Understanding the Impact of the Smith Manoeuvre with Robinson Smith

 

Creative Investing Strategies to Grow Your Real Estate Business
 
As a real estate investor who wants to scale and grow their business one of the obstacles can be finding the right make-up of strategy and financing. 
 
Fortunately, there are a number of different solutions and we have invited guests to share a number of creative strategies to help you that you may not have heard of or considered before; 

The Smith Manoeuvre™️ is based on the deductibility of interest expenses when calculating your income tax. If you borrowed money to invest in capital property that generates income, you can claim the interest that you paid on your tax return.

Francois: Our first presenter is Robinson Smith. The inventor of the Smith Manoeuvre which is great. I've heard all kinds of things. And just like Daniel said, we have the legend himself tonight. The man behind the Smith Manoeuvre, and it's based on the deductibility of interest expenses when calculating your income tax. If you're like me, we just went through that.

A few weeks ago, if you borrowed any money to invest in capital a property that generates income, you can claim the interest that you paid on your tax return. We're always looking for more tax deductions and this is going to be a great presentation. Robinson, welcome. Where are you joining us from?

Robinson: Thank you. It's a pleasure. I'm out here in Victoria, BC. The first thing I'm going to do is state that it was my father who came up with this.

Francois: That's what I thought, you look quite young. I'm like, I don't know. There's some lotion going on.

Robinson: That was my old man back in the day.

Francois: Very good. Welcome. I'll let you take it away.

Robinson: Happy to be here. Thanks everybody. I like to start off by congratulating everybody who is viewing in attendance, not a lot of Canadians take an active interest in their personal finances. Congratulations to those of you, looks good on you. My name is Robinson Smith. I'm the president of Smith Consulting Group Limited. It's a company founded by my father many years ago to assist Canadians, educate Canadians and help them implement the strategy that he developed.

I'm a former investment advisor. I was an investment advisor for a dozen years. Back in 2018, I retired from that to write my book, which I was told to put up on screen there. I wrote my book and started doing what I'm doing, which is presenting to Canadians, getting word out because it's not easy out there. It's very difficult in Canada and it's not getting any easier.

There's a lot of issues we face: increasing job insecurity, increasing inflation, increasing pension insecurity, economic uncertainty. We're concerned about our financial futures and rightly but, what is holding us back from increasing our wealth? I mentioned inflation; we're over 6% now. Insufficient salary and wage increases taxation. We pay more in tax than we do on food, clothing and shelter combined. We're consistently in the top five highest tax paying citizens on the planet and mortgages. We've all got a mortgage.

If we're investing in real estate, chances are we have a mortgage on our principal residence. But the $450,000 mortgage is going to be I'm going to have to earn over a million dollars over the course of that 25 year amortization for example, before I can pay back that full 450. I got the principal, I've got the interest I make payments with after tax dollars. It's really expensive out there and we need to do something. That's what I'm here to do today is to talk about the Smith Manoeuvre .

There's a lot of information surrounding the Smith Manoeuvre and I don't have as much time today as I usually do. I'll be going relatively quickly, but we want to learn how we can turn our mortgage into our asset. A mortgage is generally one of the biggest liabilities that we're going to own personally, but we have the ability to turn that into an asset. First, let's talk about the sequential approach to our financial affairs as Canadians. We've got two very important goals. We want to get rid of this mortgage. It's a big, ugly, stinking, expensive mortgage.

We also want to save for our future. We want to be able to retire in comfort, support our family when we get older. The decision on which of these two important goals to tackle first is generally made for us, not by us for many Canadians, because we've got limited resources. If we don't invest for our future, nobody can. But if we don't make our mortgage payments, someone certainly does care. That's what we tend to do as Canadians on the whole.

We have limited resources. We're forced to focus on paying out their mortgage at the expense of not getting invested in taking advantage of compound growth. This can lead to some bad places when we're older. I'm sure we all know someone who's living in a home where they've got hundreds and thousands of dollars in equity in the home, but they're living on a fixed income. They have to watch what they spend or maybe they're financially reliant on their children.

Maybe they're forced to downsize. Maybe they're forced to take up a reverse mortgage or potentially they have to work in retirement. Costco, Walmart, McDonald's, Burger King, take a look around, you'll notice more and more senior citizens working rather than enjoying their retirement. But when we do actively seek to improve our financial position. We get advice from financial professionals. What's the typical advice we get? Invest more max out your registered contributions, prepay your mortgage, reduce your consumer debt.

The common thread in all of these suggestions is that they require more money from your pockets. But for many Canadians, there is no more money or very little. What can we do if there is no more money or very little money? If we own a home and have a mortgage. We have the ability to reduce our tax bill. Did he increase the efficiency of debt repayment to eliminate expensive debt sooner and to invest found money.

There's only one strategy which can accomplish all of this with no new money from your pockets. The Smith Manoeuvre is a mortgage conversion strategy. We're going to convert bad debt to good debt. We're going to see three benefits right off the bat. We're going to be able to reduce our tax bill, get rid of our expensive mortgage in record time and enjoy compound growth.

These benefits start now. They occur simultaneously. They improve exponentially. And again, no new cash is required from the homeowner on a monthly basis. The strategy uses cash. You're already out. Maximizes the mortgage that you already have in place. It's just a one-time restructuring of your existing financial affairs, and many of you on this or watching this will already be set up for this strategy, but not know it.

First, a quick discussion on debt, two types of non-deductible debt. This is relatively expensive and it's taken on to acquire depreciating assets. When I borrowed to buy a car, a motorcycle, trailer, clothes, whatever it is. The value of these assets decline and disappear over time. Meanwhile, the debt that I've taken on to buy these assets, quote, unquote assets is not tax deductible.

My statement says I'm paying 6%. That's what I'm paying. But tax deductible debt, and you guys are real estate investors. You'll have a very clear understanding of this. It's relatively inexpensive and it's taken on to acquire appreciating assets. If I borrow to buy stocks, bonds, mutual funds, investment, real estate mix REITs, ETFs, all of these different things. I can deduct the interest on that borrowing because I'm borrowing to invest with the reasonable expectation of generating income. Not only is it cheap, but I'm also acquiring assets, which grow over time and the wealthy understand the difference between these two types of debt very well.

It's one of the reasons they're wealthy. This is a quick quote from Christine Ibbotson, National Post. When I was an advisor to very high net worth clients who literally had millions to invest, they too also had debt, but it was used to increase their wealth, not to spend on depreciating assets like cars, boats, and toys. Instead, they would use debt to leverage and purchase stock or investment properties, basically spending this debt on any appreciating asset that would give them a higher rate of return, and in most cases, tax write-off from the interest on the borrowed funds.

That's from a year ago. Now, the exception to this rule, non-deductible debt versus tax deductible debt is your house because while we can reasonably expect it to appreciate in value over time. The mortgage is non-deductible, the debt that we got to acquire the asset is non-deductible, but we're going to solve that problem, but we have to take action.

Your mortgage is one of your biggest investment opportunities, but you have to invest your home equity now rather than consume it later. What I mean by consuming it later is if I wait until I'm retired. I don't have the cash flow for retirement. I have to take out a reverse mortgage. I get money from my house. I start spending it. It's funding my retirement. I'm not investing. In order to take advantage of the strategy we need in order to convert this bad debt, good debt, we need a readvanceable mortgage.

Here's a typical mortgage. I got a down payment. I borrowed 500,000 from the bank. I got my house. All of this debt is non-deductible. It's a very expensive debt, even at a low rate. But a readvanceable mortgage looks like this. There's two sides to it, and they're all different and function differently. Look different but this is a basic concept. This line of credit component is attached to the mortgage loan of a half-a-million dollars in this case, and the two sides speak to each other.

Whenever this balanced bad debt goes down, the line of credit limit increases dollar for dollar. How does it actually work? This nothing ever will on a monthly basis. I'm going to make my regular mortgage like I was doing before I was doing the Smith Manoeuvre. I still have a mortgage. I still make a mortgage payment, no change there. But when that line of credit limit increases, I pull out that increase and I invest it. I do that on a monthly basis on an annual basis because I'm generating this increasing tax deductible debt over time. I get tax relief in the form of tax refunds and these refunds get bigger as the years go on, by the way.

Every year I get this refund, I'm getting it only because I'm doing a strategy. I'm disciplined. I prepaid my mortgage above and beyond my regular mortgage payment once a year, at least, or that back amount to invest as well. And again, if you borrow to invest with the reasonable expectation of generating income, you can deduct the interest on that forward.

I've got a monthly mortgage payment of 2,200 bucks. The very first payment I make 1,260 goes to interest. That's the price I paid for BRRRRng the bank's money is non-deductible at 1,260 is gone, but 940 reduces principal. That $500,000 balance goes down to $499,060 because that's gone down. The line of credit limit goes up by the same amount $940. I pull it out and I invest it again. Use is critical. Do not make a BMW payment. Do not take your wife out to dinner, do not take your husband to why would this money?

You got to invest it in order to be able to claim the tax deductions. This happens on a monthly basis, pay it down, pull it back out, invest it on an annual basis. I'm applying the refunds as a prepayment and getting that invested as well. By the time I finished the conversion of my mortgage, all of this debt is fully tax deductible because of the tax relief I've gotten from that mortgage much faster. The faster you get rid of non-deductible debt, the less you're going to pay a non-deductible interest, full-stop.

I've taken advantage of compound growth starting now because I'm able to invest on a monthly basis. While we see $500,000 of debt remaining, although it's tax deductible, we have to remember that it's offset by an investment portfolio. We're talking about that. Cycle of benefits here, the Smith Manoeuvre converts a hundred percent non-deductible mortgage debt to a hundred percent tax deductible debt.

Each month, you're generating valuable and increasing tax deductions. You're able to eliminate your expensive mortgage in record time. You're able to invest money you wouldn't otherwise have available. Happens now is happening simultaneously, and it requires no extra cash from you. Now, a lot of people will say, before I'm doing this, Smith Manoeuvre, I got a mortgage. After I'm doing this with me, where I still have a mortgage payment, but now I keep on borrowing from that line of credit each month.

That has to be serviced on a monthly basis interest only. If an all new money is coming out of my pocket, where's it coming from? And the answer lies in the increasing efficiency of the regular mortgage payment. I start off with a $400,000 mortgage. The very first month I made my very first mortgage payment at 2,214. Some of that goes to interest 728, because the line of credit is going to increase dollar for dollar. I can pull that 728 to invest next month, same mortgage payment, but a little bit less goes to interest.

Therefore, a little bit more to principal $730 comes out to dollars, goes to interest on the first month BRRRRng of $728, leaving $728 to invest. You know what happens going forward? The next month I got 733, I can pull more, goes to interest five and still $728 goes to invest. The next one, 736, $8 interest, $728 to invest. That's how it doesn't require additional cash flow on a monthly basis.

For the typical Canadian homeowner, the Smith Manoeuvre we just talked about simply using your regular mortgage payment and the tax relief is worth several, $300,000 to $400,000 over a typical 25 year mortgage, but it's able to take two or three years off the amortization about mortgage with no additional cash, but there are accelerators, which we're regularly seeing with use of accelerators results of a net worth improvement, close to over a million dollars and amortization reduced to less than 10 years.

These accelerators we're going to go through them really quickly, one by one. I do realize I'm going very fast. Let's talk about the first accelerated cash flow. Some people are in a fortunate enough position that when their income comes into their bank account, they're able to take some of that and get it invested directly each and every month. Great, good on them getting invested for their future discipline. However, what they can do is instead of investing that 400 directly and use that as a prepayment against their mortgage, they're still making the mortgage payment.

They were already coming out of pocket 400 bucks a month directly investing, but now they're going to prepay their mortgage, pull it back out and then get it in. Lots of good things are happening on getting rid of this bad debt, faster increasing tax deductions, and you're still invested with no additional out-of-pocket funds. The debt swap that was 400 bucks a month that was being invested. It's grown to $10,000. This is the guy's portfolio, $10,000 worth of investments. Call it mutual funds.

He's going to want to look at taxation here, but if he wants, he can redeem these mutual funds or stock, whatever it is for cash, take that cash prepay as a mortgage . That $500,000 mortgage boom goes down to $490,000. He borrows it back immediately and then takes care of superficial loss rules if applicable he can. If he wants the exact same investment that he just sold, or he can buy a different investment. This is gonna happen within seven days a week, something like that.

I still haven't changed. This guy hasn't changed the amount of debt he has before he did it. He had a $500,000 balance on his mortgage, and now he's got $490,000 plus $10,000. But he's gotten rid of bad debt, accrued good debt. This can also happen with cash. I got a bonus at work. What do I do with this 10,000 bucks? Do I make a payment against my mortgage or do I invest it? Do both, take that $10,000. Prepay your mortgage, pull it back and then invest in the drip accelerator.

That investment portfolio I have, or this guy. Let's say it generates $300 in distributions and all that. Maybe monthly, quarterly, annually, whatever it is. If you're getting dividends from your investments, that's fantastic. What most people do is they say, I don't want to see that 300 bucks in cash cause I'm in this for growth. I want you to automatically reinvest that fund company and buy me more units of the fund shares of the stock. That 300 bucks comes out, goes right back in instantaneous. But instead, this guy can say, no, I do want to see that cash because when I get it,I'm going to make a prepayment against my mortgage. Then I'm going to pull that same 300 back out and buy the exact same stock or fund that sent a distribution in the first place. Again, speeding up the amortization of that bad debt, replacing non-deductible debt with tax deductible debt.

Prime the pump, Have a mortgage. It doesn't work for the Smith Manoeuvre. I want to do the Smith Manoeuvre. We're a certified professional mortgage broker. We get the house appraised comes up to, it comes out at $625,000, which means with a readvanceable mortgage lenders will only go up to 80% loan to value. They'll lend me a maximum of 500,000 bucks and that's all I need actually, because that's what my mortgage balance with the wrong mortgage lender is.

That new $500,000 goes out to pay out my old mortgage and it's still non-deductible. It rides on my new readvanceable mortgage, but I've borrowed the total amount that they're willing to lend me. What happens if my house appraises that 850? At 80%, they're willing to lend me a total of $680,000, but I only need 500. There's the 500 balance over there.

I'm ignoring the 65% HELOC. I just want to get the concept across here. If they're willing to lend me $680,000 and I've only used $500,000, that means they give me an available balance of $180,000 on that line of credit. I can do whatever I want with this. I can buy a Corvette with this. I can go around the world. I can pull this cash out and the fireplace, you burn it. The lender doesn't care. They've got the house of security, they're comfortable, but what I do with it, and I don't have to pull. Maybe I'll pull some of it. Maybe I don't pull any of it. This is a discussion I have with my investment advisor.

Is it suitable? Is it going to cause too much stress, whatever, but if I do pull some of it or all of it or whatever, I'm going to invest it directly in stocks, bonds, mutual funds and new business investment real estate down payment, private lending mix reads all these sorts of good things.

Cash Flow Dam. Let's say, I've got a rental property. Maybe I pulled from that HELOC at 180 and I could use it for a down payment on a rental. I've installed renters. They're paying me $3,000 a month. I'm excited about this. I opened up a bank account dedicated to my new proprietorship, this rental property, and got the rental receipts and outgrow the expenses.

We're looking at a cash flow neutral experience here, but anyways, money in money out cause I got to make the mortgage payment. There's maintenance fees and all that stuff. Money in money out. But what can I do? That $3,000. As soon as that rental check shows up in my bank account, I can apply it as a prepayment against my mortgage, not against the rental mortgage.

That's not what I'm doing here. That's already tax deductible. I don't need to convert that debt, but I can apply it against my own mortgage. 3000 down, 3000 comes back out into the bank account, and then I make the payment on that rental property, whatever expenses I have. 3000 in, 3000 out, but I'm making it work more than once.

And because I'm borrowing to invest in my business, which has the reasonable expectation of generating income, I can deduct the interest on that. If I'm prepaying my mortgage above and beyond my mortgage payment, I'm prepaying 3000 bucks a month. This is where we see these mortgages just amortize in 6, 7, 8 years very fast. Each month we're able to invest money. You wouldn't otherwise be available.

You're generating valuable and increasing tax deductions. You're eliminating your mortgage in record time, benefits start now, or simultaneously no new cash from you is required. This is just a really quick video of the sniff band calculator that we've developed. I'm just going to hit play. Due to time constraints, this is going to be a very fast demonstration of Smith's man calculator.

Once in I'm going to give it a name, this scenario, and we're going to head to the calculator. We can enter various types of income. I'm going to throw in $150,000 of employment income. I've also got a rental property proprietorship and it generates $36,000 in rental revenues per year. It costs me $34,000 a year to service the expenses on that rental property. I'm also going to say that I have $30,000 of mutual funds invested and I've also got a $10,000 emergency fund.

We can see my marginal tax rate is 45.8%. I'm going to fill in my house value at $750,000. The mortgage balance on that is currently $450,000. The interest rate is 2.9% amortization defaults to 25 years on the readvanceable line of credit side of things. I've got a prime rate of 2.45%, and a premium of half a percent for a total of 2.95%. Next I'm going to go to the fund page, where we start to see results.

I can throw in whatever I project my investment to grow at on an annual basis. We'll leave it at 8%. This is saying the very first month's mortgage payment leaves me $769 to invest. I'm going to go ahead and invest that all. Here's where we start to see some results. Taxation improvement, total deductions over the amortization of the mortgage of $109,000 which lead to total in tax refunds of $50,000. No amortization improvement yet.

We'll see that soon, but a net worth improvement of $388,000. Already at this point. Here I can adjust the amount that I accept from the lender. They're willing to lend a total of 600, but I can move that up or down and we can see the results change. I won't go into an explanation on this right now, but let's just say, I only want to accept $550,000 from the lender.

We've seen a bit of improvement in the results. Here's where we'll see amortization improvement. If I apply my annual tax refunds as annual prepayment against that mortgage. And also reborrow that to invest, we'll see amortization improvement and also net worth improvement here. 2.33 years saved off my non-deductible mortgage net worth improvement up to $551,000.

The debt swap accelerator about $30,000 that I already inputted in mutual funds. I'm going to go ahead and debt swap that and watch the results here. The year saved and net worth improvement. There we go. 4.58 years saved net worth improvement of $791,000. I'm not going to input any future lumps.

What I'm going to do is swap my emergency cash. I'm going to secure a line of credit, a personal line of credit that I'm only going to use for emergencies. Therefore I can debt swap this cash. I can prepay my mortgage and then get it invested. And we're going to see further results here.
Cash Flow diversion, let's say I have been investing $300, on a monthly basis. That's how I built up my $30,000 in mutual funds. I'm going to go instead, apply that as a prepayment each month and then reborrow it to invest 5.42 years at $869,000. It goes to 8.42 years and net worth improvement of $1,164,000.

Cashflow Dam Accelerator I previously entered my rental revenues and expenses, and that works out to $3,000 a month in revenues and expenses of $2,833. If I implement the cashflow dam accelerator, we're really going to want to watch this one here instead of saving 8.42 years off that mortgage. At this point, I'm saving 18.25 years, which means my original 25 year amortized mortgage is going to be gone in 6.75 years.

Dividend Reinvestment Plan Accelerator. I won't go there. Prime the pump accelerator based on the numbers inputted, apart from that nondeductible mortgage debt. When I refinance into a readvanceable mortgage, I've also got a hundred thousand dollars of immediately available funds, which I can prime the pump with.

I can withdraw some all, or none of this, if I wish. But if I do, I'm going to get this invested immediately. If I pull $50,000 of this to prime the pump, then we'll watch the net worth improvement. Go from 1.3 to 1.7. Now, I've saved 18.5 years off my mortgage. I've received total tax refunds over the course of the mortgage of 145,000.

Instead of 25 years, that mortgage has gone in 6.5 years. This is net worth improvement, meaning I've got an investment portfolio of $2,210,000 offset by 100% tax deductible investment loan of $484,000 leaves a net improvement of $1,726,000. And the next screen here that just shows the graph, the green line descending at 25 years to the X axis is a 25 year amortization.

This blue line hitting $0 is the reduced amortization of a mortgage. The red line over here is my investment portfolio. The yellow line is my total debt. And then I can view and print a report, which is going to summarize the results. It's also going to give me my instructions for the monthly process of the Smith Manoeuvre based on my numbers.

There you go. A quick demonstration of the Smith Manoeuvre calculator. I hope you enjoyed it. Just really quickly we're training up financial professionals across the country in the Smith Manoeuvre because for many years, we've heard stories of professionals who have been implementing it for their clients incorrectly. We're training up all the professionals. You'd want to surround yourself with realtors, brokers, investment advisory. All of these people across the country, we've got them from Victoria, BC, all the way to Halifax, Nova Scotia, and more continue to come through the program.

Please, if you're thinking about implementing the Smith Manoeuvre, there's a lot of working parts in the strategy that a homeowner won't necessarily be aware of, but the professionals need to be and they all know each other. They speak to each other. Using our certified professionals, you can find them at smithman.net website. If you want to be connected, just submit an inquiry and on smithman.net and mastery mortgage for financial freedom, the calculator homeowner course for people who want to really get in-depth into the strategy.

Lastly, "procrastination is the enemy of your financial success". That is a quote from my father. I think he came up with it. He says he did, but it's very true. If you don't start today, you plan on starting tomorrow. Tomorrow never comes so that's it for me and everybody.

Francois: Excellent. Thank you very much. Great content. Robinson Smith, The Smith Manoeuvre and we have some questions in the chat as well. We'll take maybe a few questions. We're going to ask you Robinson, if you can answer in the chat. There were quite a few as we were going along .

Katherine: Actually, I think we do have a few minutes. If we could just ask a couple of them. I know there's one from Milena and I would like to make sure that Robinson is the one that answers all of those questions that are in the chat because we do want to make sure that those answers are qualified from Robinson, especially that question from Milena. If we can do that. If you wouldn't mind Robinson answering them, and then of course we will be able to continue with that in our virtual networking.

Robinson: Can I borrow from my corporation to make additional mortgage payments then reinvest in my corporation as long as I am reimbursed what I borrow to my corporation within two years? The only thing that applies here is what are you using to prepay your mortgage? If it's after tax dollars, or if it's a salary from your corporation, it's dividends that's fine. You can pull it out. You can prepay your mortgage, pull it out, and then you can invest back into your corporation.

Shareholders. Buy more shares, whatever the case may be. These questions are very specific to people's situations. That's why we want to talk to a Smith Manoeuvre certified professional accountant when we're looking at individual circumstances. The corporation side of things doesn't really apply as the cashflow dam does, we're talking about with the cashflow dam rental properties held in a proprietorship or a home-based business, which is a proprietorship corporations get a little bit more complicated, but there is a way there is a way to do it.

Francois: Another question we have from Ken is, he was told he can use the principle and interest from his investment properties, but not property taxes. But you showed us, it's only in the interest that you can use to deduct.

Robinson: Are we talking about a principal residence here or rental property?

Francois: It's an investment property.

Robinson: You want to get from an accountant, how to properly account for the tax deductible debt on your personal side, on the HELOC and what you can deduct on your rental property. That is the best advice I can give the interest that we're deducting on a rental property. That's what we're deducting when we borrowed to buy that rental property, we're deducting the interest on that mortgage, the principal payments we make on that rental property. That's not interest. That being said, if we're making PNI payments against that rental property, our mortgage balance is going down or equity is going up.

If you have the right financing on your rental property, such as a readvanceable mortgage, you can access that equity and get it invested as well. I don't know if I fully answered that question, but I'll go through these questions. Once we're done here.

Francois: Perfect. One last question we have again from Cardinal Law. Can a lawyer be a certified professional? I'd like to find out as well.

Robinson: They're an important part of all this when we talk about conveying the mortgage real estate lawyer, or a notary in certain provinces, like BC notaries can do that. Yes. We're training real estate lawyers and conveyancers because there's a lot of communication that goes between the mortgage broker, between the lender and conveying the mortgage and actually instructing it. And they are also very important when we talk about, if I have a house that I'm doing the Smith Manoeuvre on and I want to move my house, how do I port that deductible debt? I don't want to lose it and not to start over again. The mortgage broker, the conveyancer, they have to be clear on how that process works.

Francois: Excellent. Thank you very much.