Smith Manoeuvre Calculator

What Is the Smith Manoeuvre?

The Smith Manoeuvre is a Canadian financial strategy created by Fraser Smith that allows homeowners to convert their non-deductible mortgage debt into tax-deductible investment debt. Under Canadian tax law, interest paid on money borrowed for the purpose of earning investment income is tax-deductible. The Smith Manoeuvre exploits this rule by systematically re-borrowing the principal paid down on your mortgage through a readvanceable HELOC and investing the proceeds in a non-registered portfolio of income-producing investments such as Canadian dividend stocks or equity ETFs.

How Does It Work?

The strategy requires a readvanceable mortgage, which is a mortgage product that automatically increases your available HELOC credit limit as you pay down principal. Each time you make a mortgage payment, the principal portion frees up room on the HELOC. You immediately borrow that amount from the HELOC and invest it. The HELOC interest you pay on the borrowed funds is now tax-deductible because the funds were used to earn investment income. At tax time, you claim the HELOC interest as a deduction on line 22100 of your return, generating a tax refund. If you choose to re-invest those refunds back into your portfolio (the "accelerated" Smith Manoeuvre), the compounding effect is even greater.

Risks and Considerations

The Smith Manoeuvre is not without risk. Your investment portfolio can decline in value, especially during market downturns, while your HELOC debt remains. Rising interest rates increase the cost of the HELOC and can erode or eliminate the net benefit. The strategy requires strict discipline: you must invest the borrowed funds and not spend them. There is also a risk that the CRA may challenge the deductibility of interest if the investments do not produce income or if the borrowed funds are not used directly for investment purposes. Always maintain a clear paper trail and invest in eligible income-producing assets. This calculator assumes a constant rate of return, which does not reflect the volatility of real markets.

Canadian Tax Context

The Canada Revenue Agency allows taxpayers to deduct interest on money borrowed to earn investment income under paragraph 20(1)(c) of the Income Tax Act. This applies to interest on loans used to purchase stocks, bonds, mutual funds, or ETFs that have a reasonable expectation of earning income (dividends or interest). The deduction is claimed on line 22100 of your T1 return as a carrying charge. It is critical that borrowed funds are invested directly into eligible investments and that the investment purpose is maintained throughout. Consult a tax professional to ensure your specific implementation qualifies.