| One of the big differences between Canadian and U.S. | | | | where by a consumer who has a mortgage and |
| homebuyers is that mortgage interest payments on a | | | | investments such as stocks, bonds, GIC's (either in an |
| principal residence are not tax deductible in Canada as | | | | RRSP or outside of it) pulls out their money and pays |
| they are in the United States. | | | | all or a portion of their mortgage off and then borrows |
| A technique developed by British Columbia financial | | | | the money to buy their investments back. The |
| strategist, Fraser Smith, could change all that, while still | | | | strategy hinges on the fact that in Canada the interest |
| allowing Canadians tax freedom on the equity gain in | | | | on money borrowed for investing is tax deductible. |
| their home. This strategy is perhaps the greatest tax | | | | In one example that Smith uses, a family with a |
| advantage in Canada- and one that is not available in | | | | $200,000 mortgage at 7 percent interest and in a 40 |
| the U.S. Smith saw that too many Canadians were | | | | percent tax bracket would receive a tax refund of |
| waiting until their mortgages were paid off before they | | | | more than $36,000 by converting the mortgage |
| started to build an investment portfolio. They were | | | | interest to a tax deduction. |
| missing out on years of compounding interest and | | | | Smith said that, in addition to a tax refund, the |
| putting themselves in the position of being house rich | | | | advantage of using the procedure is that it allows a |
| and cash poor in retirement. | | | | taxpayer to begin building a large retirement portfolio, |
| This financial strategy is called the "Smith Manoeuvre " | | | | sooner instead of later after the mortgage is paid off. |
| and it is meant to convert the largest debt of a | | | | Under the Smith Manoeuvre, each year when the tax |
| Canadian's lifetime into "good" debt - the kind that is | | | | refund arrives, the homeowner uses the money to |
| tax-deductible and generates annual refunds from the | | | | make an extra mortgage payment and then "you |
| tax department. "The rich may be getting richer, but | | | | immediately re-borrow and invest the same amount." |
| rather than complain, we can learn from their | | | | "This lets the homeowner knock years off the length |
| methods," said Smith, who is now semi-retired on | | | | of their mortgage," Smith explained. "The Smith |
| Vancouver Island after a long career in the financial | | | | Manoeuvre utilizes legal, common tools from Canadian |
| sector. | | | | financial institutions and Canada Customs and |
| The Smith Manoeuvre is detailed in a new book by the | | | | Revenue," says Smith. |
| same name (146-page paperback from Trafford | | | | There are several online forums where people share |
| Publishing, Victoria). Smith says he has developed a | | | | their personal experiences using the Smith Manoeuvre. |
| "streamlined new method by which average | | | | Check them out for yourself before making a decision. |
| Canadians can make their mortgage interest tax | | | | I also recommend that you read The Smith |
| deductible, in a simple and elegant way." | | | | Manoeuvre and talk to your financial planner to see if it |
| So how does it work? Basically, it is a procedure | | | | will really work for you. |