lamz's Journal: "The Smith Manoeuvre" by Fraser Smith

I just read an interesting column by Elizabeth Nickson in The National Post (2003/01/17).

She writes about a book called "The Smith Manoeuvre" by Fraser Smith, which outlines a way for Canadians to turn mortgage interest into a tax deduction. (U.S. taxpayers can do this very simply, but Canadians have to work at it.)

First, a little background. A few tax returns ago, I decided to take a risk, and began claiming the interest paid on my margin account as a tax deduction -- an act which followed the spirit but not letter of the law. CCRA allowed my deduction, but at the same time took a few fellow Canadian taxpayers to court for doing the same thing. Well, the CCRA soundly lost the court challenges, and so claiming interest paid on money used to earn capital gains is now allowed. This is detailed in the excellent "Taxes for Canadians for Dummies," by Christie Henderson et. al.

The basic strategy outlined in "The Smith Manoeuvre" is this:
1. Plough every last cent into paying down your mortgage.
2. Take out the largest second mortgage you can, and invest the entire amount.
3. Claim the interest paid on the second mortgage as a tax deduction.
4. Plough your tax refund into your first mortgage.
5. Increase the second mortgage to the maximum, and invest it all.
6. GOTO 3

I'm going to pick up the book tomorrow, and am seriously considering following the plan. If I find any more information, I'll post it here. For now, take a look at the website for the book: Smithman.net.