Most Canadians accept this as a fact of life:
“Mortgage interest on your home isn’t tax-deductible.”
Which means that every dollar of interest you pay on your principal residence is money you’ll never see again.
What fewer people realize is that Canada’s tax system does allow you to deduct interest, but just not on your primary residence mortgage. If you borrow money to invest with the intention of earning income, that interest is deductible.
The Smith Manoeuvre is a long-standing strategy that takes advantage of that exact rule.
It doesn’t erase your mortgage overnight.
It doesn’t make debt disappear.
What it does do is slowly convert non-deductible mortgage debt into a tax-deductible investment debt, while you continue paying down your home.
Let’s break it down.
The Core Idea
At a high level, the Smith Manoeuvre works like this:
- You have a readvanceable mortgage (a mortgage + HELOC combined)
- You make your normal mortgage payments
- As your mortgage principal goes down, your HELOC limit automatically goes up
- You borrow that newly available HELOC amount
- You invest it in a non-registered account
- The interest on that borrowed money becomes tax-deductible
- You can also service the minimum HELOC monthly payment from the HELOC itself
You’re not adding new debt out of nowhere, you’re recycling the principal you already paid and changing the type of debt you hold.
Instead of waiting to invest after your mortgage is gone, you’re doing both at the same time.
The Rates (This Is Where Most People Get Confused)
Let’s use realistic numbers:
- Mortgage rate: 3.99% (not deductible)
- HELOC rate: 4.95% (deductible as you will use this to invest)
- Marginal tax rate: 40%
At first glance, most people stop right here and say:
“Why would I borrow at 4.95% when my mortgage is only 3.99%?”
Because HELOC interest used for investing is tax-deductible, the real cost is much lower than the posted rate.
Lets use this example:
- HELOC rate: 4.95%
- Tax deduction: 40%
- Net effective rate:
4.95% × (1 − 0.40) ≈ 2.97%
Now compare that to your mortgage:
- Mortgage rate: 3.99%
- Tax deduction: 0%
- Net effective rate: 3.99%
So even though the HELOC looks more expensive on paper, it’s actually cheaper after tax. That’s the entire logic behind the Smith Manoeuvre. You’re gradually replacing:
- Non-deductible debt at 3.99%
with - Deductible debt at ~2.97%
And at the 2.97% borrowing rate, you are investing in the market where you expect to make more than 2.97% to be in profit.
A Simple Example
Let’s say:
- Mortgage balance: $400,000
- Readvanceable mortgage setup
- Mortgage rate: 3.99%
- HELOC rate: 4.95%
- Marginal tax rate: 40%
Month One
- Your mortgage payment pays down $1,200 of principal
- Your HELOC limit increases by $1,200
- You borrow that $1,200 and invest it
- You pay for the minimum monthly HELOC payment from the HELOC too
After that month:
- Your mortgage is $1,200 lower
- Your HELOC is $1,200+ higher
- Your total debt is roughly the same
- But $1,200 of it is now tax-deductible
Repeat this every month.
After a Few Years
Let’s say you’ve recycled $100,000 of your mortgage into investments.
- HELOC interest at 4.95% = $4,950/year
- Tax refund at 40% = ~$1,980
- Net interest cost = ~$2,970/year
That’s the same ~2.97% effective rate and that borrowed money is invested instead of sitting idle in home equity.
What Do You Invest In?
To keep the interest deductible, the investments must have a reasonable expectation of income.
Common choices:
- Dividend-paying Canadian stocks
- ETFs that distribute income
- Other income-producing investments
Capital growth is great, but income is what is keeping the strategy CRA friendly.
Is This Risky?
Leveraged investing can always be risky.
The Smith Manoeuvre:
- Uses leverage
- Relies on long-term investing
- Requires discipline (no using the HELOC for lifestyle spending)
Markets will go up and down.
Your HELOC interest doesn’t stop just because markets are having a bad year.
This strategy works best for:
- High-income households
- Stable employment
- Long time horizons (10–20+ years)
- People who can emotionally handle volatility
It’s not for everyone, and needs to be set up with the guidance of a professional.
Another important point to keep in mind it to not co-mingle your HELOC investing debt with any personal debt, as this could pose a big issue with the CRA if they ever audit you. You want a clear paper trail of the use of the HELOC, which should just be for investment purposes.
Why Some Canadians Use It Anyway
When done properly, the Smith Manoeuvre can:
- Lower your after-tax borrowing cost
- Turn “dead” mortgage interest into something productive
- Build an investment portfolio earlier in life
- Potentially reduce your mortgage faster using tax refunds
- Improve long-term net worth without changing your monthly budget
Key Takeaways
The Smith Maneuver is a long-term strategy and for the right homeowner, it can be a powerful way to make their mortgage work with them, to help build wealth long term. Key word here is long term, as this is NOT a 5-6 year strategy, but a 12-15+ year one.
