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If you’re a Canadian homeowner looking for smarter ways to build long-term wealth and reduce your tax burden, you may have heard of something called the Smith Manoeuvre. It’s a financial strategy that turns your mortgage into a tax-deductible investment loan over time. And while that might sound a bit complex, it’s actually a fairly straightforward idea—when done properly.

In this two-part guide, we’ll walk through how the Smith Manoeuvre works, who it’s best suited for, what kind of mortgage you need, and the potential risks involved. Our goal is to help you understand the mechanics and decide whether it’s a fit for your financial situation.

What Is the Smith Maneuver in Canada?

Imagine this: every time you make a mortgage payment, part of that money goes toward paying down your loan’s principal. Normally, that’s where it ends. Your home equity grows, but your home equity is doing nothing for you until you sell your home or refinance.

The Smith Manoeuvre flips that idea on its head.

Smith Maneuver is a legal, long-term strategy that lets Canadian homeowners turn their mortgage into a wealth-building machine. Here's how it works in simple terms:

You pay down your mortgage like usual.

As you build equity, your lender gives you access to a line of credit (called a readvanceable mortgage).

You borrow that newly available equity and invest it—in things like stocks, ETFs, or mutual funds that generate income.

Because you’re borrowing to invest, the interest on that loan is tax-deductible.

Over time, your mortgage is replaced with a deductible investment loan, and you're building a portfolio alongside it.

You’re not paying more—you’re just recycling your mortgage payments into a smarter, more tax-efficient strategy. Instead of waiting 25 years to be mortgage-free before you start investing, the Smith Manoeuvre lets you invest now, while paying off your home at the same time.

Smith Maneuver Example Using Realistic Numbers

Let’s say you’re paying down your mortgage and want to use the Smith Manoeuvre each month:

$800/month goes toward mortgage principal.

That $800 is immediately available to reborrow from your HELOC.

You borrow it and invest it in a portfolio (e.g. ETFs or dividend stocks).

After 12 months, you’ve invested $9,600 in borrowed funds.

With a modest 6% annual return, your investment could grow to ~$10,200.

You’ll pay about $576 in HELOC interest (6% on $9,600).

That interest becomes tax-deductible, and at a 40% tax rate, you get back $230 in tax savings.

Now imagine repeating that every year. In 10 years, you could have:

Over $130,000 invested

Thousands in tax deductions

A regular mortgage replaced by a tax-deductible investment loan

Who Is the Smith Maneuver Best Suited For?

The Smith Manoeuvre isn’t for everyone. It’s a long-term strategy that comes with both tax benefits and market risk, so it’s important to know whether it’s the right fit.

This strategy works best for:

Homeowners with stable, predictable income – You’ll need to make consistent mortgage and investment payments over many years.

People who have a long time horizon – The real benefits of the Smith Manoeuvre show up after 10–20 years.

Those comfortable with investment risk – Your borrowed funds will be invested in the market, and values will rise and fall over time.

Taxable investors – The tax deduction only helps if you’re paying income tax in the first place. If you’re in a low tax bracket, the benefit is smaller.

Disciplined savers – This strategy requires you to reinvest consistently and resist the temptation to cash out early.

If you’re nearing retirement, carrying high-interest debt, or uncomfortable with investing, this strategy may not be the right move.

What Are the Benefits of the Smith Maneuver?

When done right, the Smith Manoeuvre offers three big advantages:

1. Tax Deductibility

Normally, the interest you pay on your mortgage isn’t tax-deductible in Canada. But when you borrow to invest in income-producing assets (like dividend-paying stocks or certain mutual funds), the interest on that investment loan is deductible.

Over time, this can reduce your taxable income and result in a larger tax refund every year.

2. Accelerated Wealth Building

By reinvesting borrowed funds regularly, you build a portfolio while paying down your mortgage. That’s a powerful combination. Instead of waiting to be debt-free before investing, you build equity in both your home and your investments at the same time.

3. Strategic Use of Equity

Most homeowners build equity slowly and let it sit unused. The Smith Manoeuvre allows you to put that equity to work—without selling your home or taking on unstructured debt.

What Are the Downsides of the Smith Maneuver?

This strategy has real benefits, but it also comes with some risks and responsibilities:

1. Market Risk

You’re borrowing to invest. That means your portfolio will rise and fall with the stock market. If markets decline, you could owe more than your investments are worth in the short term. This strategy only works over the long run—there are no guaranteed returns.

2. Debt Discipline

While you are converting your mortgage into a tax-deductible investment loan, you’re still in debt. If you use the line of credit to buy a new car or go on vacation instead of investing, you’ll undo the entire strategy.

3. Complex Setup and Recordkeeping

The Smith Manoeuvre requires you to carefully track borrowed amounts, investment performance, and interest payments—especially for tax purposes. It’s not “set and forget.” Many people work with a financial advisor or accountant to stay compliant.

4. Tax Rules Can Change

Although the strategy is legal and has been used for decades, the government could choose to tighten rules on interest deductibility in the future. It’s not likely, but it’s something to consider.

Best Types of Mortgage for Smith Maneuver

To implement this strategy, you’ll need a readvanceable mortgage. This is a special mortgage that combines a traditional mortgage loan with a home equity line of credit (HELOC) that increases as you pay down your principal.

Here's how it works:

Each mortgage payment reduces your loan balance.

That paid-down amount becomes instantly available to re-borrow through the line of credit.

You then invest that borrowed amount.

Popular readvanceable mortgage products in Canada include:

Manulife One

Scotiabank STEP

TD Home Equity FlexLine

RBC Homeline Plan

BMO Homeowner ReadiLine

Not every lender offers these products, so you may need to switch lenders or refinance your mortgage to get started.

Best Types of Investments for the Smith Maneuver

The key rule is that the investments must be income-generating in order for the interest on the loan to be tax-deductible.

Common investment types include:

Dividend-paying Canadian stocks

Mutual funds or ETFs that pay distributions

REITs (Real Estate Investment Trusts)

Corporate bonds or bond funds

You cannot invest in RRSPs or TFSAs with borrowed money under this strategy. The CRA doesn’t allow interest deductions for contributions to registered accounts.

You’ll also want to work with an advisor to make sure your portfolio is diversified and matches your comfort with risk. Remember, you’re investing with borrowed money—so you want your investments to be reasonably stable over time.

How Do You Set Up the Smith Maneuver?

Setting up the Smith Manoeuvre requires a few key steps. It’s not something you do overnight, but with the right tools and guidance, you can get it up and running fairly smoothly.

Step 1: Get a Readvanceable Mortgage

First, you need a readvanceable mortgage. This is a combined product with:

A regular mortgage loan, and

A home equity line of credit (HELOC) that increases automatically as you pay down your mortgage principal.

You may need to refinance your existing mortgage to get access to this type of product. Speak with a mortgage broker or lender that’s familiar with the Smith Manoeuvre to explore your options.

Step 2: Open a Non-Registered Investment Account

Next, open a non-registered investment account (sometimes called a taxable account). This is where you’ll invest the money you borrow from your HELOC. You cannot use RRSPs or TFSAs with this strategy if you want the interest to be tax-deductible.

Step 3: Set Up a System for Transfers

Each time you make a mortgage payment, your available credit on the HELOC increases. You then:

Transfer that new credit from the HELOC into your investment account

Immediately use those funds to buy income-generating investments

This cycle repeats with every mortgage payment, slowly growing your investment portfolio over time.

What if the CRA Audits Your Smith Maneuver?

One of the biggest fears people have about this strategy is, “What if I get audited?”

The good news is that the CRA does allow interest to be deducted on investment loans—but only if everything is documented properly.

Here’s how to protect yourself:

Keep separate bank accounts for investment borrowing and spending.

Only use the borrowed funds for investing, never for personal use.

Keep a paper trail of each transfer from your HELOC into your investment account.

Store your investment statements, loan documents, and interest payment records for at least six years.

If you mix personal and investment expenses in the same account, the CRA can deny your deduction. Clean recordkeeping is critical.

Get a Readvanceable Mortgage to Start

The Smith Manoeuvre is a powerful long-term strategy—but it only works if your mortgage is set up the right way from the start. Not all lenders offer the right type of product, and not all mortgage professionals are familiar with how this strategy works in practice.

That’s why your first step should be speaking with a knowledgeable mortgage broker who understands the Smith Manoeuvre and can help you structure it properly.

A broker can help you:

Choose the right lender — Not all banks offer the same flexibility when it comes to readvanceable products, prepayment options, or HELOC terms.

Set up a readvanceable mortgage — This special type of mortgage links a line of credit to your home equity and allows automatic re-borrowing as you pay down your principal.

Structure your payments for efficiency — Your broker can help align your mortgage and investment timeline to maximize tax deductibility and minimize interest costs.

Getting your mortgage structure right is the foundation of this strategy—and it's not something you want to get wrong. A good mortgage broker will make sure you start with the right setup, so you can focus on building wealth confidently and compliantly.