It’s a beautiful thing when money comes full circle. If you are a high income earner, you have a sizable and taxable investment account, AND you have debt in the form of a LOC or mortgage, you may want to consider using the Smith Maneuver*.
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*This strategy must be completed under the guidance of an accountant; it is not tax advice and the following is for illustrative purposes only.
How the Smith Maneuver works:
Under the Canadian tax code, interest paid on monies borrowed to earn an income is tax-deductible.
Therefore, if you have an existing investment account, you can liquidate it, use the money to pay off that amount of the mortgage, then use the mortgage money to invest back in your portfolio. You will then be able to deduct the interest income against income earned in your investment portfolio, before making interest charges tax-deductible against investment income. Circling back: it’s a beautiful thing!
Here are a few key points:
The monies used for investment purposes cannot be commingled with the other mortgage monies, they must be in a separate account with interest charged separately. Capital gains will be triggered during the liquidation; you cannot buy back stocks that have a capital loss within 30 days or you lose the ability to claim those losses.
There are also a few risks:
During volatile markets, you risk sitting on the sidelines while the market moves up/against you, or opportunity cost. There may be added accounting expenses. You need to cross your t’s and dot your i’s to stay on side with CRA.
As noted earlier, the above strategy needs to be completed under the guidance of your accountant in conjunction with your wealth management advisor. In my experience, working with a good accountant is priceless.
About Anna Hilberry:
Anna graduated with a Bachelor of Commerce Degree in 2007. In 2008, she became a licensed Sales Associate, and in 2012 she became a licensed Investment Advisor. Anna has extensive experience in successful investment management with a wide breadth of product knowledge and is currently an award-winning Portfolio Manager with The Hilberry Group and National Bank Financial.
NOTE: National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Anna Hilberry, Associate Investment Advisor at NBF. The opinions expressed do not necessarily reflect those of NBF.
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