What if your mortgage interest were tax-deductible?

In Canada, interest on your home mortgage is not deductible. Interest on money you borrow to invest usually is. The Smith Manoeuver is a way to slowly turn the first kind of debt into the second.

2 min read • No tax knowledge needed

How it works, in three steps

1You pay down your mortgage as you normally do. That frees up borrowing room on a credit line secured by your home (a HELOC).
2You borrow that room back from the HELOC and invest it in a non-registered account.
3You deduct the HELOC interest on your tax return, because the money was borrowed to invest. The refund goes back against the mortgage.

Over time the mortgage (not deductible) shrinks and the HELOC (deductible) grows, while your investments build up on the side.

A simple example

Say you pay $10,000 off your mortgage this year, borrow $10,000 from the HELOC and invest it. The HELOC charges 5%, so the interest is $500 a year. In a 40% tax bracket the deduction returns $200, so the interest really costs you $300, or 3% of the amount borrowed.

If your investments earn more than 3% a year after tax, you come out ahead. If they earn less, you lose money. The numbers here are round figures for illustration; your HELOC rate and tax bracket change the answer.

Is this for me?

It may fit if you

Own a home with a mortgage and equity built up
Have a medium or high income, so the deduction is worth more
Plan to invest for 10 years or more
Can handle your investments dropping in value

Think twice if you

Would lose sleep over borrowing to invest
Have little home equity or an unstable income
Haven't used your TFSA and RRSP room yet
Won't keep careful records of the borrowing

The honest risks

Investments can fall, and the HELOC debt stays.
HELOC rates are usually variable, so the cost can rise.
The CRA wants a clean paper trail. Mixing personal spending into the credit line can put the deduction at risk.

This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.

See what it would look like for you

Enter your mortgage, HELOC rate and tax bracket. The calculator shows the 25-year result and the return you need to break even.

Open the Smith Manoeuver Calculator

Want to go deeper?

The full Smith Manoeuver guide, with CRA rules

Break-even: what return do you need?

Next: step 2 of 5 · 6 min read

Smith Manoeuver Break-Even: What Return Do You Need?

Also in: Guides for homeowners Guides for high-income earners