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.
The Smith Manoeuvre works basically as follows:
1. First find a re-advanceable
mortgage
2. Then sell your
non-registered assets (like stocks held outside of an RRSP)
3. Use the proceeds as a
down payment on your mortgage
4. Make your mortgage
payments like normal
5. As you pay off
principal, re-borrow that principal into a line of credit (LOC)
6. Invest this re-borrowed
money at a higher rate of return than the interest you pay on the line of
credit
7. Deduct your investment
loan (LOC) interest and use the tax savings (refund) to pre-pay your
mortgage
8. Repeat steps 3-7 until
your mortgage is fully paid off.
Fraser Smith, for whom the Smith Manoeuvre is named, 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
risks and serious 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. The TDMP is one
plan that will help you minimize these risks, and in particular the tax
risk by administrating the required ‘cash damming’ efficiently.
Therefore, you should understand TDMP fully and why this highly
sophisticated and tightly managed Smith Manoeuvre program works.
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