Trying to get my head around the Smith Manouvre - Calgarypuck Forums - The Unofficial Calgary Flames Fan Community

V · 12-16-2009, 11:34 AM

I didn't want to hijack the Stocks thread with this, so I thought I'd start a new topic.

Hypothetically, I have 100k in a cash investment account. I also have a 100k mortgage. Can I withdraw the 100k from my investment account, pay off the mortgage, then take out a LOC against the house for 100k, and use that borrowed money to deposit 100k into my investment account? Essentially I'm making all of the interest I pay on the mortgage tax deductible.

photon · 12-16-2009, 11:37 AM

That's the idea yeah.

Most people don't have $100k sitting around, so they have to go at it bit by bit, but that's the goal; to have 100% of the mortgage "paid off" and the line of credit is being used for investments.

VladtheImpaler · 12-16-2009, 11:38 AM

Quote:

Originally Posted by V

I didn't want to hijack the Stocks thread with this, so I thought I'd start a new topic.

Hypothetically, I have 100k in a cash investment account. I also have a 100k mortgage. Can I withdraw the 100k from my investment account, pay off the mortgage, then take out a LOC against the house for 100k, and use that borrowed money to deposit 100k into my investment account? Essentially I'm making all of the interest I pay on the mortgage tax deductible.

I believe there was a Federal Court decision in favour of Revenue that ruled this a transparent tax avoidance maneuver, but I'll wait for a specialist to weigh in...

Slava · 12-16-2009, 11:40 AM

Basically you have your head around it. Feel free to PM me if you want more details or specifics. You just have to make sure that the investments are the kind to provide dividends or income and you're set though.

Shazam · 12-16-2009, 11:40 AM

Don't forget about the Picard Maneuver.

VladtheImpaler · 12-16-2009, 11:41 AM

Quote:

Originally Posted by Slava

Basically you have your head around it. Feel free to PM me if you want more details or specifics. You just have to make sure that the investments are the kind to provide dividends or income and you're set though.

Don't forget to email me, so that we can meet and you can woo me.

Slava · 12-16-2009, 11:42 AM

Quote:

Originally Posted by VladtheImpaler

I believe there was a Federal Court decision in favour of Revenue that ruled this a transparent tax avoidance maneuver, but I'll wait for a specialist to weigh in...

That decision (I'm assuming that you're talking about Lipton from the Spring?) was much more convoluted. IIRC those people were buying and selling shares in their own business to avoid paying tax.

The one thing that stems from Lipton though is the allowance of writing off interest on investment loans. In other words, that is supported by this decision.

VladtheImpaler · 12-16-2009, 11:42 AM

Quote:

Originally Posted by Shazam

Don't forget about the Picard Maneuver.

Or the more traditional Corbomite Maneuver...

macker · 12-16-2009, 11:43 AM

http://www.bloomberg.com/apps/news?p...d=ay0_hYKE0qq8

Carney says get ur done....

V · 12-16-2009, 11:47 AM

Quote:

Originally Posted by photon

That's the idea yeah.

Most people don't have $100k sitting around, so they have to go at it bit by bit, but that's the goal; to have 100% of the mortgage "paid off" and the line of credit is being used for investments.

I thought so, but here's the extension of the idea.

Let's say I only have 20k in my investment account. I can do the same transaction 5 times and end up with the same result. Pay 20k off mortgage, borrow 20k to put back in my investment account, use that same money to pay another 20k off the mortgage, borrow another 20k to refill the investment account, etc. Somehow that doesn't seem legal.

Slava · 12-16-2009, 11:48 AM

^ That is exactly what you can do. At the end you're still going to be borrowing $100k, right?

V · 12-16-2009, 11:50 AM

Quote:

Originally Posted by Slava

Basically you have your head around it. Feel free to PM me if you want more details or specifics. You just have to make sure that the investments are the kind to provide dividends or income and you're set though.

Care to expand on that? What kind of investments do not provide income? My investment account is used for buying and selling stocks. That would appoy, would it not?

Slava · 12-16-2009, 11:51 AM

Quote:

Originally Posted by V

Care to expand on that? What kind of investments do not provide income? My investment account is used for buying and selling stocks. That would appoy, would it not?

Well the main one that doesn't fit the bill is Real Estate.

Pastiche · 12-16-2009, 11:55 AM

Quote:

Originally Posted by V

Care to expand on that? What kind of investments do not provide income? My investment account is used for buying and selling stocks. That would appoy, would it not?

Better to go into fixed income dividend based mutual funds or ETFs.

Slava · 12-16-2009, 11:57 AM

I should clarify that the test is the investment has to be dividend or interest producing.

V · 12-16-2009, 12:04 PM

Really, so the interest paid on borrowed money that is used for (let's say) buying and selling penny stocks is not tax deductible? I had always assumed that it was.

loob job · 12-16-2009, 12:05 PM

Is there a counterclockwise swirl at the end of this manouvre?

Slava · 12-16-2009, 01:50 PM

Quote:

Originally Posted by V

Really, so the interest paid on borrowed money that is used for (let's say) buying and selling penny stocks is not tax deductible? I had always assumed that it was.

Well like I mentioned the test is that it would produce dividend or interest income. There are certainly stcka that could meet that requirement. Honestly I haven't had many people who want to invest money from their house into penny stcka though...it's extremely risky.