The Smith Manoeuvre: A Hidden Canadian Tax Hack

In Canada, mortgage interest on a principal residence is not tax-deductible. Yet savvy Canadians use a legal strategy—the Smith Manoeuvre—to reclassify mortgage-backed borrowing as tax-deductible investment debt. Though decades old, the tactic remains little-known outside financial planning circles.

🔍 Legal Basis & Mechanics

Under § 20(1)(c) of the Income Tax Act, interest is deductible only if borrowed to earn property income (e.g., dividends or interest). The Smith Manoeuvre achieves this by converting standard mortgage payments into deductible borrowing used to invest in income-producing assets.

This requires a readvanceable mortgage—a mortgage bundled with a Home Equity Line of Credit (HELOC). As principal is repaid, available credit increases, which can then be borrowed and invested. The HELOC interest is deductible because it funds income-generating investments. Tax refunds are reinvested into mortgage principal, speeding the cycle.

🧠 Why It Counts as a Hidden “Hack”

• Minimal coverage in mainstream media or financial advertising
• Not intuitive—requires thinking about debt and tax strategy unconventionally
• Requires discipline, documentation, and investment literacy
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⚠️ Risks & Limitations

• Market risk: Investment returns may underperform HELOC interest
• CRA scrutiny: The Supreme Court's ruling in Lipson v. Canada (2009) warns against overly aggressive tax manoeuvres
• No net debt reduction: Total debt remains until repaid aggressively
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✅ Who Should or Shouldn’t Try It

Suitable for:

• High-income earners in top marginal brackets
• Disciplined investors with non-registered portfolios
• Experienced homeowners with substantial equity

Not suitable for:

• First-time homeowners with low equity
• Risk-averse individuals or those with low investment knowledge
• Anyone needing liquidity or facing unstable income
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📉 Strong Opinion

The Smith Manoeuvre is a legitimate and compelling method for long-term, financially literate Canadians to optimize taxes. However, it's not a universal solution. Most Canadians would benefit more from safer, simpler optimizations like the FHSA, RRSP, and TFSA before attempting leveraged investment strategies.

📘 Summary Table

Step	What You Do	Why It Works
1	Refinance into a readvanceable mortgage	Frees equity with each principal payment
2	Borrow the principal amount via HELOC	Shifts debt into income-producing investments
3	Invest in dividend/interest-generating assets	Makes HELOC interest tax-deductible
4	Reinvest your tax refund into mortgage principal	Accelerates amortization and equity access
5	Repeat	Compounds the tax and investment advantages