An Intro to the Smith Manoeuvre

Many Canadians are surprised to learn that mortgage interest isn’t tax-deductible in Canada—unlike in the U.S. But what if there was a way to make it deductible, while also building an investment portfolio over time? That’s exactly what the Smith Manoeuvre aims to do.

The Smith Manoeuvre is a long-term financial strategy designed to convert your non-deductible mortgage interest into tax-deductible investment loan interest. It only works for homeowners with a re-advanceable mortgage—typically a mortgage and line of credit combined—and requires both discipline and a good understanding of the mechanics.

Here’s how it works in simple terms: every time you make a principal payment on your mortgage, that amount becomes available to borrow again from your line of credit. The Smith Manoeuvre takes that newly available credit and immediately reinvests it into investments like dividend-paying stocks or ETFs. Since the money is borrowed for investment purposes, the interest on that loan is tax-deductible under CRA rules.

Let’s walk through a basic example. Say you have a re-advanceable mortgage of $500,000 and you make a monthly payment where $1,000 goes toward the principal. That $1,000 now becomes available on your line of credit. Instead of letting it sit unused, you borrow it and invest it. Over time, your actual mortgage gets smaller, but your investment loan grows—and so does your portfolio.

Tina in Vaughan used this strategy after speaking with her accountant and financial advisor. She had a stable income, a $600,000 home, and a $400,000 mortgage. Over the years, she consistently re-borrowed her principal payments to invest in a conservative dividend ETF portfolio. As her mortgage shrank, her investments grew—and she claimed the interest on her investment loan on her taxes each year, generating tax refunds that she used to pay down her mortgage even faster.

Success with the Smith Manoeuvre requires discipline - you need comfort with debt, confidence in your investments, and patience. This isn’t a shortcut to quick gains—it’s a long-term approach to steadily growing wealth.

As with any market-based strategy, this method does involve risks when your investments drop in value. If markets drop, you're still on the hook for the loan. That’s why this is best suited for people with a strong income, a long time horizon, and a high tolerance for risk. It’s also important to work with an accountant who understands the Smith Manoeuvre—it’s easy to misstep on the tax side if you’re not documenting everything properly.

We partner with several lenders who offer re-advanceable mortgages, often in the form of HELOCs, that make this strategy possible. But not all products are equal—some give you automatic re-advance features, while others require manual approvals or don’t allow immediate reuse of principal payments.

If you're ready to turn your mortgage payments into tax-efficient investments, reach out to us for a free consultation and to run the math on how this strategy can benefit you with a lender suited for your needs.