An in-depth look at the legal Canadian tax strategy that converts your non-deductible mortgage interest into a tax-deductible investment loan, accelerating both debt payoff and wealth creation.
The Concept
In Canada, mortgage interest on your primary residence is not tax-deductible. However, interest on money borrowed for the purpose of earning income (investing) *is* deductible. The Smith Manoeuvre allows you to swap bad debt for good debt incrementally as you pay off your home.
How it Works
Using a readvanceable mortgage (like a HELOC), every dollar of principal you pay off becomes a dollar of borrowing room. You use that room to invest in income-producing assets, and the interest on that borrowing becomes a significant tax deduction at the end of the year.
The Compounding Effect
The annual tax refund generated by the interest deduction is then applied as a lump sum to the mortgage principal, creating even more borrowing room and accelerating the cycle. Users of this strategy can often shave 10-15 years off their mortgage while simultaneously building a large investment portfolio.
"Why pay off your mortgage for thirty years when you can make the bank work for you?"— Rahul Jain