Smith Maneuver Blueprint for Success in 2025
Pay off your mortgage 5-10 years faster, while saving thousands on income tax. Send kids to school. Retire sooner, with more. The Smith Maneuver can give you a real financial edge to achieve these goals and more. But for the Smith Maneuver to work well, it’s important to understand what’s involved with setting it up and optimizing it.
By reviewing our Smith Maneuver Blueprint, you’ll learn:
- Top tips for setup/ implementation
- How to help optimize performance and minimize risk.
- Smith Maneuver example, and what the results could look like.
As a Certified Financial Planner and Mortgage Broker with extensive Smith Maneuver experience, I can answer your questions, provide personalized calculations, and help manage the implementation and optimization along with you, at no extra cost. Book a free consultation in the calendar.
Top Tips for Smith Maneuver Setup/Implementation
Here we lay the foundation for the Smith Maneuver.
Understanding Your Risk Tolerance
Because the Smith Maneuver involves borrowing from a HELOC to invest, the first thing to understand is your risk tolerance.
Risk tolerance can be defined as your ability to hold on to your investment/ not sell your investment when the market drops.
When the market drops, will it come back up? At every point in the history of the modern financial markets/stock markets, going back over 150 years, markets have always rebounded after a drop. But the key has been holding during the dips. Those who try to avoid or time the dips by selling, usually get caught holding losses and missing out on market rebounds.
There will continue to be market dips and corrections in the future, but markets will also continue to rebound and increase.
Tolerating risk is a high level of understanding that these fluctuations exist, and with this understanding, building confidence in your ability to withstand selling on emotions during these fluctuations.
Trusting yourself to hold the course even when things look terrible is the single biggest key to success with the Smith Maneuver.
Committing to the Long Term
Going hand in hand with understanding the inevitability of market fluctuations and your risk tolerance, is holding for the long term. We’ve studied the numbers going back 50 years and have seen that for periods of 20+ years, there hasn’t been any point where you would have lost with the Smith Maneuver, using a simple S&P 500 index investing strategy.
In any 20 years measured, there have been significant gains. However, there were shorter term, 5 year periods where you would have lost money with the Smith Maneuver using the same S&P 500 index investment strategy – IF you sold.
So the message is not to pull out funds in the short term. The Smith Maneuver is designed for and rewards those who take a long-term approach of 15 – 20+ years.
Given this, it’s a best practice to think of the Smith Maneuver as a tool to help you reach your longer term goals, such as paying down the mortgage faster or retiring sooner, with more. The strategy should not be aligned with shorter term goals that require funds within the next 5 years.
Selecting the Best Mortgage
Picking the best mortgage is essential for an optimally functioning Smith Maneuver. At Altrua Financial, we go through a vetting process to select the best mortgage. This means lower costs, less time involved, more efficiency and more flexibility.
Typically the mortgage is sourced through a Big Bank, and we ensure the lowest most competitive interest rate with that lender. In addition, we ensure these features:
- Readvanceable HELOC: The credit limit grows as the main mortgage is paid down.
- Flexible pre payment/ extra payment privilege: Extra allowable mortgage payments that do not trigger penalties and are not limited to ‘annually’ or ‘semi-anually’.
- Allows readvancing of the HELOC at 80% loan to value/ 20% down payment: Every dollar of mortgage repayment increases the HELOC limit from the beginning.
- Multiple mortgage ‘components’: Allows the mortgage to be separated into several distinct parts, each serving a specific purpose and organized for clean record keeping. For example, there could be a HELOC component for personal use, and a HELOC component for the Smith Maneuver, in addition to the main mortgage component.
- Deducting HELOC interest payments from the HELOC itself (‘capitalizing’ the interest): As the borrowings from the credit line charge interest, we seek the option to charge this interest back onto the HELOC itself. This option means no additional out of pocket payments for you and higher income tax deductions.
- Automatic investment: The HELOC can contribute directly to your investment without manual account transfers or additional work.
The right mortgage will make all the difference. Connect with Altrua to get our recommendation for today’s best Smith Maneuver mortgages and how they meet these criteria.
Other Mortgage Resources:
Account Setup and Coordination
Given there are a few moving parts with the Smith Maneuver, it’s important to have a clear roadmap and checklist to help with the setup. Each situation will be different, but here’s the setup process we work through with clients. It typically takes about 2 hours of your time in total, depending on questions.
Mortgage Application (15 mins)
After an initial discussion or two, completing personalized calculations and answering your questions, a secure/ encrypted application link is emailed to you.
We provide a ‘pre approval’ and best mortgage options to accommodate the Smith Maneuver long term.
Mortgage Approval (30 mins)
We do all the heavy lifting with the lender, but you’ll want to review the approval document and ask any questions. Approval can take a few days to obtain from the best lender, but it will be worth the wait.
We will ensure the mortgage approval is set up perfectly so that all accounts are aligned with the correct payment dates. We will make any necessary changes/ adjustments at this point during the mortgage approval.
Based on your application, we also determine more specifically the initial amounts to be invested on a monthly basis.
Bank Account Setup (30 mins)
Once the mortgage is approved, set up your dedicated Smith Maneuver bank account. It’s best practice to have a basic Smith Maneuver dedicated account to handle 2 transactions per month. These basic/ low transaction accounts often involve no monthly fee.
As part of the mortgage approval, we set up your daily chequing account to make the regular mortgage payments to the new re advancable mortgage.
We obtain a ‘pre authorized debit form (PAD)’ or void cheque from the mortgage lender for pulling funds to make the tax deductible investments. With the right mortgage, these payments flow directly from the HELOC itself, thereby avoiding manual transfers to the separate account.
Investment Account Setup (30 mins)
We determine based on your preferences and goals, how you’d like to invest and where you’ll be investing. We offer a partnership for low cost balanced ETF based portfolios, and can work along side you long term. We also support ‘Do it Yourself’ investing.
Either way, you’ll need to open a dedicated non-registered investment account (often called ‘self directed margin account’ in online brokerages).
Provide the PAD/VOID cheque to the investment manager to link investment transfers to the newly formed Smith Maneuver Investment Account.
Financial Plan
Complimentary financial planning is offered, to project how your Smith Maneuver Strategy will affect your retirement and other life goals. ($2,500 value)
Ongoing Management: Income Tax and Bookkeeping
More discussed in the next section, however, the main point for now is determining how you’ll be proceeding with the bookkeeping and income tax filing. If you’re doing it yourself, set up calendar reminders and start your record keeping in Excel. If you’re working with Altrua Financial or a different bookkeeper, set up that relationship before the Smith Maneuver is finalized.
Reliable Bookkeeping
Bookkeeping is essential for the success of the Smith Maneuver, in case the CRA wants to see how you’ve been deducting the HELOC interest. Altrua Financial assists clients in keeping proper records to help make this process simple. Or you may elect to keep records on your own.
Either way, the main records you’ll need to have access to are:
- Annual mortgage statement (typically mailed directly from the Bank in January)
- Copy of your annual mortgage payments. (downloaded PDF file)
- Record of all HELOC transactions including interest charged back/ recapitalized onto the HELOC and each month’s investment purchase. (downloaded PDF file)
- Copy of the year’s investment purchases (downloaded PDF file)
- A spreadsheet file that matches/reconciles and summarizes these different transactions for the year. (Template provided by Altrua Financial)
WARNING: For record keeping ensure your HELOC and Smith Maneuver investment account are strictly dedicated to Smith Maneuver activities. We need to be able to trace and match or ‘reconcile’ each transaction (there should be only 12 investment transactions per year) across these forms. However, other transactions, such as spending on personal items in the Smith Maneuver dedicated HELOC, will throw off the accounting and could result in hours of forensic reconciliation from an accountant at a higher cost.
As long as the mortgage components (ie, the HELOC) used for the Smith Maneuver are kept distinct, it will be simple and there should be no issue.
If non Smith Maneuver related spending is required from the mortgage, this should be done from a distinct mortgage component (ex. a different HELOC account) within the overall mortgage. Selecting the best mortgage will help to facilitate this easily in case it’s required.
We recommend the mortgage be set up for monthly payments to help reduce the number of payments to 12. Keeping in mind, monthly payments can still be accelerated by making extra pre payments, as discussed in ‘picking the right mortgage’ step.
Optimizing Smith Maneuver Performance, While Reducing Risk
Once the foundation is laid, we aim to optimize performance and minimize risk for your best outcome.
Debt Consolidation and Interest Cost Efficiency
If you have a car loan, other loan or credit card debt, it’s usually best to consolidate this into the main mortgage at the outset of the Smith Maneuver. This is because:
(1) It can lower the interest cost.
(2) It frees up monthly cash flow that can be used for extra payments into the mortgage.
For example: Instead of making a monthly mortgage payment of $2000 and a car payment of $500, the idea is to consolidate the car loan into the mortgage and then increase the mortgage payment to $2500 per month.
This speeds up the conversion to tax deductible interest and improves long term functioning of the strategy.
Income Tax Savings
The Smith Maneuver is in large part, an income tax savings strategy.
Because the Smith Maneuver dedicated HELOC balance is invested into income producing (or potentially income producing) assets, the interest can be deducted for income tax purposes. This involves an ‘interest cost’ entry on Line 22100 of the income tax return.
To optimize income taxes, it’s important to have the most tax efficient investments. We recommend investment classes heavily weighted towards capital gains, since this is the most efficient tax treatment – even more so than dividends. However, we are happy to work with any preferred investment strategy.
Also, the Smith Maneuver and income tax reporting should be structured to involve both spouses on the home (if applicable), from the first income tax filed, to allow for income splitting strategies and potentially lower overall taxes.
If you already have an accountant, at Altrua we are happy to collaborate with them on the Smith Maneuver. Otherwise, at Altrua Financial we offer a low cost income tax and book keeping service, so you can save time while proceeding with confidence.
Income Tax Return Re-investment
Once the interest deductions are processed and the income tax return is received, how this refund money is used can help to make the Smith Maneuver work to its fullest.
The best practice, and fundamental to optimizing the Smith Maneuver strategy, is to apply the return/refund against your mortgage.
Paying down the main mortgage using your income tax return helps you to become mortgage free faster while perpetuating the tax-deductible mortgage conversion process.
Maximize Risk Adjusted Returns
There are different takes on what investment works best for the Smith Maneuver. Some prefer dividend-paying stocks, others real estate investments, yet others on Exchange Traded Funds/ETFs.
The main rule for deducting interest for income tax purposes is that the investment is income producing, or has the potential to be an income producing investment. So no bitcoin or gold investments would qualify, because these investments can’t possibly pay a dividend or income stream.
At Altrua, we believe tax efficient stock market index Exchange Traded Funds (ETFs), such as the S&P 500 index, or a Globally Balanced portfolio of indexes, are well aligned with the Smith Maneuver.
One reason we like ETFs is that we can easily study past returns over long periods of time. With an ETF such as the S&P 500 index, the returns are reliable long term – not just for 3-5 years of past performance, but for 100+ years.
Another reason is ETFs provide ‘efficient’ returns from a highly diversified index of investments/companies (ex. The S&P 500 index invests in 500 top US companies). Returns are efficient because the management fees/costs of owning ETFs can be very low, under 0.10% in some cases. Because of the low ongoing management cost, this leaves more returns for you, the investor. Some mutual fund investments, for example, charge 2%+ in fees, which eats into your return over time.
With the right ETF, returns are also more tax efficient – focusing on capital gains taxed most favourably upon the sale.
Finally and perhaps most importantly, the ETF strategy is simple. All you need is an investment account such as Questrade or through your bank, and investment purchases can be easily managed. It is simple to set up and manage long term.
Reducing Investment Risk
It never ‘feels’ like a great time to invest. The market is either too high, or it’s not performing well. Then there’s all the political risk and noise fed to us by the media.
But by averaging in, or buying into the markets slowly and consistently over time, you can reduce risk and improve returns. Because the Smith Maneuver works over several years to convert taxable mortgage interest into tax deductible interest, this also spreads out your investment over several years.
When markets are going up, you’ll feel the confidence that comes with the returns. When markets fall, you’ll still add to your investment consistently at bargain prices.
In fact, by buying as markets are decreasing, profits can be made during longer periods of ‘flat’ markets, as markets move back up to/return to the point when they started dropping. Unless you’re within 5 years of retirement, a down market can be a real opportunity for an investor.
At the End – Efficient Collapse for More Tax Savings
Years down the road when approaching retirement, you’ll likely have a large NON Registered investment (ie. NON RRSP/ TFSA) that is part of the Smith Maneuver strategy. So when selling the investment and taking the profits, it will be subject to capital gains tax.
It’s important to consider the income tax treatment of these capital gains (profits from the Smith Maneuver), and to potentially reduce income tax.
One way to do this is to collapse the Smith Maneuver slowly over time. This means selling the investments to pay down the HELOC and take profits, perhaps over 5 years leading up to, or as you enter retirement. If you still have a main amortizing mortgage in addition to the tax deductible HELOC, you could pay off the main mortgage at 20% per year, for example, and potentially avoid pre payment penalty.
Another potential strategy is to plan some years at the beginning of retirement, with no other income. This means postponing pensions for some time, to dedicate these years to cashing out your Smith Maneuver, thereby keeping the marginal tax rates and average income tax paid, at their lowest.
Yet another strategy is to purchase RRSPs with the sale of Smith Maneuver investments. Buying the RRSPs reduces the higher taxable income in the year, that was caused by the capital gains/Smith Maneuver profits. Then once the investments are in the RRSP, the funds can be withdrawn from the RRSP slowly over your retirement, to help reduce taxes paid. Once the RRSP is converted into a RRIF (registered retirement income fund), at the age of 65 or later, there is also the option of income splitting with a spouse, and the pension income tax credit that can work to make taxation even more efficient.
If you have a spouse, by structuring the Smith Maneuver properly at the outset, income splitting strategies can be utilized as well.
Smith Maneuver Example
Here’s a Smith Maneuver example, applying the strategies seen in the Blueprint above. For more Smith Maneuver examples, click here.
Assuming:
Home Value $1,000,000
Starting mortgage balance, (in this example a refinance): $500,000
Amortization: 20 YRs
Interest rate: 4.5%
Mortgage Principal payment at the beginning: $1,294.37 (amount invested from HELOC in month 1)
Mortgage Interest payment at the beginning: $1,857.66
Total Regular mortgage payment: $3,152.03
HELOC Rate (average in this example): 5.75%
HELOC interest cost starting in month 2: $6.20 (this amount is ‘recapitalized’, or added back into the HELOC and this will continue for 20 years)
Income is $100,000 with a 31.48% Marginal Tax Rate
Income tax refund from HELOC interest paid (average tax refund over 20 years): $3,898 – used to repay the mortgage faster
Return on Investment: 7%
Results after 20 years:
Note: Mortgage payment did not increase given a consistent 4.5% (mortgage) and 5.75% (HELOC) interest rate over 20 years. Interest rates are likely to vary.
Investment portfolio value: $852,877
HELOC Balance Owing: $500,000
Net Investment gain after HELOC repayment: $352,877
Accumulated income tax savings: $99,466
To help reduce capital gains tax on the $352,877 of realized gains in the unregistered Smith Maneuver portfolio we apply the following strategies:
- Spread the sale over 5 years or $70,575.4/yr to keep the marginal tax rate lower
- Arrange for the first years of retirement to be ‘other income free’ by postponing other pensions/ cash flows to keep the marginal tax rate lower on the sales.
- Place some of the funds in RRSPs (if under the age of 71 and have room left)
Disclaimer: Past performance does not guarantee future results. The information on this website is for education and illustrative purposes only, and is not intended to be used as, or construed as investment advice. Seek the advice of a licensed investment processional before investing.