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Learn How to make Your Canadian Mortgage Tax deductible
We want to help our clients reorganize their financial situation and provide them with the capacity to convert their bad-debt house mortgage to a good-debt investment loan. This process has become know as the Smith Maneuver – which was pioneered by a Financial Strategist named Fraser Smith. It's a ground-breaking, legal strategy that enables ordinary Canadian homeowners to convert their non tax deductible mortgages in to a tax deductible investment loan.
This process will help Canadians increase their assets while not increasing their debt.
Debt is only good when it is tax-deductible.
It is bad when it's the wrong kind of debt - the kind that is not deductible against your income.
Bad debt can be converted to good debt if you employ strategy set out in the Smith Maneuver.
Wealthy people have debt, and they like it that way. They use their after-tax cash for toys and holidays. However, they borrow to invest and deduct the interest on those investment loans. That's called "good debt" and it's how the rich become richer.
If you have house mortgage debt, it is the wrong kind of debt until you convert it to tax-deductible debt.
The key is starting with the proper mortgage product that allows you the ability to have one portion that represents your current debts (or the bad debt) and a second portion that is designed for your investments (for creating the good debt)
We are able to provide a mortgage that is divided into 2 portions. The 1 st portion would be a fixed rate and payment; this covers the current bad debt. The 2 nd portion allows for the funds to be advanced as you need it. This portion will be used for investments and becomes the good debt. The real benefit of this particular mortgage is that as you pay down the fixed or bad debt portion, that amount immediately becomes available in the 2 nd portion to re-borrow for investments.
Call us today - let us explain the process and set you on the path to a more prosperous future.
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Tax Strategy # 1: |
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Converting Mortgage Debt to Tax Free Debt Using an Existing Asset
If you already own stocks or equity mutual funds outside of an RRSP portfolio, and also have equity in your home, you can effectively convert your "bad" mortgage debt to good debt through an asset swap. Here's a simple scenario. Let's say you happen to owe $60,000 on your mortgage, and you also happen to own $60,000 worth of shares in a Canadian corporation. To execute the asset swap, take the following steps:
• Sell the shares.
• Use the proceeds to pay off your mortgage.
• Borrow $60,000 based on the equity in your home.
• Re-deploy the $60,000 in an eligible investment (i.e. stocks or equity mutual funds). If the shares you sold look good, you can make a similar investment.
Your debt situation hasn't changed, but your loan is now for the stock, not for your home, and your interest payments, are therefore tax deductible. This is effectively the same as having a tax free mortgage.
Of course, in real life, the numbers won't work out this perfectly. You might owe $80,000 on your mortgage, and own a $25,000 matching asset. In this case, you can use this method to convert $25,000 of your "bad" mortgage debt to "good" tax-free debt. The interest on the remaining $55,000 would still be taxable.
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| Tax Strategy # 2: |
Converting Mortgage Debt to Tax-Free Debt Over Time
If you don't have a matching asset to sell and re-buy, you can gradually convert your bad mortgage debt to good tax free debt through a systematic process. While this process is sometimes packaged by financial advisors as a tax-free mortgage, there are limits to how much tax sheltering you actually achieve.
mechanics are that you re-borrow a portion of each mortgage payment and invest the money in stocks or equity mutual funds. The money you re-borrowed is now good debt: debt where interest payments are tax deductible. As you start to pay interest on the equities, you will generate tax returns, which can be used to pay off the mortgage more quickly. The added equity in your home allows you to borrow more, and grow your investment portfolio faster. The process creates an accelerating snowball effect. The result can be years taken off your mortgage with no increase in payments.
It's important to note here that you are incurring debt for the equities at the same rate as you are retiring debt for your home, so your debt level remains constant. Once your mortgage is paid off, you are still in debt, but your liability is balanced by the investment portfolio you've acquired. It is essential that you consult an accountant or certified financial advisor if you want to follow this strategy. |
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| Tax Strategy # 3: |
If you own an unincorporated business, Revenue Canada treats you and the business as the same entity. This means that if you have business expenses, you can use them to incur business debt and free up your cash flow to pay off your mortgage, your car loan, or any other debt, more quickly. The advantage, again, is that interest payments on business loans are tax deductible. (Note: Paying yourself out of the business does not denote a business expense. This has to be money that you pay to others.)
The same method can be used if you own rental property, or rent out an apartment in your home. Borrow to pay any related expenses you have. The interest you have will be tax deductible, and the extra cash can go directly into your mortgage.
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