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Deal Addict
Nov 10, 2012
2484 posts
1771 upvotes
Calgary
MRobi1 wrote: My comment on being backwards stemmed from keeping the withdrawl amount the same and lowering the investment amount each month, whereas you'd really want to increase the withdrawl monthly but keep the investment amount the same. So we're really saying the same thing here :)

Where I'm curious on which route may be better is this...

Path 1:
Month 3 from the example above, withdraw $1,005 from HELOC, invest $1,000, use the remaining $5 to service interest. HELOC balance: $1,005

Path 2:
Month 3, withdraw $1,005 from HELOC, invest $1,005, $5 interest charge billed to HELOC, pay from chequing act, reborrow $5 to replenish chequing. New HELOC balance: $1,010.

In path 2, your HELOC balance will grow at a faster rate but your investment will also grow at a faster rate. My assumption (and why I'm asking if anybody has done the math), is that path 2 will give better results because that $5 should be earning at a higher rate than the $5 interest charge, and a longer time in the market should net better results. Yes you'll need enough in your chequing account to cover the interest charge, but you'll be reborrowing it right away so it doesn't really have any affect on your cash flow.
I am basically doing path 2. My goal was to make this as automated as possible. So each month, I have my brokerage account automatically withdraw the same amount directly from my HELOC. I then also set up my brokerage account to automatically buy investments (TD eseries) on that same day. So the actual investing part of my SM is fully automated. Once a month when my HELOC statement arrives, I transfer the interest payment from my chequing account to the HELOC and then withdraw that same amount back to chequing to capitalize the interest.

I am not concerned that each month my principal payment amount is going up slightly on the mortgage. Every so often when the difference becomes material enough I will alter the automated withdrawal/investment up to account for this.
Jr. Member
Sep 14, 2018
131 posts
86 upvotes
Really it's just leverage investing, but we're matching up the investment with the mortgage principal, to balance out the debt, and gain the huge benefit of being able to write off the interest. The readvanceable HELOC provides the increasing credit room at a decent interest rate.
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User avatar
Feb 2, 2014
9079 posts
2582 upvotes
Toronto
hingisfan24 wrote: Really it's just leverage investing, but we're matching up the investment with the mortgage principal, to balance out the debt, and gain the huge benefit of being able to write off the interest. The readvanceable HELOC provides the increasing credit room at a decent interest rate.
That's all it is. I'm surprised it's coined it's own sexy name (Smith Maneuver).

Having said that, you can always write off interest in leverage investments, so that's nothing new.

The big thing, is that you're getting access to a lot of funds (which you cannot access via unsecured debt) and at a lower rate.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Jr. Member
Dec 25, 2012
133 posts
15 upvotes
MISSISSAUGA
So I owned VCN and XAW in my SM account. If I sell/buy to re-balance, do I have to pay capital gain tax?
Member
Dec 13, 2010
327 posts
369 upvotes
Vancouver
nhr594 wrote: So I owned VCN and XAW in my SM account. If I sell/buy to re-balance, do I have to pay capital gain tax?
Yes, you would incur capital gains if you sold. Can you rebalance with new money instead of selling?
Jr. Member
Jan 26, 2020
139 posts
50 upvotes
Is anyone familiar with whether we can do the smith maneuver for selling options/financial derivatives?

When I was reading ed rempel's blog it mentions "This means you can’t buy raw land, gold bars, or options, but generally any mutual fund, seg fund, ETF or stock is fine. As long as it does not have a prospectus that prevents paying income." but this is specifically about buying options

Selling puts which is what I like doing specifically is different since it's a contract that forces you to purchase 100 shares of a stock, but its too complex of a strategy and I don't think many people doing SM are implementing that.

Thanks
Newbie
Feb 24, 2018
67 posts
19 upvotes
MRobi1 wrote: My comment on being backwards stemmed from keeping the withdrawl amount the same and lowering the investment amount each month, whereas you'd really want to increase the withdrawl monthly but keep the investment amount the same. So we're really saying the same thing here :)

Where I'm curious on which route may be better is this...

Path 1:
Month 3 from the example above, withdraw $1,005 from HELOC, invest $1,000, use the remaining $5 to service interest. HELOC balance: $1,005

Path 2:
Month 3, withdraw $1,005 from HELOC, invest $1,005, $5 interest charge billed to HELOC, pay from chequing act, reborrow $5 to replenish chequing. New HELOC balance: $1,010.

In path 2, your HELOC balance will grow at a faster rate but your investment will also grow at a faster rate. My assumption (and why I'm asking if anybody has done the math), is that path 2 will give better results because that $5 should be earning at a higher rate than the $5 interest charge, and a longer time in the market should net better results. Yes you'll need enough in your chequing account to cover the interest charge, but you'll be reborrowing it right away so it doesn't really have any affect on your cash flow.
Path 2 : you have $1,005 to invest. Do you need to use all (like 100%) of $1,005 to invest to avoid tax complication ??
example:
- You just deposit $1,005 to you non-register account to buy stock XYZ
- However, stock XYZ is cost $1000 per share
- now you have $5 extra ..

what do you do in this case to avoid tax complication or a call from CRA ?
Member
Dec 13, 2010
327 posts
369 upvotes
Vancouver
dongta wrote: Path 2 : you have $1,005 to invest. Do you need to use all (like 100%) of $1,005 to invest to avoid tax complication ??
example:
- You just deposit $1,005 to you non-register account to buy stock XYZ
- However, stock XYZ is cost $1000 per share
- now you have $5 extra ..

what do you do in this case to avoid tax complication or a call from CRA ?
Folks who have been doing the SM have said that, as long as the entire $1,005 is deposited to your investment account, and the intent is to invest it as soon as you are able to, you can still deduct the interest. It is theoretically possible that, if you just stashed your HELOC withdrawal as cash in your investment account and left it for the year, or the cash amount is significant, that the CRA might care.
Member
Dec 13, 2010
327 posts
369 upvotes
Vancouver
Red2hawk wrote: Is anyone familiar with whether we can do the smith maneuver for selling options/financial derivatives?

When I was reading ed rempel's blog it mentions "This means you can’t buy raw land, gold bars, or options, but generally any mutual fund, seg fund, ETF or stock is fine. As long as it does not have a prospectus that prevents paying income." but this is specifically about buying options

Selling puts which is what I like doing specifically is different since it's a contract that forces you to purchase 100 shares of a stock, but its too complex of a strategy and I don't think many people doing SM are implementing that.

Thanks
Should probably check with an accounting professional to be sure. It would seem reasonable though? You are generating income (which you would pay full income taxes on), and if your option gets called, you would be buying an eligible investment. But who knows with the CRA!
Deal Addict
Nov 10, 2012
2484 posts
1771 upvotes
Calgary
mastaj wrote: Should probably check with an accounting professional to be sure. It would seem reasonable though? You are generating income (which you would pay full income taxes on), and if your option gets called, you would be buying an eligible investment. But who knows with the CRA!
Selling the put option itself would have nothing to do with the SM if I am thinking about it clearly... You don't need to draw on your HELOC to sell the put option (if the put is never called, you had 0 cash outlay and just received premium).

Where it would come in would be if the option buyer exercises the option... at that point, presumably you would draw on your HELOC to fund the purchase of stock. So you need to find out from an accountant whether purchasing a stock in this manner qualifies for SM. The other part I am not sure of is the tax deductibility of any margin costs for implementing this strategy - another thing to talk to an accountant/tax expert about. And finally, I suppose you want to be sure that adding this type of trading in doesn't end up having the CRA treat you as a trader/professional, where my understanding is all gains/losses get taxed as regular income. Once again, best to check with an accountant/tax expert.

Long story short, totally agree with the advice from @mastaj
Deal Addict
User avatar
Sep 19, 2013
2451 posts
885 upvotes
Winnipeg
Red2hawk wrote: Is anyone familiar with whether we can do the smith maneuver for selling options/financial derivatives?

When I was reading ed rempel's blog it mentions "This means you can’t buy raw land, gold bars, or options, but generally any mutual fund, seg fund, ETF or stock is fine. As long as it does not have a prospectus that prevents paying income." but this is specifically about buying options

Selling puts which is what I like doing specifically is different since it's a contract that forces you to purchase 100 shares of a stock, but its too complex of a strategy and I don't think many people doing SM are implementing that.

Thanks
I have given a lot of thought to a LEAPS strategy out of HELOC. Its just a theory for now. LEAPS with covered calls. I would of course, let go of my ability to deduct taxes, so this is not a SM. But if the excess return from this strategy over traditional SM is significantly higher than the refund I get through tax deduction, it makes sense. Its laden with some additional risks and most importantly, one should know what they're doing. But all I'm saying is this can be considered because my theory has the same underlying base assumption - "stocks will do well in a long-term horizon".

But I will stop here, else the mods will kick me out for being off-topic in a "SM" thread. Smiling Face With Open Mouth And Smiling Eyes
In the beginning the Universe was created. This has made a lot of people very angry and been widely regarded as a bad move. -- Douglas Adams
Member
Mar 14, 2018
298 posts
346 upvotes
Mr Bean wrote: I have given a lot of thought to a LEAPS strategy out of HELOC. Its just a theory for now. LEAPS with covered calls. I would of course, let go of my ability to deduct taxes, so this is not a SM. But if the excess return from this strategy over traditional SM is significantly higher than the refund I get through tax deduction, it makes sense. Its laden with some additional risks and most importantly, one should know what they're doing. But all I'm saying is this can be considered because my theory has the same underlying base assumption - "stocks will do well in a long-term horizon".

But I will stop here, else the mods will kick me out for being off-topic in a "SM" thread. Smiling Face With Open Mouth And Smiling Eyes
I don't like this idea at all. If your options expire to be worthless, how are you paying back your HELOC?

LEAPS already leveraged and you are using leverage to buy a leveraged product... Sounds like a really bad idea.
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Sep 19, 2013
2451 posts
885 upvotes
Winnipeg
clutch31 wrote: I don't like this idea at all. If your options expire to be worthless, how are you paying back your HELOC?

LEAPS already leveraged and you are using leverage to buy a leveraged product... Sounds like a really bad idea.
With covered calls, your short options expiring worthless is your desired goal. There is nothing to pay back here.

If you're talking about LEAPS expiring worthless, the ones I've studied in my theory are 2-yr LEAPS with 50% strike, so yes you will be underwater if you're not able to rollover. One would need to keep buffer to rollover. Rollover would need some capital to buy LEAPS at those crashed prices. But I say good catch, needs more analysis on things that could go wrong and what to do.

Regarding leverage, thats correct, thats what I mentioned about additional risks. You gains & losses are exaggerated. That comes back to the base assumption in both SM and my theory - you shouldnt be doing any of them if you dont believe that stocks will gain in long term. If stocks are to be negative after 20 years, then the stock market is the least of my worries.

I can understand that not everyone is comfortable with this. Even for me, this is a theory only. But something that I can understand and I would give a lot more thought to.
In the beginning the Universe was created. This has made a lot of people very angry and been widely regarded as a bad move. -- Douglas Adams
Newbie
Mar 1, 2016
18 posts
2 upvotes
Random question about the tax write off component..

If we were to invest in a start-up, or register a partnership to invest in a start up, are we still able to claim this?

Thanks in advance
Member
Dec 13, 2010
327 posts
369 upvotes
Vancouver
paulmenezes wrote: Random question about the tax write off component..

If we were to invest in a start-up, or register a partnership to invest in a start up, are we still able to claim this?

Thanks in advance
Yes, investing in a business should count, and allow you to deduct the interest paid on the loan
Newbie
Mar 1, 2016
18 posts
2 upvotes
mastaj wrote: Yes, investing in a business should count, and allow you to deduct the interest paid on the loan
Thank for the reply. I figured as much. Thx
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Jul 4, 2005
7054 posts
1207 upvotes
Ottawa
I finally got my CIBC HPP so I have a base limit of $50k and ready to enter the game! I'd like to decrease any extra paperwork during tax season for my initial years as I get familiar with the process, thus, I'm thinking of tossing it in to ETFs that don't have any ROC. Would that be any fund in this link with no ROC defined? This is the first time I'll be opening up non-registered accounts, so want to minimize paperwork wherever I can. On the other hand, I know I can also choose stocks that pay dividends(e.g. AAPL), but being foreign, requires some additional paperwork? Hope my questions make sense...
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Sep 19, 2013
2451 posts
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Winnipeg
jeeva86 wrote: I finally got my CIBC HPP so I have a base limit of $50k and ready to enter the game! I'd like to decrease any extra paperwork during tax season for my initial years as I get familiar with the process, thus, I'm thinking of tossing it in to ETFs that don't have any ROC. Would that be any fund in this link with no ROC defined? This is the first time I'll be opening up non-registered accounts, so want to minimize paperwork wherever I can. On the other hand, I know I can also choose stocks that pay dividends(e.g. AAPL), but being foreign, requires some additional paperwork? Hope my questions make sense...
I had a detailed post on all tax components, maybe upto 2-3 pages back (if you're using max posts per page). Edit: post # 3383

But long story short, stocks will be a good bet if you want to start slow. Canada/US taxes dont matter. Only real difference is Canadian dividends have dividend tax credit and US dividends need W8-BEN. If you find stock ETFs with no ROC, please share. There are few I found with annual ROC, so thats something to consider if you prefer ETFs over stocks.
In the beginning the Universe was created. This has made a lot of people very angry and been widely regarded as a bad move. -- Douglas Adams
Newbie
May 15, 2018
34 posts
14 upvotes
Toronto, ON
Wow - what a thread! Been researching SM for a while and I am about to sign with a lender. Below is my situation and had a few questions - was hoping if someone can confirm my understanding?

My situation:
- Current mortgage remaining - $820k @2.7% fixed, expires in Jan 2023
- Property value - $1.2M
- Approved total - $960k (so LOC of 140 right now)
- Tax brackets - Self (45.16%) / wife (41.16%)
- RRSP - maxed out / TFSA on track for maximization over next 1-2 years
- Non-registered investments - $250k (global, not just in Canada)
- NBC All in One --> Prime-1.15% for mortgage and Prime+0.25% for HELOC portion. I also have Scotia STEP approval at (-1.05 / +0.5%), but not considering obviously due to higher price
- No other debts

My strategy:
1. Right away, sell 100k from my non-registered account and pre-pay my current lender, BEFORE I break my mortgage. This will REDUCE my the early breakage penalty with current lender. This will also provide double pre-payment in same year.
2. Move to NBC and then pre-pay another 100k to increase HELOC (mostly done over the course of the year, as I don't think I can immediately pump that much money in market - money is coming from global investments, pumping back from Canadian account will take a bit of time)
3. Remaining 50k non-registered funds keep stashed as rainy-day funds.
4. Continue to maximize RRSP/TFSA and then pull HELOC to invest in non-registered accounts (both in my and wife's name, haven't decided the split)

Questions:
1. Is my strategy for #1 sensible? Should I prepay my current lender and then again pre-pay my new lender?
2. Should I just pre-pay maximum right away, and thereby reduce any mortgage?
3. I also read that moving HELOC to RRSP (if I don't have enough free cash flow) will help further due to tax benefits - with NBC's sub-accounts capabilities, is this wise to do from a paper trail perspective? I want to keep the accounting as simple as possible.
4. Is there a benefit in investing the entire heloc in my name, due to the higher tax bracket? Does the heloc interest rate only use the top bracket for tax saving purpose?
5. Are NBC and scotia products comparable? I want to see if I should negotiate with Scotia if their product is better.

Thanks for the inputs!
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Jul 4, 2005
7054 posts
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Ottawa
Here is my nasty flowchart, curious to hear your comments on this. As I mentioned before, easy paperwork is the goal hence why I have a bunch of free tang accounts. Any optimizations are welcomed. I have P2 in the mix too because our incomes today are the same but it could differ in the future etc., so would like to future-proof if I can.

Flowchart

It was always hard to find charts like this so hopefully it can be helpful for others too!

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