What is the Smith Maneuver method and how can it benefit you? Read more to find out…
The Smith Maneuver is a legal tax strategy that can make part of the interest on a residential mortgage tax-deductible in Canada. In Canada, we have the principal residence tax exemption, which means the home you live in won’t be subject to capital gains tax when you move or sell. The Smith Maneuver refers to using a home equity line of credit, or a portion of capital from a residential mortgage to invest in other appreciating assets like stocks or other real estate.
How Does This Method Work?
This method works because when someone borrows to invest with the expectation of generating income, the taxpayer can deduct the related interest from the income. However, borrowing to purchase a primary residence is not considered “deductible borrowing” because there is no reasonable expectation of generating income from the home in which one lives.
Who is a Good Candidate for the Smith Maneuver?
- Homeowners with at least 40% equity in their homes
- Those who have a high-risk tolerance
- Individuals who have the financial capability to withstand long-term market volatility
Tying It All Together…
No one financial strategy is a silver bullet to reaching your financial goals. Everyone should always have a trusted professional in their corner to give reliable advice. Look for professional designations, trusted referrals, and testimonials. Ensure that any advisor you speak with is working for your best interest and isn’t just trying to sell you on a flavor-of-the-week strategy.
Ultimately, good cash flow management, diversifying your portfolio, and building businesses are great ways to have financial freedom. Creative strategies like the Smith Maneuver can help you reach your goals, but they ultimately shouldn’t replace a holistic and sensible financial plan. If you want to learn more about the pros and cons of the Smith Maneuver method, watch the video down below! You can also learn more about the Smith Maneuver strategy by reading the book, which you can purchase here.
Step by step guide to the Smith Maneuver:
Benefits of the Smith Maneuver:
Drawbacks of the Smith Maneuver: