In today’s world, it’s important to take control of your finances and make the most out of your hard-earned money. One way to do this is with the Smith Maneuver and Cash Damming.

In Season 7 Episode 5 of the REAL Collective Podcast, we sat down with Christina Pentlichuk and Stef Edwards of ‘In Debt on Purpose’ and they broke down these strategies for us and answered some key questions.

The Smith Maneuver

The Smith Maneuver is a way to use your equity and leverage it to invest in financial instruments. This involves using non-registered investments (stocks, mutual funds, ETFs) that you own to collateralize some or all your mortgage. By doing this, you are also able to take advantage of the tax deduction associated with the interest on your debt.

To use this strategy, you must have the right kind of mortgage. It needs to be re-advanceable, and you must have at least 20% equity in your home.

For example:

If you had a $500,000 home with a $400,000 mortgage and you pay $2000 per month – a portion of that payment is interest and a portion goes to pay off the principal.

Every time you make a payment it becomes more efficient (which means more money is going towards the principal and less towards interest.)

The Smith Maneuver takes advantage of the principal on the pay down. You would have $400,000 re-advanceable HELOC line of credit. Every time you pay $1000, the bank keeps that interest and $1000 goes to the principal (equity that you can now access).

Now, you can take the $1000 and invest it in capital markets and purchase a nonregistered investment that is now going to earn you income. CRA allows you to deduct the interest on that investment loan (borrowed for the purpose of investing) and the interest is tax deductible.

These tax deductions are what you would use to help pay your mortgage down.

Cash damming in conjunction with the Smith Maneuver

This a great strategy is for anyone that owns a primary residence and has or is looking to acquire an investment property in personal name.

Typically, one would think that the rental income that you receive must go towards paying the rental expenses, and that’s the flow of cash.

However, with the Smith Maneuver one of the accelerators is how the flow of cash is changed.

When you own that investment property personally, that income that you’re receiving for the rental must be claimed as personal income on your income taxes and you can claim the expenses on your personal income taxes.

When you use cash damming, you take that rental income and use it to pay down your primary mortgage first when you have that re-advanceable line of credit. Once you make that extra payment towards your principal portion of your mortgage a hundred percent of that is a principal pay down and is available back to you on that line of credit so you can immediately turn around and borrow that from the line of credit and pay a hundred percent of those rental expenses on the property.

If you’re in a positive cash flow position in your investment properties that means you’re paying your personal mortgage off faster because you’re only taking as much money out of the line of credit to be able to pay those rental expenses. The debt is the same, you just have less on your personal non tax-deductible mortgage and now the line of credit money that you’ve used to be able to pay those rental expenses is tax deductible.

If you’d like to find out more about these wealth building strategies, watch the full podcast episode, and reach out to Christina Pentlichuk (christina.pentlichuk@vinegroup.ca) or Stef Edwards (stef.edwards@vinegroup.ca).

For more valuable real estate related tips, you can check out the REAL Collective Podcast on iTunes, Spotify or YouTube.