The Smith Manoeuvre

The Smith Manoeuvre 'SM' is about transforming a nondeductible debt (bad debt) into a deductible debt ("good" debt), while potentially increasing your assets (in form of a stock portfolio) and paying off that nondeductible debt faster, using leverage with a home value as collateral. 

[this post is accompanied with R codes allowing investigations of the strategy under different financial situations]

In Canada, F.Smith originally applied this financial process on home mortgages, slowly restructuring such to increase individuals' Net Assets, leveraging the tax opportunity to "deduct interest expenses on money borrowed to purchase investments with the purpose of earning income" [CRA IT-533]. There are many variations of the SM, and I have elected to present one in this post that is of interest to me.

The overall objectives of the present SM variation are to (1) Accelerate the repayment of a home mortgage and (2)  Create additional financial assets in form of a dividend-growth portfolio (another interesting link for dividend portfolio), (3) without introducing additional financial burden other than the monthly contribution associated to the original home mortgage. First things first, let's review the mechanic of the SM process, then draw a clear picture of the risks.


Home mortgages are the combination of (a) a principal representing the required amount to purchase a home (what the bank lends), and (b) the interests representing the costs associated to borrowing from the bank (why the bank lends). The full amount of such a mortgage is repaid through monthly (or bi-monthly) contributions (and lump sum contribution to the principal) where part of the amount goes toward the interests, while the remaining goes toward the principal, and where the initial agreement is to secure (repay) a significant part of the overall interests, but with the understanding that gradually such proportion shifts toward repaying most of the principal.

'101 mortgage' statements apart, the SM will aim at borrowing back the progressively contributed amount toward the principal, to invest in a dividend-growth portfolio to benefit from the cumulative effect of (a) annual dividend distribution and (b) tax returns originating from the "interests on borrowed money to purchase investments" principle, to increase either the monthly contribution (limited to twice the minimum) or the lump sum contribution to the principal thus effectively attacking the mortgage while reducing interests (interests = function of remaining principal); effectively, there are 2 kinds of lump sum contributions, an annual contribution usually limited to 10% of principal, and a punctual but unlimited contribution at the end of a mortgage term (during rollover prior mortgage renewal).

NOTE  the "interests on borrowed money to purchase investments" principle applies providing that investments are carried in non-registered accounts, that is outside RRSP,TFSA and the like, and only if with the objective to try to earn investment income, including interest and dividends.

The financial instrument to borrow back the principal involves structuring a mortgage value (the principal) in a Home Equity Line Of Credit 'HELOC' (also referred to as a revolving line of credit), where the principal can be re-advanced (borrowed) for investment, yet subject to repayment of the amount drawn plus interest (at variable rate), with a HELOC minimum monthly payment requirement. To prevent the introduction of additional financial burden other than the original monthly contribution of the home mortgage, while re-advancing the principal, part of the amount will be invested in the dividend-growth portfolio while the remaining will be put aside to satisfy the HELOC minimum payment requirement, in other words capitalizing interests referred to as Guerrilla Capitalization in SM terminology (interests on interest being tax deductible, the tax return from "interests on borrowed money to purchase investments" principle remained effective).

At this point, one may wonder why is the Guerrilla Capitalization process tax deductible under CRA IT-533 #30; It is my understanding (please validate this with competent counsel in the matter of money management and tax deduction) that as the very first contribution has been fully dedicated to SM portfolio investment, then further interests, and interests on interests, are tax deductible. In other words, make sure to get your accounting right, and do not capitalize interests to do anything else but the Guerrilla Capitalization for supporting SM portfolio contribution from re-advanced capital .... or else things would go south from a tax deduction perspective !!!

NOTE since 2013, provided a minimum down payment of 20% of the value of the property is deposited, a maximum amount equivalent to 65% of the value of the property may be available in the form of a HELOC (the remaining has to be in the form of a mortgage loan). For example, $65,000 can be re-advanced in the HELOC with a property value of $100,000 as collateral.

Finally, this variation of the SM will be completed once a debt free status is reached, that is when the HELOC is paid up in full from the ongoing cumulative effect of monthly contributions, dividends and tax returns, being applied toward the re-advanced principal. (see final notes for other SM variations)


Thereafter is presented a full SM, for a Quebec resident (tax implications detailed in source code ; Ontario is implemented as well), on a $360,000 mortgage, with an annual percentage rate 'APR' of 3% compounded semi-annually requiring a minimum monthly contribution of $1,704, further structured in a HELOC with an APR of 3% compounded daily, and where assumptions for the dividend-growth portfolio are 3% annual capital appreciation and 4% annual dividend distribution.

The complete source code is available in my GitHub under WealthManagement/StandaloneTesting/ as SmithManoeuver.R. SM Simulations can be performed by modifying information relating to a specific Personal Financial Situation (income, rates, mortgage amount ...) in the 2 scripts contained in the directory WealthManagement/StandaloneTesting/FictionalFinancialSituation.

Figure 1
A primary read on assets reveals that the home mortgage repayment is anticipated by 8 years (2953 days), and an additional 5 years (1795 days) on top of the traditional home mortgage plan provides a dividend-growth portfolio of $537,000.

> max(Mtg$Schedule)-max(MtgSmith$Schedule)
Time difference of 2953 days
> max(SmithGConv$Schedule)-max(Mtg$Schedule)
Time difference of 1795 days

A secondary read on costs reveals that the total interests paid for a SM is significantly greater than than those paid for a traditional home mortgage. But in reality, a meaningful review of costs should be from the perspective of the debtor, and this cannot be evaluated by looking at interests considering these are 'attacked' by sources of revenue other than one's cash flow (dividends, tax returns) and thus only represent what's in for the bank as a creditor.

Thereafter is presented a summary view of the additional costs for carrying on a complete SM from the debtor pocket perspective, along with the net resulting assets (taking out the additional costs from the portfolio value).

Figure 2
Describing this figure is rather straightforward. we've mentioned previously that (1) in takes 5 additional years to perform a complete SM, and (2) no additional financial burden is introduced other than the monthly contribution originating from the initial home mortgage. Consequently, the additional costs from a debtor perspective is these 5 years of additional monthly contribution, or $103,000 represented by the green line that leads to a net asset dividend-growth portfolio value of $450,000 that should keep on generating value on a yearly basis.

Food for thoughts: consider the following statement from the Globe and Mail in view of retirement (I will update some R code for this later on):

it’s possible for an individual with no other sources of income to earn nearly $50,000 in dividends without paying any tax at all.

> max(NetBenefits)
[1] 450020.5
> max(cumsum(SMCost))
[1] 102221

THE QUEBEC PROVINCE LIMITATION (comments driven by evidences)

The amount of investment expenses deductible (understand the interests) in Quebec is upper bounded by the maximum of the distribution received (understand the dividends) originating from the amount borrowed to invest  during same year, unlike other provinces in Canada without such limitations. It is thus often said that SM is of lesser interests in Quebec, if interesting at all.

In the R code provided for the SM, this is materialized in IncomeStructure.R, under the function InterestTaxRefund() at
ProvEffectiveRefund = max(QcRates[QcBrackets<Income$GrossSalary]) * min(Amount, EarnedDividends)

Thereafter is the comparison of performing a complete SM in Quebec and in Ontario, under similar hypothesis. There is indeed an additional cost for performing such in Qc to the order of $12,000, representing  2.3% of the final dividend-growth portfolio value, stemming from an additional 7 months of contribution to complete the SM, but overall dividend-growth portfolio values are almost equivalent.

Figure 3

This scenario illustrates the fact that the limitation of the "deductible interests on money borrowed to invest" principle affecting Quebec residents only impact part of the SM processes for the first 15 years, at which point the capital appreciation of the portfolio value offset this Qc specific constraint. THIS RESULT IS A GOOD ILLUSTRATION OF GOING FROM THEORY TO GETTING EVIDENCES !


In this scenario, a complete Smith Manoeuvre sginificantly accelerates the repayment of a home mortgage loan while potentially creating an additional dividend-growth portfolio at reasonable costs from the debtor perspective, without introducing additional financial burden other than the monthly contribution deriving from the original home mortgage.


The Smith Manoeuvre is all about using leverage ... on your home ... which means part of the risks are driven by your appetite for profits while building a portfolio. To mitigate part of the risks associated with different variations of SM, I have chosen one SM variation that focuses on accelerating the repayment of the home mortgage, supported by the definition and the management of a dividend-growth portfolio.

Indeed, the portfolio's objective is to generate increased cash flow to contribute to lump sum payments toward the home mortgage and later on onto the HELOC. Thus, a meaningful exercise while investigating this strategy is to define portfolio characteristics that satisfy (1) the debtor investment profile, (2) cash flow effectively attacking outstanding debt and (3) variability in value that the debtor can stomach. Such exercise should be performed in collaboration with competent counsel in the matter of money management.

NOTE as illustrated in the previous section, Quebec residents have to factor in capital appreciation with more weight when designing their portfolio in view of tax return constraints, although appreciation similar to that of inflation (3%) deliver SM performances similar to that obtained in Ontario.

Once the definition of such portfolio characteristics is done, the lack of consistency in keeping your objective in line with the original plan is yet another risk, as the portfolio value may increase over time, providing extra cash flow that should be used for nothing else but repaying debts, and portfolio value may decrease over time, providing a temporary lack of extra cash flow for which re-evaluation is required with potential action (other than panic!).

Yet another inherent risk of the SM is the HELOC variable rate, a double edge sword, which upon increase reduces the contribution to the portfolio and increases the required additional interests to be paid. Same applies with the renewal of home mortgage rates throughout the mortgage life, with same implications. Managing the mechanics of the different debts' structures involved in the SM should be performed in collaboration with competent counsels in the matter of money management, and legal & tax accounting.

Finally, to prevent additional burden on you cash flow other than the monthly contribution deriving from the original home mortgage loan, the consistency with which the capitalization of interests intervene is crucial. Poor management at this level will drag on further interests to be paid, and might lead to draining additional cash flow. Although of lesser contribution to a risk of ruin, this may significantly increases behavioral stress on the debtor should this process be not fully understood and applied.


Figure 1 allows to define risks measures, one of them being the sell off portfolio equity value after the home mortgage loan is fully repaid, and when sufficient to fully repay the HELOC: this is exactly when the blue & pink curves intersect. As well, the standard deviation between these 2 curves represents the profits that would derive from selling off the portfolio equity to terminate the SM and minimize the risk of ruins due to the remaining HELOC debt.


The eligibility to the Smith Manoeuvre structure requires a 20% down payment of the home value, for the bank to grant you access to the instrument enabling a home mortgage loan (at fixed rate) to reside inside a HELOC (at variable rate). This is commonly referred to as All-in-One banking 'AIO'. Practically, the HELOC can represent up 80% of the home value, from which a maximum of 65% can be re-advanced toward the dividend-growth portfolio, the remaining being automatically in a mortgage loan.

In such scenario, interest to both HELOC and the mortgage loan can be directly withdraw from the AIO provided that paychecks are automatically deposited in that account. This efficiently use free cash flow to consistently reduce interests from the variable interest rate of the HELOC which are compounded daily.

Although this is sufficient to start a SM, creating a SM-specific sub-HELOC account associated to a SM-specific checking account, will enable easy track recording of SM cash flow for tax purposes should there be an audit (specifically the amount of dividends and "interests on money borrowed to invest" principle).

Below is an illustration of such AIO with National Bank of Canada. NBC advertises the AIO as a financial process where

Figure 4

In this scenario, fess and interests arise during cash outflows. Thus transfers from the main HELOC to the SM sub-HELOC account are immediately subject to interests, even if funds are not withdrawn from the SM sub-HELOC account. In other words, it might be more efficient to aggregate enough 'free principal' in the main HELOC to transfer a bulk amount in the SM sub-account synchronously with the purchase of equity in the trading account while growing the divided-growth portfolio. Furthermore, and for illustrative purposes at NBC, the SM checking account is subject to a 1$/transaction fee and the SM sub-HELOC account is subject to a flat 2,5$/month 'maintenance fee'. No additional fee exists besides the HELOC & mortgage loan interest (on top of the home value!).

It is my personal opinion (as a non financial adviser), that the most difficult part of maintaining the SM is cash flow transfers enabling the capitalization of interest in the SM checking account. Again, it is my personal opinion that, with support from competent counsel in the matter of money management and accounting, these transfers should be predetermined and automated based on the loan schedule received from the bank upon loan subscription, detailing the periodic amount of principal reimbursed upon each monthly contribution. I will update this post with R codes for that matter.


It is my personal opinion that variable interest rate should be monitored monthly, along with the dividend-growth portfolio performance, specifically in terms of anticipated $-figures from the dividends distribution. Indeed, it is the $-amount of dividends that directly contribute to the repayment of loans, not the capital appreciation (or depreciation) of the portfolio (yes they are related through the dividend yield but in the end, what matters is $-amount despite what goes up/down).

Furthermore, with support from competent counsel in the matter of financial advises, the loan interest rate should be monitored to strategically determine the length of the home mortgage loan, evaluated against the benefit of unlimited repayment of principal during roll over during loan renewal (which may drastically reduce the overall interest of the loan).

Should there be a good soul to design a SM dashboard, let me know !


There has been presented a variation of the Smith Manoeuvre with Guerrilla Capitalization for the creation of a dividend-growth portfolio. However, different variations of the SM can be thought of:
  1. - To reduce the overall risk exposure of the manoeuvre, part of the portfolio could be used to increase the repayment of the home mortgage (the capital appreciation), or upon full repayment of the loan, to contribute to attacking the remaining HELOC (if not totally closing the HELOC by selling out most of the portfolio equity).
  2. - Instead of investing in a dividend-growth portfolio, some argue that it would be desirable to invest in an aggressive equity-value growth portfolio. I remember reading some of Warren-Buffet thoughts on the subject in his 2012 annual letter to Berkshire-Hathaway investors (see page 19). Nonetheless, the main risk associated to designing such  portfolio is that very ability of management considering the overall objective of the SM is to repay a home mortgage by leveraging additional findings otherwise not available to you. If no dividends, extra-contributions should be brought in form of selling equity with relevant capital appreciation every year, effectively thinking you can beat or at least equate Wall Street. It is my personal opinion that this require well educated competent counsel in the matter of money management to perform as such without putting your home at additional risk.
  3. - To accelerate the reimbursement of the HELOC, the portion of the portfolio that derives from capital appreciation could be sold off the significantly contribute to repaying that debt.
  4. - To Increase the leverage used during the Manoeuvre by using a portion of the re-advanced principal not for direct investment in a portfolio, but as a collateral for another loan used to create a portfolio but with more capital. There are risks associated with leverage, and although I would personally consider such in some situation, I believe that is not the case when a principal residence, someone's home, is used as a collateral.  
  5. - Not to repay the HELOC and maintain the interests deduction (..for ever..), with the assumption that the portfolio will always balance out [the due interests + HELOC] in the end (this assumes interests are paid monthly out of one's pocket, or from some monthly distribution, or from selling some stocks).


  1. This is probably the most in depth analysis of the SM for quebec residents. I am shocked no one else has ever commented on it. Thank you!

  2. Hi Florent,

    I have a question about the quebec limitation. According to my understanding, as long as the interest on the LOC is less than the dividends paid out (which it is in your example - 3% LOC vs 4% dividends), this limitation should never impact the deductibility of the interest expense.

    What do you think?

  3. Indeed, I have factored this in my code although my understanding is that it's more about $$ value rather than percentage, which explains why this effect fades as the portfolio grows through compounding. In my example, after 15 yrs, the Qc limitation has no impact anymore (thus under constant assumption, HELOC interests would be entirely paid off by the portf.div):

    # This function determines the effective federal and provincial tax rates after
    # deducting interest expenses, and returns the effective fed & prov rates for calculations
    ## NOTE: IN QUEBEC, The amount of investment expenses you deduct cannot be greater than your investment income.
    ## [qUEBEC SOURCE]:

  4. Thanks Florent, but I still fail to see why it would apply, even in the early years. e.g in year 1, say you have a 10K HELOC @ 3% and a 10K dividend portfolio yielding 4%. The interest expense would be 300$ and the investment income would be 400$ (4% yield) + 150$ (3% capital gains / 2).

    So even in year 1, wouldn't you be able to deduct the entire 300$ ? What am I missing?

    Thanks for the insight.

  5. ... because at no point in time, on a calender year basis, you'll have the **same dollar amount** in the HELOC and your SM-portfolio.
    -> The SM-portfolio will always be lagging in terms of size (taking into accounts broker fees when making investment choices). Furthermore, although you will pay 3% on heloc right away, based on dividend ex-date frequencies, part of the SM-portfolio contributed during the year may not get the 4% you've mentioned (in my code, I have assumed 50% of the contributed cash does not get div returns during the year of their contribution).

    That, I believe, is the difference between theory and evidence when doing a SM.
    Yet from an ROI PoV, **check my Qc figure** and you'll see that the difference btw total div returns and Qc claimable div are very close, so although I foresee a difference based on my assumptions, I believe this is negligible and as a result, doing a SM in Qc and elsewhere in Canada comes down to the same numbers.

    HTH ... just an illustration.

  6. I see! Thanks for the explanation. Makes sense for stocks with annual dividends, but I suppose if one were to DCA into a monthly dividend ETF such as CDZ or VDY before each month's ex-div date, then the drag effect of the QC limitation would be virtually eliminated. Provided the LOC interest rate remains below the actual dividends received + 1/2 cap gains for the year.

    This is what I intend to do for my SM.

    Unfortunately I find it's very hard to get any reasonable advice on SM tax issues in quebec, most advisors either know nothing about it or say "leverage is too risky don't do it".

    So thanks again for your insight and help!

  7. My pleasure and I agree with your div-related comment, although I do not provide tax or investment advices. I have merely programmed one SM scenario and provide details on the hypothesis and my personal conclusion.

    One last thing on the conclusion side:
    1. Check your broker fees. It might be worth waiting to accumulate x$ and then pay broker fees when buying such ETF, rather than paying the broker fees monthly on the re-adv HELOC amount.
    2. Dividends are one thing, but make sure your investment strategy will maintain your principal relatively safe; less dividend but within a portfolio growing in principal might be a great option in the mid-term thanks to compounding. This is what I personally focus on.

    Let's check on this in 12 months from now ;-)

  8. Merci Florent, as a last comment, to avoid any broker fees, I intend to use Questrade for commission-free ETF purchases, which (in theory) will negate the commissions drag of doing a monthly (or even semi-monthly) DCA.

    As you say, now time to get some evidence :-)

  9. I'm trying to run the code in R Studio, but for some reason it won't go thru....
    What am I missing ?

    1. ... eventually you're missing some "error description or error log" for me to help. ;-)


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