Smith Maneuver for Lower Taxes on Real Estate

Published December 27, 2021 by Real Estate Leads

Many investors in Canadian Real Estate are investing the way they are with an understanding that real estate provides a more reliable return on investment than stocks or bonds do these days, and that’s actually more true in Canada than it is in the USA. This is because demand continues to way outstrip supply here, and that is unlikely to change in the immediate future. The federal government has made efforts to cool the overheated market, and interest rates are expected to rise somewhere in the middle of 2022.

There are many people who will be quick to point out the folly of Government intervention in markets of any sort, and to be fair they are often much more educated and informed on the subject and not taking a position on the matter primarily because of a personal interest. There are also many intrinsic factors that keep the prices for real estate in Canada high, and most of them won’t be significantly changing any time in the near future either. Long story short, real estate investors continue to have little to nothing deterring them from investing as they wish.

A successful real estate agent is one that is receptive and attuned to their clients’ wishes and interests, and being able to advise them in the best way possible with that understanding is going to go a long way. Investors will welcome any info that improves the projections for their investment, and as such you should be as in-the-know as possible to impress and retain clients. In some cases it is the creating of new clients that is the challenge, and for realtors of this type our online real estate lead generation system here at Real Estate Leads is highly recommended.

The Smith Maneuver is something of a loophole for getting around taxes on investment properties, and it’s something your clients may well like to be made aware of. Let’s have a look at it with our final blog entry for the year here.

Legal Tax Strategy for Mortgage Interest – Deductible Interest

The Smith Maneuver is a legal tax strategy to convert mortgage interest into deductible interest. This is how it works. The owner gets a re-advanceable mortgage loan, ones that bank regulators typically call Combined Mortgage-HELOC Loan Plans (CLP). These are mortgages where the principal payment is immediately made available as mortgage credit.

The owner then makes regular mortgage payments. The payments you make are then available as credit on your HELOC., which is then used as credit for investing. Every payment made on the mortgage is taken from the HELOC, and then channeled into buying income-earning, eligible investments.

The owner then deducts the HELOC interest, with the interest paid on it now considered a tax deductible loan with the way it is used as an income generator. Your client will then get a portion back on their tax return.

From there, the tax return is used to pay down their mortgage. It functions as an accelerator that works to build the portfolio faster.

Repeat as Necessary

This process is repeated as many times as necessary until the mortgage is paid off. Once nothing more is owing for the mortgage, they can either start paying off their HELOC or start new at the beginning again on a new investment. Be aware that at some point the write offs will no longer be worth the interest, so clients should be running the numbers or have someone doing that for them.

Done right the homeowner receives these benefits:

  • No outstanding mortgage loan
  • An investment loan with tax deductible interest, generated from HELOC debt borrowed in size of the original mortgage.
  • A more substantial mortgage portfolio.

Eligible Investment Types

Not all investments have eligibility for loan interest deductions. Only if the loan is for income-earning investments is it deductible. Financial advisors will often suggest only using dividend paying stocks for this reason and the CRA considers borrowed-fund share interest costs to be deductible on the basis that it is the common shareholder who will be receiving dividends.

Using money to buy a rental property, for example, can be eligible provided it is income producing.


Utilizing the Smith Maneuver may make a lot of sense, but it also comes with risks. They include some obvious ones like a major decline in home prices or investments, but of course one will immediately ask how likely that is going to be in Canada for 2022 and beyond in the foreseeable future given the super insulated hot housing market in Canada.

Hope that all of you have a good remainder of your Holidays and a Happy New Year coming up.


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