Is it possible to make mortgage interest tax deductible?

Many of our clients have asked this question. The simple answer is yes, but it can be tricky. The reality of the situation is that most of the 3.5 million mortgages in Canada are non tax-deductible. While our neighbours south of the border can deduct part of their mortgages, Canadians cannot or at least have not attempted to deduct their mortgage interest.

It can be done by using a process called The Smith Maneuver. The technique for making Canadian mortgages tax deductible was developed by Vancouver resident Fraser Smith. Smith came up with the idea for the "Smith Maneuver" when he left real estate for financial planning at the end of the eighties, just as the real estate boom ended, and the big boom in the mutual fund industry was beginning. "Everyone thought I was a genius, but it was really just luck," says Smith. At the time, he was fascinated with the idea that Americans, unlike Canadians, could deduct the interest on their mortgages. "I was obsessed with that. And as I searched through the Tax Act I came up with the maneuver," says Smith.

The Smith Maneuver is a mortgage management strategy that generates free annual tax refund cheques by converting the existing non-deductible mortgage interest to deductible investment debt. It is premised on the deduction allowed for interest on investment loans, but the conversion is dependent upon a banker willing to do the conversion. It can get a little confusing at times, but put simply you would borrow back any principle paid on a mortgage as an investment loan to re-invest. Your debt is not increased, but the debt conversion process provides the double benefits of new free money via tax refunds, plus the simultaneous creation of an investment portfolio of diversified assets, which are always free and clear.

The investments will be purchased with money borrowed at the lowest rates possible, because the house is the prime security. The interest will be a tax deduction. You will apply the resulting tax refund cheques against the first mortgage and borrow back an equivalent amount immediately to buy more investments, thus repeating the process yet again.

For the Smith Maneuver to work, you would initially need to convert your fixed mortgage to a Line of Credit so that money could be borrowed back as quickly as it is paid off the principle and without penalty or re-application. The Smith Maneuver may not be right for everyone, but can prove to be an excellent tax strategy. To learn more you can purchase Fraser Smith‘s book entitled "The Smith Maneuver", check out his website at www.smithman.net or contact your Agent at Unisource Mortgage to discuss the possibilities.

Source: Unisource Mortgage Canada Newsletters Archive