In Canada, if you borrow for the purpose of investing, where you expect to earn income,  the interest on that loan qualifies as being tax deductible.  For example, if you take out a line of credit to increase your investment portfolio, whatever interest paid throughout the year on that loan is a tax deduction.

Mortgages, on the other hand, are not tax deductible.  Because of this, Fraser Smith designed a wealth building strategy, “The Smith Manoeuvre,” which converts the interest on your mortgage into an income tax deduction.

Let’s say you want to invest your annual bonus – $15,000 – in mutual funds.  Rather than investing the funds directly, the Smith Manoeuvre instructs you to use the $15K to pay down your mortgage principle, than re-borrow the funds against your house to invest.  In this case, because the $15K was effectively borrowed for the purpose of earning income, it qualifies as being tax deductible.

The Smith Manoeuvre then goes one step more & advises to use that tax refund cheque to further pay down your mortgage.  This process is repeated until your mortgage is fully paid off, leaving you with a considerable investment portfolio & tax deductible investment loan.

Of course, this strategy does involve an increased level of risk & is certainly not for everyone.  The purpose of this page is simply to illustrate the tax deductible mortgage & inform clients that this option is available.  Implementing such a strategy should only be done after consulting with an accountant or financial adviser.

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