my mortgage statement, if I’m borrowing from the home or a personal line of credit, wherever it comes from, that statement says, “I’m paying 6%,” then that’s what I’m paying. It’s not tax deductible.
That’s expensive debt plus I’m borrowing to consume. I’m borrowing to buy an item that is going to depreciate or disappear completely in value over time. It’s expensive. The “asset” that I purchased with this disappears. The tax act also says if Canadians borrow with a reasonable expectation of generating income, then we can deduct the interest. If I borrow from my home personal line of credit, wherever it is, if I borrow to buy an investment asset, stocks, bonds, mutual funds, REITs, MIX, ETFs, investment property, and invest in my business or somebody else’s business, then I can expect to receive income from that investment. I can deduct the interest.
I look at my statement, and it says that I’m paying 6% for the borrowing that I bought this investment with. For example, a 50% marginal tax rate, then that only costs me 3% in reality because it’s tax-deductible. It’s a very inexpensive debt. Plus, I’m only getting the benefit of these tax deductions, which reduces the actual cost of that debt because I’m buying an investment that I can expect to appreciate in value over time to improve my wealth.
When I borrow to consume, we call that wealth destruction. It’s expensive and the asset disappears. When I borrow to invest, that’s wealth creation because it’s relatively cheap debt plus the asset is going to grow over time. When it comes to the Smith Manoeuvre, when dad read the tax act, we put a bunch of little pieces of different puzzles and put them together to develop this strategy.
The first step in all of this is to make sure I have the appropriate financing. Canadians will scrape together a down payment. They will go to the bank, they will get a mortgage, and they will buy their house. A lot of times, the type of mortgage that these Canadians have on their property is the wrong type. It doesn’t allow us to access the equity as fast as we are creating it in order to pull funds out to invest.
When I make my mortgage payment with this traditional type of mortgage, a lot of it goes to interest. It’s not tax-deductible, and a little bit reduces the principle, but I can’t access that principle. Let’s say my mortgage payment pays down my mortgage by $1,000 that balance. I can’t access that $1,000 of equity that I created and I can’t do anything with it.
If I have the right type of mortgage, and this is where Smith Manoeuvre certified professional mortgage brokers come into play, they look at my situation and say, “Based on what you got going on, here’s the right type of advanceable mortgage for you.” Now, I have the ability to access the equity as fast as I created because the portion of my mortgage payment, which reduces the principal balance on that mortgage is made available again on the line of credit. The line of credit limit will increase dollar for dollar, so I can pull that $1,000 out and I can get it invested. That is a very important point is to get it invested.
A lot of Canadians will have a re-advanceable mortgage. They don’t know necessarily. They do. They haven’t been taught how to use it. At the end of the month, they get their mortgage statement and say, “I have a line of credit. It says I have $1,000 available.” That’s probably the amount of a monthly payment on a BMW 5 series. Fantastic. They borrow to consume every month. They make a car payment. They go on vacation and buy wardrobes.
All they are doing, in this case, is paying down expensive non-deductible mortgage debt with their principal and interest payment each month and borrowing back interest-only non-deductible debt to buy assets that depreciate and disappear in value. They are maintaining their total debt. It’s all non-deductible. It will be non-deductible forever, and the assets they are buying disappear.
When I borrow to invest through The Smith Manoeuvre in something that’s going to generate income, I can deduct the interest. It’s very inexpensive. That reduces my tax bill. I’m getting a tax refund at the end of the year that otherwise I wouldn’t have received. I take this new money that I got from the CRA. I prepay my mortgage with this new cash. We know that if I prepay my mortgage, 100% of that prepayment goes to the principal. Down it goes by that tax refund amount. Increase that line of credit limit by the same amount, and once a year, I get to pull that tax refund out to invest as well.
There’s a lot here. We are giving a lot of information here. Let’s first break it out. One of our first questions was this. It seems like there are milestones and there’s a timeline involved here. The first thing is this, is that the best-case scenario for The Smith Manoeuvre is someone who’s applying for a mortgage now. Rather than going the conventional route, they come and see one of the experts that you have and they put them in a mortgage, which as it builds equity, that equity turns into a line of credit that they could access to then invest with, correct?
That’s entirely correct. Either a home buyer someone who’s buying a home or someone interested in the strategy they want to implement, can refi into one.
Let’s talk about that. I own $1 million home. I have $500,000 in equity and a $500,000 mortgage. I come and see you or one of your team members. It’s time for my refi so I’m not going to be paying any penalties. I refi more of my mortgage into the re-advanceable mortgage. We have it here. We go and do it re-advanceable mortgage. Now, the $500,000 in equity can be accessed as a line of credit, but only the interest payment on that line of credit that I have borrowed to invest in an income-producing asset is a write-off. Not the mortgage I’m paying on the $500,000 mortgage, correct?
Just to be clear, you have a $1 million house and a $500,000 mortgage balance. Yes, you have $500,000 of equity as well in that home, but you can’t access all of it. To get a little bit technical, so nobody has any confusion going forward, I need at least 20% equity in my home to get the right type of mortgage re-advanceable. In this scenario, you do. Now you have a $500,000 mortgage balance, but the amount of equity you can access considering the 2012 loss fee rules, HELOC rules 65% is $150,000.
It’s only $150,000. Fair enough. Let’s put that $150,000 aside. The first question we want to answer is the $500,000 mortgage, the interest being paid on that in this new mortgage is still not deductible.
Correct. The original use of those funds, regardless of who your lender is, wants to buy that house.
We understand that. Let’s go to the next step. Now you have some equity. You have converted your mortgage. If your mortgage wasn’t already a re-advanceable mortgage, you have now seen one of the Smith-certified people and you have turned it into a re-advanceable mortgage. Right here it says, “Obtain an advanceable mortgage. The type of mortgage allows you to borrow against the equity of your home as you paid on the mortgage principle.” Great. I have option two. As my equity builds, I have an option to access it. If I already have a big portion of equity, I can borrow against it to make investments.
Let’s go ahead and talk about investments as far as what those investments are. We did research on this. The Tax Code says, “Revenue Canada is vague. It’s purposefully vague, but it’s pretty straightforward here on what someone could invest. It says you have to make an investment in an income-producing investment, so stocks and what have you. Let’s break that down. It says over here, “Mutual funds, ETFs, the stock market, and so on and so forth are income-producing assets.” That’s very broad. Is there a list that limits you only to that list or is there any income-producing asset?
Not having ever been an accountant and not being an accountant now, this is where the accountant would come in. Someone has an idea of what they want to invest in. They look at this and say yes or no, as far as qualifying for deductible interest. There has to be a reasonable expectation of income. I went through a list, of stocks, bonds, mutual funds, REITs, and CTFs, all that stuff. There has to be a reasonable expectation of income. There doesn’t have to be income.
For example, I can like an equity mutual fund. It’s never paid out dividends. It appears to be strictly a capital gain play. However, if this fund has not indicated anywhere that no distributions, no dividends, no income will ever be paid out, the potential that in the future it may. It may declare an extraordinary dividend. I can still borrow to invest in that equity fund and claim the deductions because there’s a possibility that it could send income out in the future.
Dividend funds are fine. I’m receiving dividends whether I take them in cash or they are being reinvested automatically. Then you move into other types of investments where one would think you could deduct the interest, but you can’t and a lot of people are gold bugs. They love gold and they say, “I’m going to implement the strategy, and each month, or with available equity, I’m going to pull that out and I’m going to buy gold bullion.”
You have to be careful. If I buy a gold bar, that’s just a lump of metal that either sits on my desk so that everyone can see it when they walk into my office, or it sits in my vault. I’m not generating any income from that. That’s pure capital gameplay. The CRA says, “Where is the income coming from that?” In some cases, it’s raw land. I buy raw land. I’m going to buy it, hold it, and sell it in a few years for profit. Where’s the income? It’s not there. Unless I’m buying it with the intention of developing it and that type of thing. There’s no list that I’m aware of that says yes and no, because things are vague. These are where tax professionals come in and say, “If we were ever asked by this by the CRA, here’s how we could defend it.”
I would say it’s pretty black and white in what are income-producing investments and non-income-producing investments. You made great examples of gold and bullion. This sentence is very important because it says that this means that investments that are primarily speculative or that have a low likelihood of generating income may not qualify for the deduction.
We understand that. The reason we are so keen on getting answers from you is that we have a dog in the race here. We create syndications. We also are launching a real estate fund, which is income income-producing type of investment. They have a high likelihood of producing income and we want to know if our investors can use the Smith Manoeuvre and invest in our syndications. Syndication was project-specific funds. We create all the entities for one deal. They’d be investing in one deal.
A fund is a basket of deals and they can invest. They have longer maturity, but they are both income-producing because we buy income-producing assets. That’s part of our offering documents and everything else. That’s where we are going with this question as far as income-producing or non-income-producing.
To that, I’m not familiar with the type of investment products you guys create. I have a vague idea, but I haven’t dug into it. Also, I don’t have the professional qualification to say yes or no, but there’s a high likelihood that there would be no problem here because if there is a reasonable expectation of the possibility of generating income, it should be okay.
What I would suggest is going to your favorite tax accountant or tax lawyer and saying, “Here are our investment products. If as a Canadian I borrowed to invest in one of our investment opportunities with the CRA if they ever have any issue with me deducting the interest,” and then you are going to get a professional opinion. Yes, no, or quite likely not a problem.
I found over the years that you would think that accounting and taxation is a cut-and-dry industry. You can talk to 6 different accountants about 1 item, and you are going to have a few different answers because it’s not so cut and dry and there are ways to defend if ever asked, so it’s quite interesting. I never give any opinion specifically on any specific types of investment products, but you will find if you guys look into it that you get a tax opinion, it should be okay. You are going to recommend to anybody considering your investment to talk to their professional, but I don’t see an issue from what I know. Somewhat limited. I don’t see a problem with your description. It should be okay.You would think that accounting and taxation is a cut-and-dry industry. But you can talk to six different accountants about one item and you're going to have a few different answers. Click To Tweet
To add on to that, as far as opinions when it comes to CPAs and tax strategists, that’s coming from them. You have multiple opinions. Coming also from the CRA, you have multiple opinions depending on the officer that you end up dealing with. Some get convinced about certain things. Some don’t and some have different views.
That’s cross country, across Canada and you can avoid it. You get you get one CRA agent who thinks about something this way and another will think about it that way. As long as you have a professional opinion and they have said, “If asked, here’s how we can defend. Maybe we win or maybe we lose, but here’s the defense.” I understand previous tax law and case law, and all that type of things.
We learned our lesson with that too, setting up our tax structure for Canadians to invest across borders, and we talked to twenty different accountants. They all said something different. We could relate to that for sure. That’s good for everybody reading this. Just go to your tax accountant.
Do you have a list of tax accountants who have expertise in the Smith Manoeuvre or have had dealings with CRA?
We touched on The Smith Manoeuvre Certified Professional Accreditation Network. For the past few years, we have been training a number of different professionals. Accountants, investment advisors, mortgage brokers, and all the different types of professionals. The Canadians should surround themselves with others in any event, whether they are doing the strategy or not, but now we have from Victoria to Halifax. We have Smith Manoeuvre certified professionals. Canadians who are looking to be connected with them can write on the website saying, “Here’s the type of professional I’m looking for. Here’s where I am.”
Let’s go over the actual mechanics of when your team gets their hand on a file. There’s a client who is trying to buy a home and is aware of The Smith Manoeuvre. He comes and sees one of your team members or the certified people who can do The Smith Manoeuvre. The person gets a re-advanceable mortgage. Now, their equity keeps building or they can access extra equity. If they got a mortgage, there’s no equity to access. It’s just as it is.
It depends on how much the down payment is.
It depends on how much down payment they decide to put up. Is it part of the strategy to put up more of a down payment to borrow against to then write that piece off?
Everybody is different. Someone will write to my website saying, “I’m looking for a Smith Manoeuvre certified professional mortgage broker in Vancouver.” We set them up. This professional will discuss this with the client. “How much do you have for a down payment? How much could you get for a down payment? Do you have any investment properties? What’s your investment?” All that qualification stuff, whether it’s a purchase or a refi.
When you ask do you want more of a down payment or enough to get into the product, the whole goal for a Canadian homeowner, firstly, should be to get rid of that expensive non-deductible mortgage debt sooner. The bigger a down payment I put, the less non-deductible expensive debt I have to incur. The more my down payment is, the more immediately available access I have to credit that I can pull to invest.
You are paying interest on your own money though. Let’s do the example of a $1 million house. You are sitting on a $500,000. The same example we used. You have an option of either putting in $350,000 and getting a $650,000 mortgage and then start building your equity to use for The Smith Manoeuvre, or since you have access to $500,000, you can put the whole $500,000. Borrow $150,000 out, pay interest on that, and go and reinvest it to then write off the interest. Doesn’t it make more sense to take $150,000 and invest it where you are planning to invest it?
This is where I was going. The important thing to know is some people may not want to borrow any additional funds. If I have to refi, for example, I have a $500,000 mortgage and a $1 million house. If I refi into the right type of property, I’m going to have significantly available equity that I could pull out to invest. I might not be the type of person that wants to do that.
I have already got $500,000 of debt. I want to convert that to good debt via The Smith Manoeuvre process, but I don’t want to take out an extra $150,000 and invest it. It’s who I am as an individual. I’m incurring an extra $150,000 worth of debt when I already have $500,000. It depends on the person. Are they investment-oriented? Are they more conservative? That type of thing.
If I have the ability to put a bigger down payment against my house and have a smaller non-deductible mortgage balance, that’s what I’m going to do personally, because then I have immediately available equity I can put to work, get deductions on it, invest it, and take advantage of compound growth. Plus, I have a smaller non-deductible mortgage balance.
The whole idea is to get rid of that as fast as possible. If I’m only putting down 20%, which is the minimum required, and I’m getting a big mortgage on my house, now it’s going to take me longer to get rid of that debt because I’m starting with more debt. I’m going to put as much as I can down smaller mortgage debt, and immediately available equity, put that to work, start reducing my tax bill, and take advantage.
Let’s break this down a bit more because the advice of everyone who understands real estate is debt is the superpower of real estate investing. Debt doesn’t exist in equity investing. That’s why real estate has beat the equities whatever it is last many years because of debt. Leveraging debt is always important in commercial or residential real estate.
You are saying that in this case scenario for Canadians, it makes more sense that, again, going on my $1 million home, that if somebody has $1 million cash. They should buy the home cash, borrow against it, and then go and invest it so they can write off that nominal interest rate they pay on whoever they borrowed from.
In the long term, does the math make sense there? Another option is the person pulls that money out and goes and invests directly and doesn’t go through this process. I’m wondering because it’s the interest that gets written off against your income. It depends on what income you are making and if you got a T4 job or a T1 type of income, it depends on what type of income producer you are as well.
It does depend on your marginal tax rate. The higher your marginal tax rate, the better your tax relief is. The whole, point here is if I’m going to have debt, do I want non-deductible debt or do I want tax-deductible debt? If I have the ability to buy my $1 million home with cash and then refinance that home and pull out and borrow to invest. That’s what I’m going to consider rather than a minimum down payment and have all this non-deductible debt.
Let’s talk about deductible debt compared to non-deductible debt. Does the type of mortgage your advisors have access to? Is that type of mortgage, which is re-advanceable? Is it going for a re-advanceable mortgage to increase the rates?
A mortgage is a mortgage. Lenders have different rates at any given time. Sometimes lenders want to get mortgages and sometimes they don’t.
I understand that but I’m talking about particularly for re-advageable mortgages is going with a re-advanced mortgage at a higher. I’m not talking about where the market is at. Is that a higher cost? No, it’s not. It makes more sense for somebody buying a home to increase their mortgage payment through a re-advanceable mortgage because they can write it off. It makes more sense. If it’s a nominal amount or if they can pay cash. If somebody’s got cash for that million dollar, is the advice to buy cash and then get a mortgage on it? What would be the process there?
Firstly, any advice given is going to be dependent on who this client is. I understand what you folks do here your goal and your focus. My goal and my focus is to make sure that Canadian homeowners, regardless of their interests, whether they are like the stock market or investment real estate is that they understand. They have the opportunity to minimize their non-deductible debt, maximize their tax deductible debt, and get invested with money that otherwise wouldn’t exist. Simply by getting this structure in place on financing.
Now there’s consideration here because we are looking at different rates that the amortizing rate is going to be different than the interest-only rate on that HELOC. We have seen past few years, 2% on the amortizing and a higher rate on the HELOC. After factoring in tax de deductibility on that HELOC side, does it make sense to replace tax-deductible debt, to replace non-deductible debt at a low rate with tax-deductible debt at a high rate?
Based on the marginal tax rate, what’s your real rate? Maybe it makes sense, maybe it doesn’t to aggressively pay down your non-deductible debt at this particular time. You refinance into the type of mortgage that works. What are rates doing then? This is the analysis that the professionals need to do. The whole point here is you and your readers are very well aware, and understanding of debt, good debt, bad debt, non-tax-deductible, and non-deductible.
That understanding is what has made the wealthy, they understand debt and they use it to their advantage, and your typical Canadian doesn’t truly understand debt. They have simply never been taught it. They hear the word debt and it’s this big, dark, ugly cloud above their head because they think of credit cards, mortgages, car loans, and student loans.
Debt is bad, and this is why there aren’t more wealthy people. It’s because wealthy people understand that you can use debt to your advantage. You can use debt and you can leverage debt to buy investment properties, to buy stocks, and to buy these assets, which you are going to appreciate over time.Wealthy people understand that you can use debt to your advantage, you can use debt and leverage it to buy investment properties. Click To Tweet
That’s why they love this because when they get the right type of mortgage when they start to implement The Smith Manoeuvre, maybe they have had the wrong mortgage for a number of years. They refinance into the right mortgage. They still have their non-deductible mortgage balance. That doesn’t change, but now they have access to $200,000 and they enjoy real estate, they understand it, they feel comfortable, they can pull that out and they can buy their second rental property or their first
Now they have two assets that are producing wealth for them, their rental property or their real estate investment opportunity they have gone into, plus their principal residence. Now they can implement the cashflow dam accelerator. We haven’t talked about accelerators or anything like that. The important thing here is for those who are interested in investing in real estate, this strategy, The Smith Manoeuvre gives you an opportunity to either get into real estate or to further increase your portfolio and generate an additional source of wealth from your principal residence, which most Canadians aren’t at this point. It’s the house in which they live. They are busy making that mortgage payment. They are going to pay it for 25 years and not see any other benefit from it because they are not going to be accessing the equity as fast as they are creating it.
They are creating significant equity in their asset. When they are paying that mortgage down, their equity increases. They hit retirement. They have a clear title house and they are living off of a fixed income because, for the past 25 or 40 years, they haven’t put their equity to work. It’s earned them less than 0% due to inflation. A lot of people know someone who’s a senior citizen, they have a clear title house. It’s worth $1.1 million. They have to watch what they spend because all they have is CP and OAs.
What’s the advice to that person? Let’s talk about both spectrums here. We will talk about the senior citizen who’s got a $1 million house paid off, and then we will go over the new couple who want to buy a home and are going to scrape by to be able to make that 20% down payment. We will talk about that later, but what’s that advice to a senior who’s got a $1 million home to clear title? Should they use The Smith Manoeuvre, pull money out, and invest it?
That’s not the Smith Manoeuvre. This is important to understand. The Smith Manoeuvre is the debt conversion strategy. If I have a mortgage or if I have to get a mortgage for my principal residence is non-deductible. It allows us to convert that from non-deductible to deductible. If I look at anyone who’s clear title, and I see this a lot.
40% of homes in Vancouver are clear titles.
Hey, Reddit or whatever. I’m clear title, I want to implement The Smith Manoeuvre. You are not going to because you don’t need to. You are already rid of that mortgage debt. If you want to borrow, go slap a HELOC against your clear title house and pull that out to invest. That’s straight Leverage investing. That’s not the Smith maneuver because there’s no debt to convert.
Compare the two. Should the Smith Manoeuvre be used instead of a HELOC or HELOC with The Smith Manoeuvre or not? What is that?
The Smith maneuver is applicable when someone has mortgage debt on their principal revenue.
Somebody is a clear title. They have already made their call.
They should get a HELOC.
After talking to a professional deciding that’s what they want to do. If they want to pull from their house to invest, they can get a HELOC. They don’t need a re-advanceable mortgage because there’s no bad debt to convert.
Let’s talk about the other spectrum which is a young couple. They just scraped by save $200,000. Their income, they can debt service, the $800,000 mortgage. They came and saw one of your guys, they got a read advanceable mortgage. Their equity is building in their home, and let’s say that equity builds up a bit depending on what’s the advice there. Let it build up to $50,000 and then take that $50,000. Invest somewhere or as it comes in, it automatically goes into an index fund. What is the advice there?
There is no advice. There’s a consultation and there’s a decision on what that client wants to do, and then there’s implementation of that, and that’s important to understand. The opportunities, the option here is if I have the right type of mortgage, as fast as I’m paying down that bad mortgage debt, I can access it.
Maybe it’s $1,000 each month. I can pull back $1,000, I can get it invested. Once I get the right type of mortgage, I also have $150,000 of immediately available equity. I can pull all of that and invest it. I can pull some of it, I can pull none of it. It depends. How am I going to sleep at night? It’s up to the client. There’s an opportunity to still convert that $500,000. They have $150,000 available on the HELOC side
If they don’t want to touch it, they don’t. They just pull that $1,000 and get it invested. They have continually got $150,000 of immediately available equity going forward. They are building up their investment portfolio in whatever they are investing by $1,000 a month. It’s tough to get into investment real estate with $1,000 a month, but over time, I am going to have $50,000 to $75,000 to $100,000 built up. I can redeem whatever I have been investing $1,000 a month. A big chunk of cash. Now I can buy my first rental property.
A couple of other questions before we finish up here. You touched on this a lot. People need to come and see you. Some accountant says they are doing something that’s called a Smith Manoeuvre, which is not. What our research shows is in general, CRA takes a case-by-case approach to the use of Smith Manoeuvre and closely scrutinizes taxpayers who claim deduction for the investment interest. While there is no specific, information, our research told us that when you do utilize The Smith Manoeuvre, the CRA takes a specific interest in this strategy. The CRA takes a cautious approach to the use of the spit maneuver and closely scrutinizes taxpayers who claim a deduction for investment interest.
The CRA is responsible for determining when a deduction is qualified or not. They have that role whether someone is implementing a Smith Manoeuvre, and borrowing on a monthly basis to invest, or whether someone is simply executing leverage investing by taking a HELOC and slapping it against a clear title house.
Whether a business is claiming the deduction, or whether individuals are claiming any other types of deductions. When you are preparing your tax return and sending it in, nowhere are you saying, “I’m doing the Smith Manoeuvre. You are sending it in. You are claiming your tax deductions and the CRA will do what the CRA does. Now we had well over 500 families as clients, back when I was actively advising a while back. There had been a number of assessments, which is where the CRA says, “We are looking at this, can you please provide some documentation?”
The accountant will on behalf of the client. Assemble and send to the CRA and the CCRA says, “Thank you for that. We will see you next year.” We didn’t have any clients get audited. The responsibility there for the CRA is to ensure that regardless of who the person is that Canadian taxpayer is, regardless of what strategy, this isn’t the only strategy out there. This is one of them.
The homeowner isn’t claiming anything. They shouldn’t, isn’t doing anything. They, shouldn’t, and that’s why it’s so important to have the right professionals in your corner because they know how to determine what type of investment we can go into. How to make the paper trail of borrowing to invest. Where did that money come from?
Where did it go? What was the interest paid on that? A lot of mistakes that some people will make is have, they have the mortgage and they have the HELOC and there’s deductible debt on it, but they also pull money out to make a down payment on a car. Now we have this HELOC, which has both tax-deductible debt from the process and non-deductible debt, which is borrowed to consume. The CRA will look at that and say, “How much is for what type of debt?” Maybe they disallow the whole thing. That’s why it’s so important to have the right professionals in your corner.
The last point on this matter is another issue is the proportion of the borrowed funds that can be claimed as tax deductions. The CRA has stated that only a portion of the borrowed funds that is used to purchase income-producing investments can be claimed as a deduction. Touch on that a bit.
What I’m claiming has to be the interest on money that I borrowed to invest in an income or potentially income-producing asset.
This says part of it, so all of it.
That’s probably referring to the fact that I alluded to. If I have a line of credit or a debt facility somewhere and I’m claiming tax deductions on all of it, was all of it borrowed to go to an investment, or was some of it used to go to buy a car or pay my credit card bill?
The last question I have if you don’t mind going back, I wanted to ask you, is whether The Smith Manoeuvre is only available to utilize in your primary residence.
No. This is the main use for it because the vast majority of homes are owned by typical Canadians or the principal residence. It’s applicable to a principal residence because it’s a non-deductible debt. However, I may also own a cottage recreational property. I have a mortgage on that. I’m not renting it out. It’s simply for my family. We go a few times a year, whatever, but if that debt is not deductible because I’m not renting it out, or generating income, then I have the ability to put a re-advanceable mortgage on that as well and convert that debt in addition to my principal residence. Another question that a lot of people have as well. This sounds great. I’m also going to do the Smith Manoeuvre on my rental property.
The misunderstanding there is, that you don’t need to do the Smith Manoeuvre on your rental property because it’s already tax-deductible debt you borrow to invest in a business. However, having the right financing on your rental property is very important because if I have a traditional principle plus interest mortgage on my rental property, each month I make that payment. I’m paying down my tax-deductible debt, paying down tax-deductible debt, and I’m increasing my equity in that rental property.
When I want to pull equity out of my rental properties to buy my second piece of rental property, I have to requalify appraisal, legal, documentation, all of that, fun stuff, and now I get a higher limit and I could pull and I can buy my second property, but if I have a re advanceable mortgage on that rental property, it’s like I’m refinancing every month and it doesn’t cost me anything because I can access the equity each month that I’m paying down. Effectively, therefore only making interest payments on all that tax-deductible debt. As long as when I access it, I put it to work, and invest in it. This is where talking to someone who can take your portfolio, all your portfolio, what you have going on, your investments, securities, real estate saying, “Here’s how we are going to set this all up.”
Moral story. If you are getting a mortgage in Canada, make sure it’s re-advanceable.
They are very flexible. However, it can also do some damage to people who aren’t using them effectively.
Thank you so much. We are going to have you on again to do your presentation at some point.
I learned a lot. Thank you.
Let’s get to the second segment of our show because we have Robinson on for a long time here. Let’s get this banged out.
Let’s get this party started. We are going to go to the ten championship rounds for financial freedom. I’m going to ask you a series of questions, whatever comes top of mind. Are you ready?
Number one, who’s been the most influential person in your life?
The most influential, let’s split that between my mother and my father.
Second question, what’s the number one book you’d recommend?
What is that book about?
It’s a book about doing whatever you are doing to the best of your abilities and how important that is, regardless if it’s a big project or a little project. I picked it up when I was still a teenager because it had a motorcycle in the title, but I certainly learned a lot when I read that book.
I never heard of that one before. I will have to pick it up. Next question. If you had the opportunity to travel back in time, what advice would you give your younger self?
Stop with toys. That’s what I tell myself. I’m not telling anybody else, but I would tell myself, you don’t need as many toys. Toys don’t bring you happiness. The toys end up owning you. You don’t owe the toys.You don't need as many toys. The toys don't bring you happiness. The toys end up owning you. Click To Tweet
Ava, we got to hold off on the private jet.
You guys going nutty. You get the jet. You let me over.
He wants it. A great advice. I love that. Next question. What’s the best investment you have ever made?
Not to get ethereal and say, “Investment in knowledge,” and stuff like that, but the actual best investment, and I still do, is I do quite a bit of private lending.
What’s the worst investment you have ever made and what lessons did you learn from it?
Startups. I have had a number of startups that went away. If I was thinking about investing in startups, I’d tell my younger self to do a lot more due diligence, and maybe don’t invest in as many. Some have paid off, but most of them have not.
Talking about sophisticated investing. VC investing is probably one of the most sophisticated investing, it’s like going to a roulette table. There’s a strategy on a bet on roulette. You can’t put on one number and expect to hit it.
How much would you need in the bank to retire? What’s your number?
I’m a simple man, $300 million to $400 million. I could be happy, easy. It’s not a game-stopper for me to do what I love doing, which is getting out and talking about this. It’s not something I have a lot of thought about. I’m here doing what I do and I will continue regardless of what the bank account says.
If you could have dinner with someone dead or alive, who would it be?
It would be someone my wife would recommend to me. I don’t know who she would recommend for me, but we are two different people with respect to the fact that I am more of a numbers financial strategy guy. My wife also came out with a book, Making Friends With The Boogeyman, and it’s about dealing with one’s life on a more emotional and spiritual level, she’s been teaching me a lot about that, and she has been taught about that from others. Whether these people taught her. They are deceased and taught her in their writings or whatever the case may be. I would let her decide so that she could continue to help me grow from that perspective rather than the financial ease-focused one that I have naturally.
It’s a bit of a wishy-washy answer.
That’s a good one. I like that. Let the wife decide. If you weren’t doing what you are doing today, what would you be doing now?
I’d be a teacher. I don’t know. Young kids. University. I have always wanted to be a teacher. I enjoy being in front of people whether it’s a classroom or up on stage. I believe that if one has knowledge they have a certain duty to relay that to others. I do enjoy the teaching role.
You have the patience to do that because we pressed you a long time and you stayed in character and you responded so perfectly. I would say one of the best explainers.
I’m looking forward to doing an event with you folks where I can get the PowerPoint out go through the steps and get into the nuts of it all.
Next question. My favorite one. Book smarts or street smarts?
Street smarts. You were leaning towards that question, I don’t know, but that’s part of the intrigue. Why does one person decide the one? As far as whether would I rather be street smart or book smart, I’d rather be street smart and then work towards being book smart.
Most of the guests on our show are academics, scholars, experts, and highly well-educated. The answer seems to be 98% street smart. That’s the interesting part about it.
I’m going to change my answer to the other 2%.
Last question. If you had $1 million in cash and you had to make one investment now, what would it be?
If I had $1 million in cash, one investment, I would go into a private loan.If I had a million dollars in cash, I would go into private loans. Click To Tweet
It’s oddly enough. If I had to do something quick, that’s probably what I would have done as well.
Quickly tell everybody what’s the best way that they can reach you.
Through the website. SmithMan.net. There are lots of information there. I can be reached through there. We have the book. That’s where you go.
Thank you so much, Robinson. We appreciate your time. Thanks for being with us and sharing your knowledge and wisdom with us. I’m sure a lot of people got that value from this.
Thanks for your time, Robinson.