Smith Manoeuvre is alive and well

Born in 1938, Smith died of cancer on Sept. 25 at age 74.

His “manoeuvre” was and is a way for Canadians to achieve what American homeowners enjoy as a matter of course: writing off interest on their mortgages. In Canada, you can’t directly deduct mortgage interest cost on a principal residence from your taxes.

Smith developed a perfectly legal end run that let homeowners convert the bad debt of non-deductible mortgage interest into the good debt of taxdeductible investment loans. The manoeuvre combined the traditional step of paying down mortgage principal with reborrowing monthly principal payments for the purpose of investing in stocks or other securities. Interest on the latter can be written off for tax purposes.

To do this required a mortgage that lets you reborrow the paid-down principal gradually and seamlessly, known as a “readvanceable mortgage” or a “readvanceable line of credit (RELOC). Former mortgage broker and Post mortgage columnist Tony Humble recalls a time when Smith had to convince Van City Credit Union to offer a RELOC. Once they did, it was followed by First Line, Merix Financial, Scotiabank‘s STEP program, TD’s HELOC, BMO‘s Readiline and Manulife One.

Smith developed it long before the 2002 publication of his book. Son and successor Rob Smith, 40, says his father used it in Vancouver in the mid 1980s, implementing it for his financial planning clients. The strategy swept through Western Canada but was almost unknown in the east until Smith shared it through his book.

The Smith Manoeuvre was a slim volume I was the first to review nationally. Later editions were called Is your Mortgage Tax Deductible? In its various incarnations, it sold 55,000 copies. It spawned not just a business for Smith but an entire cottage industry of mortgage brokers and financial planners who made it the strategic core of their businesses. In 2006, Fraser launched Smith Manoeuvre Financial Corp., which became Canadian First Financial Centres.

Despite the fact Smith helped make thousands of Canadians financially independent, retirement was not in his vocabulary. Friend and business partner Karl Straky says Smith was in the office the day before he went to hospital (he died of nonHodgkins lymphoma). Straky estimates thousands of Canadian mortgage brokers use the technique and that $250-million is placed into similar programs every year.

Sandy Aitken, a Smith protégé who went on to automate the process with his own Tax Deductible Mortgage Plan (TDMP) and his own book, Mortgage Freedom, estimates the industry is much larger. He estimates 20% of the more than $1-trillion in Canadian mortgage debt is in lines of credit tied to homes, or $215-billion. Even if the bulk is in consumption, the amount invested in the markets is at least 25%, for at least $50-billion, Aitken says. “Fraser started it all and the courts have since validated it.”

One financial planner in St. Therese, Que., Andre Cyr, says half his clients use the manoeuvre, and 75% of those are aged 40 or under. He says it’s not a hard sell. “It’s easy. People solicit me to set up the Smith Manoeuvre.”

There will be a celebration of Smith’s life sometime in October.

jchevreau@nationalpost.com