For nearly four decades, Canadians have turned to an investment strategy of writing off the interest from mortgage payments as tax-deductible.
Known as the Smith Manoeuvre—after its creator, financial planner Fraser Smith—the strategy involves getting a readvanceable mortgage, which includes a line of credit.
After paying the mortgage every month, a homeowner then borrows the exact same amount of money under the line of credit, invests it, and reaps a refund after filing their income taxes.
The Smith Manoeuvre effectively takes advantage of a Canadian law that allows the debt from paying for a home to be invested in a source with the reasonable expectation of generating income, something that can then be written off an income tax statement.
Amid today’s 5% overnight interest rate, ever-rising real estate costs, and stubborn inflation, such a strategy sounds appealing.
This goes double for mortgage brokers. Ryan La Haye, mortgage broker at Group RLH – Planiprêt Mortgage Cabinet, says brokers need to think as strategically as possible about how to engage with clients. In an age when generative AI is catching up to humans, he says, helping clients with complex investment strategies like the Smith Manoeuvre can make brokers more relevant.
“If we don’t gravitate towards something that’s completely outside of simply helping you get your mortgage, finding you an approval, or giving you a great service,” La Haye says, “I don’t think that’s going to be enough.”
However, mortgage brokers looking to incorporate complex strategies like the Smith Manoeuvre into their offering to clients shouldn’t just go in guns blazing. There are a number of considerations brokers should make first.
The Smith Manoeuvre is actually trademarked by Fraser Smith, and mortgage brokers cannot simply say they know how to use it without taking an accreditation program.
La Haye, who is accredited, says brokers who use the term could face legal penalties for violating the trademark, although they haven’t gone after anyone just yet.
Ultimately, the Smith Manoeuvre is complicated. Clients need to understand how debt conversion works, how to pick the best mortgage lender to properly do the Smith Manoeuvre, and understand all of the ways to speed up tax rebates — known as ‘accelerators.’ It also means understanding the sorts of investments the Smith Manoeuvre cannot take advantage of, like RRSPs or TFSAs.
Having a broker who understands this process is critical, even if they aren’t following the exact methodology laid down by Fraser Smith. In fact, La Haye says, it is possible for brokers to offer their own version of the Smith Manoeuvre, so long as they don’t violate Smith Consulting Group’s trademark.
He compares it to the way fast-food chains continue to thrive despite the dominance of McDonald’s. “You can do hamburgers,” he says, “you just can’t call it a Big Mac.”
Understand—and prepare—your client
Not everyone will benefit from the Smith Manoeuvre.
La Haye describes it as a strategy that works best for potential homeowners who need additional cash and cannot generate more. This could mean someone who is paying for their family’s expenses, a car, a home, and isn’t able to leverage their salary or other income accordingly.
Perhaps most importantly, La Haye says, the Smith Manoeuvre isn’t a short-term bet. At minimum, he says, clients should be willing to look about 15 years out.
“Anyone who looks to implement this as a short-term strategy is very bad,” he says. “This is why we have an accreditation program to teach people, but it’s mis-implemented and mis-advised many, many times.”
For brokers, the Smith Manoeuvre isn’t just a financial service. La Haye says it acts as a conversation starter, even with non-ideal clients. It lets them know that you can provide them valuable help with strategies to reduce their mortgage payments, or otherwise generate income, in a way that an automated mortgage approval system or low-cost brokerage simply couldn’t.
“It’s not necessarily about implementing it,” La Haye says. “It’s more about showing that this is the sort of a service I offer.”
Work with other financial professionals
The Smith Manoeuvre and other complex financial strategies aren’t entirely within a mortgage broker’s purview. La Haye suggests mortgage brokers ensure any clients attempting the Smith Manoeuvre have an accountant, and ask to speak with them to ensure what’s going on.
He also says a financial planner to manage investments is essential, especially if they are independent rather than tied to a specific bank.
Ideally, any financial professionals who work on Smith Manoeuvre cases should be accredited. This doesn’t just apply to brokers.
La Haye says the accreditation program is also meant for financial planners, accountants, and realtors. If everyone works together, he says, it doesn’t just create a more valuable experience for a mortgage broker’s clients, it also raises revenue for everyone involved in the process.
“When people want to implement this manoeuvre, I suggest that they create their own team that’s all accredited,” La Haye says. “That way, the client’s not going to run into any problems and, at the same time, you’re creating a nice loop of partners that are going to be able to share clients and drive clients to each other.”