Smith Manouever

[Nickelodeon]

It's amazing to me but IMHO you are getting better advice from TERB members than you are from your "financial planner", who is likely remunerated not by you but by the finance industry.

Listen to your TERB friends or hire a "fee for service" financial planner who only works for you and not someone selling you a financial product.

The volatility of the current market makes this idea on a non-starter without even the persuasive arguements made by 3Ts and others.

Blue

 

[3Tees]

But that's what I don't understand. The interest deductions wouldn't be tied to the mortgage, but rather the funds borrowed to invest in interest?

The other issue how you get the equity capital in the first instance. For many of us, that would mean selling existing investments, which would generate tax liabilities.

So, as Mongrel says, it's not for everyone....

If I read GAAR correctly (and that is an exceptionally big if), it basically says "we don't care about our own laws or anything else - if it looks like a duck and quacks like a duck, it's a duck and we're going to make it so you can't use it." So if it looks like you're using this to get big refunds and make your mortgage tax deductible, we're going to close that loop.

The equity capital comes from a Home Equity Line of Credit on your house, and loans provided to you where they'll give you a value of 3:1 if the loan money is put into mutual funds.

 

[jonai1]

If I read GAAR correctly (and that is an exceptionally big if), it basically says "we don't care about our own laws or anything else - if it looks like a duck and quacks like a duck, it's a duck and we're going to make it so you can't use it." So if it looks like you're using this to get big refunds and make your mortgage tax deductible, we're going to close that loop.

The equity capital comes from a Home Equity Line of Credit on your house, and loans provided to you where they'll give you a value of 3:1 if the loan money is put into mutual funds.

well usually its a 2 to 1 loan...fraser smith has been doing this for almost 20 years..the method was to come up with a readvanceable mortage a la VanCity credit union, who essentially developed this product for him..now more mainstream banks...not all are offering this re-advanceable mortgage product.

As others have said..its not for everyone...but if set up correctly - u can definitely save 1000's in mortgage interest...remember its the investment loan interest taht you're using to deduct...

People(rich people) have borrowed money for years to invest in stocks, funds or real estate all on the basis of the reasonable expectation of making a profit...i think CRA will have to draw a specific line in the sand in order to neagte this so-called 'scheme'. More then likely they will have to grandfather existing taxpayers and disallow any new deals i would think...

 

[3Tees]

well usually its a 2 to 1 loan...fraser smith has been doing this for almost 20 years..the method was to come up with a readvanceable mortage a la VanCity credit union, who essentially developed this product for him..now more mainstream banks...not all are offering this re-advanceable mortgage product.

As others have said..its not for everyone...but if set up correctly - u can definitely save 1000's in mortgage interest...remember its the investment loan interest taht you're using to deduct...

People(rich people) have borrowed money for years to invest in stocks, funds or real estate all on the basis of the reasonable expectation of making a profit...i think CRA will have to draw a specific line in the sand in order to neagte this so-called 'scheme'. More then likely they will have to grandfather existing taxpayers and disallow any new deals i would think...

I met with someone in the Toronto Office who said 3 to 1. Whatever though, it is still very leveraged.

Your point about Rich People borrowing money to invest is valid - hell, I'm about to do it to invest in Real Estate. However, Rich People may not have borrowed to structure a system to deduct the interest paid on their mortgage.

I've looked up a basic overview of GAAR - see below. Under GAAR, CRA does not have to draw a more specific line in the sand, and they certainly don't have to grandfather anyone. When I investigated this, I was told that one of the risks was CRA disallowing it - so it would suck to be you if you had to unbundle all those loans and pay all those fees if CRA disallowed it. Here is a brief overview of what is likely a very complex concept...

IN 1988, A GENERAL ANTI-AVOIDANCE
rule (GAAR) was added to the Income
Tax Act, giving Revenue Canada
broad powers to challenge perceived
tax avoidance activities or abuses of the
tax system in situations where no specific
anti-avoidance measure exists. Although
GAAR has been in place for
almost eight years, Revenue Canada is
just now beginning to invoke it on a
regular basis as part of its standard audit
procedures.
According to the Department of
Finance, GAAR is intended to prevent
abusive tax avoidance transactions but
not to upset legitimate commercial or
family transactions undertaken for tax
planning purposes.

It does say the intention is not to upset legitimate commercial or family transactions undertaken for tax planning purposes... however, my sense is who knows how that could be interpreted.

 

[HafDun]

People(rich people) have borrowed money for years to invest in stocks, funds or real estate all on the basis of the reasonable expectation of making a profit...i think CRA will have to draw a specific line in the sand in order to neagte this so-called 'scheme'. More then likely they will have to grandfather existing taxpayers and disallow any new deals i would think...

There is a fundamental difference between borrowing money to invest and using a combination of leveraging and money shuffling to replace an existing mortgage with a tax deductable loan. The Smith Maneuver professes to replace your mortgage in as little as a 3-5 years. If you needed the mortage to pay for your house (not tax deductable), then how, in that short period of time can you justify eliminating that need? That is the grey area that CRA is struggling with.