Episode 182: Smith Manoeuvre, RRSPs, HELOCs, and Spousal Income: Where Many Canadians Get Wealth Structuring Wrong

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Is using the Smith Manoeuvre actually the smartest strategy for your family’s financial future—or just a well-known tactic that needs deeper thought?

If you’re earning a strong income, filling up your RRSPs, and asking “now what?”, you’re not alone. Many high earners in Canada hit a ceiling when it comes to traditional tax-advantaged accounts—and they’re left wondering how to structure their wealth more efficiently. In this episode, Kyle Pearce and Jon Orr walk through a real listener case study that exposes the blind spots, tax traps, and strategic decisions facing Canadian professionals trying to hit their retirement goals without losing half their income to taxes.

You’ll discover:

• Why simply maximizing your RRSP isn’t enough—and how to think beyond the basics
• The real pros and cons of using the Smith Manoeuvre in your name vs. your spouse’s
• How to balance today’s tax savings with tomorrow’s income-splitting strategy for retirement

Ready to move from tax confusion to tax confidence? Hit play and learn how to make smarter wealth-building moves with the income you’ve already got.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Unlocking financial freedom in Canada starts with more than just saving—it demands a strategic blend of wealth optimization, tax-efficient investing, and a clear financial vision setting that aligns with your lifestyle and goals. Whether you’re a high-income earner, entrepreneur, or family focused on building long-term wealth in Canada, understanding tools like the Smith Maneuver, RRSP optimization, and capital gains strategies is essential. This episode explores how smart investment structures, corporate wealth planning, and personal vs corporate tax planning can turn your financial goals—like early retirement, passive income planning, or legacy planning in Canada—into a structured, achievable reality. We break down the nuances of salary vs dividends in Canada, the power of corporate structure optimization, and how to use real estate investing in Canada alongside a modest lifestyle wealth approach to build robust financial systems for entrepreneurs. If you’re navigating Canadian tax strategies, curious about real estate vs renting, or looking for effective retirement planning tools, this episode offers a roadmap to smarter financial buckets, Canadian entrepreneur finance, and true financial independence in Canada.

Transcript:

Jon Orr: Let’s talk about a case study from a Canadian wealth secret listener and investor. This is a common question I think we get asked is let’s unpack some moves and strategies. What are the secrets for tax advantage structures, tax advantage moves that we can be making so that we’re keeping more of our hard earned money in our piles?

and making sure that we’re hitting our financial goals. And I think we’re all kind of on this pathway. And when we think about the four stages that we currently talk about here on the podcast, but also with our clients, when we’re helping them structure their financial plans, or with listeners like this person, you know, a lot of times the conversation, Kyle starts with what we would call stage three, which is which is what this listener came with us. He’s like, Hey,

I’m looking to learn more about how to effectively use the Smith maneuver to optimize my strategies because I make a lot of money, my spouse doesn’t, maybe there’s a way for me to like make this work and take advantage of this disparity between my salary and hers and take advantage of that tax, that tax, you know, space in there, which is optimizing the structure, you know, you’re that stage three for us is like you thinking about your structures. Now stage one is about vision and like goal setting stage two is about

you know, making sure that we have the right reservoir. Stage three is about optimizing structure. So a lot of times we get these conversations about like, what structure should I pick? But then it sometimes rolls back into, well, we could use that structure, but should we? And so what we’re gonna do in this episode is we’re gonna, we are going to address and unpack this Smith maneuver question about should we be rolling, you know, should I be taking, using the Smith maneuver?

you know, in my personal name or my spouse’s personal name, we’re going to talk about that. But then what we’re going to do is we’ll roll and unpack like the vision part. But that vision part, we’re probably going to roll into a second episode because I feel like we’re going to chat here. So there’s a lot to unpack with this listener. Kyle, let’s dig into it. Give us a little background on this listener. So that listeners now go, what’s what’s in the what’s what are the pieces that we’re working with here to help optimize this this plan?

Kyle Pearce: Yeah, we’ve got a couple. They’ve got a couple children and actually the spread in ages of the children as well, which is really, you know, interesting. And I’m sure, you know, makes planning a little bit more challenging as well. So they have one that’s sort of getting ready to move out of the house. Another one is very young and entering into school. They are about 40 years old each. Okay. So we’re just going to call them around 40. The husband, as you mentioned, earns a significant salary and bonus.

So they’ve got about $400,000 coming in for the husband. We’re gonna call him Dan today. And the spouse has about $90,000 coming in. So a significant income, almost half a million dollars on paper before taxes. Now we know what happens to his $405,000. It becomes much less, of course. However, this is still a very, very healthy amount of income coming in.

They own a primary residence with a very small mortgage relative to the value of the property. So value of the property is about 1.1 million and the mortgage is only around 350, right? So pretty low loan to value on the mortgage, which is great. Like this is fantastic. And they’ve done what we’re gonna call quote unquote, all the right things in terms of investing. So he’s filled up his RSPs every year. Super smart for someone who’s a T4 employee.

control the income and how it’s coming to them for our business owner friends that’s going to look and sound very different but for our friends that can’t control this income maximizing the 30,000 ish of room that you get every year is really important he’s already done that that’s great here’s the challenge though for someone who’s a high income earner like we find in Daniel he is only given up to about $30,000 now on someone who is earning $180,000 a year

That is exactly the 18 % that you are allowed, the maximum contribution of an RRSP. The problem for him is that he earns more than double 180. That means that technically his RRSP room only represents around 9 % of his annual salary. This is problematic if we trust that doing the right thing is simply filling up our RRSP, right? Which is something that you could easily fall into because then,

he’s paying himself less than 10 % per year in doing so. Now, he does have some other investments as well, but nothing near as significant as the RSP bucket, right? So this is a challenge for high income earners here in Canada is that it’s very easy to think like it’s like I did what I was supposed to do. I filled up my RSP, I filled up my tax free savings account. Now what do I do? Well, guess what, the more income we have,

unless we’re taking a significant portion thereof and actually investing it, it’s likely that we’re losing it to lifestyle creep. So this is some information we don’t yet have from Daniel and actually that’s his homework right now is to actually go and figure out how much are you actually spending in after-tax dollars so that we can help you plan forward and determine what is it that you actually need?

in order to make this stage three conversation that he sort of come to us with, like he had said, he’s like, I want to leverage my property in order to use Smith maneuver to have more good debt instead of bad debt. So he wants to convert his primary mortgage into tax deductible interest instead of it being non-tax deductible. This is fantastic, but to what end? And like, what is it that we’re trying to achieve? And if he does this, is it actually going to help him get to the bigger goals which are essentially being able to retire by in his case 55 which about 15 years off.

Jon Orr: Right, yeah, like it’s not even just asking, you know, is it the right move? Or I guess, is it going to help? Because like really the question is like, is it going to help enough? Like is it worth it? Like maybe there are other moves you could be making that get you there faster, closer, you know, structure wise. Like that’s an important question too, because it’s like, yeah, we could do this, sure. But is it the best

Kyle Pearce: 100 % 100 % and, and that’s exactly it is like what we can tell you is that if you do this Smith maneuver and you do it well and you’re, you know, patient and you do all of those things, it’s going to help. Right. But the question is, is it going to help enough? And you know, so one of the major questions here that we’re going to address in this episode, but then in a future episode, we’re going to talk about more like bigger picture today. We’re going to address is like his question is, like, if I was to say,

fully pay off the mortgage using some unsecured or not unsecured unregistered accounts that he has. If he was to take that money, sell those assets, put it down on the mortgage, and then essentially re borrow a good chunk of equity. He hasn’t specified if it’s just to replace the current mortgage. Is it double the current mortgage? None of that yet is really known, but he’s wondering like if I was to do that,

should I or could I take that money and put it all in my name because I have the higher income or should I take that money and put it in my spouse’s name in an unregistered account because she has a lower income and I’m sure there’s some people who have some sort of wheels turning right now and they’re going probably initial at first blush going like why would you put it in the spouse’s name when he could save a bunch in terms of the interest. that he could write off against his very high salary. And we’re gonna dig into a few of the nuances here.

Jon Orr: Hmm. Yeah. Well, well, what I like, especially if like, if you’re looking at the, non registered accounts, he’s got a good chunk, you know, between the spouse, between him in there to put down and, know, to cash in, take into the, to the accounts, put on the mortgage to pay it all off. Now, if you can pay it all off and he’s, think close then

because he’s got a renewal period coming up, and he’s at a low interest rate currently on this mortgage, right? Like he locked it in five years ago, and it’s like, which was a prime time to be locking in that mortgage five years ago, come renewal time in the next six months, that mortgage rate is not going to be what it was. And so I think this is a good move for him to use a Smith maneuver in this case.

Whether it’s his wife’s or his, in a way, it doesn’t matter, but we are going to get into like, which one it should be. But doing the Smith maneuver in one of those two cases is a good move here because he’s going to borrow the funds, he’s going to pay off the mortgage, he’s not going to then renew the mortgage. Now he has complete, you know, there’s no mortgage now. Then he’s going to borrow, so he doesn’t have to renew at a higher rate, but he’s now going to have the HELOC.

because he’s gonna borrow it on the HELOC at the rate of your HELOC, which is already gonna be that higher rate, and now go and invest it. Hopefully earn that return that’s higher than that HELOC. But we also have done some episodes in the past that says it doesn’t matter what the actual HELOC rate is for you to actually really make use of the Smith maneuver. So head back into some of the.

the history of our episodes to understand that and learn about that. But what I like is because now also he’s gonna get that tax deduction. Now, let’s unpack that. So he’s making a good chunk of salary. His wife’s making less than half of that. And so while we have to decide, does he put it on, is it now tax deductible to his income?

as an investment, if we were gonna now put it into his unregistered accounts and her unregistered accounts, which one of these do we do? Because like you’re saying, it seems like a great move because if you go with his, because now all of a sudden, now we can write off that mortgage, it’s not mortgage, it’s a loan, but that same amount is now tax deductible on the interest portion to his income.

which is gonna lower the tax, which was at the higher rate. So that makes sense. So Kyle, why would we even consider doing it on Spouse?

Kyle Pearce: Yeah, so and this is actually this particular individual who brought this idea up because immediately like my first blush, you know, thought is, hey, you know, you’ve got such a significant income, put it on your name. That way you can write off essentially 53 % of that interest, which is great. So that’s going to take a, you know, call it five and a half percent if it’s prime plus, you know, prime plus point five right now, an extra 50 basis points on your home equity line of credit. You’re looking at like

two and a half to two and three quarter percent after you consider taxes. That’s great. That’s fantastic. On the spouse, she’s going to be at a marginal rate of around 30%, depending on the province, but around 30%. So there’s a big arbitrage here between their marginal tax rates. Now, actually, I shouldn’t say marginal. Their average tax rates. Her marginal tax rate would be about 30%. So there’s a good arbitrage there.

And I like that at first blush, but his concern was, okay, we fast forward, we do this for let’s say 15 years. And now we’ve got this big investment and it’s all in my name. And now he’s also got an RSP, which is closing in on a million dollars right now. It’s gonna obviously continue to grow and compound into the future. He’s now got a lot of the assets in his name. And when he goes to pull that income out down the road,

he’s going to once again sort of be stuck in a high tax bracket, whereas his spouse is gonna have less assets in her name, she had been putting away less in her RRSP and in her defined contribution pension plans. And so when she goes to take money out, she’s gonna take out a small amount, get taxed a small amount, he’s gonna be taking out probably a larger amount for retirement income and therefore get hammered in taxes. So.

there’s a lot of unknowns here because we don’t know what is that number that they’re actually spending today. And then if we project that out, like what does that look like into retirement as well? Like, do you need that same amount? They talked about the kids going to private school and you know, that obviously having a cost, well, that’s not gonna last forever. So does that bring down your, you know, annual spending by 10%, by 20%, by 30 % like.

These are pieces that we’re really gonna have to work through in the visioning portion, in the visioning stage. But as of now, my gut wants to say, I like him taking on more of these unregistered funds. However, we often talk about this idea that, you know, even if later, there’s a big amount in his unregistered account, the part we often forget is there’s also gonna be a big debt sitting there against it, right?

There’s two options. One option is you kept paying the interest only on the actual loan balance on the actual property and your investment account kept growing. That’s gonna keep your interest that you pay every year under control, but there’s also some people who actually let the interest compound on the borrowed funds. So you have the compounding asset over here and you have the compounding debt over here. And with more debt,

comes more tax deductible interest to write off, which could help to deal with some of his issue when he goes to pull money later in retirement from this unregistered account. So there’s a lot of numbers and number crunching that we can do, but we really need to have a better sense as to like, what does the timeline look like? How much am I planning to pull out and.

What kind of debt am I going to still have on the books that I have now a tax deduction that I can continue to write off against when I do pull money out of that unregistered account?

Jon Orr: Right, so if he’s planning for retirement in 14 years, he gets to write off that amount every year for 14 years, which could accumulate to a large tax savings, in comparison to his spouse, who was only going to be able to write off a smaller amount because of her salary in terms of the tax deductions that she’s going to be earning. So I get that. So you’re saying we need we need more info.

Kyle Pearce: We 100 % need more info and we also need to know, like depending on what you invest in, like let’s pretend for a second that it was primarily capital gain investments. Now, some people are gonna push back and say, listen, the CRA, you there’s the, you have to have the intent to earn income when you’re writing off the interest on this investment loan. So yes, that is true. However, as long as there’s no stated fact that a stock

or an investment cannot pay a dividend, it typically can pass. Now I say typically double check with your account and make sure that everybody’s happy with what you’re deciding you’re going to invest in. But you do not have to have all of your Smith maneuver leveraged funds in dividend paying stocks, for example, right? Which is which is another misconception a lot of people have. But even if let’s say you had all capital gain assets going on and you were to sell all of

the investment bucket 15 years from now. Who knows what that number’s gonna be, right? We can compound it out and figure it out. But let’s pretend there’s a million dollar capital gain. That million dollar capital gain in his name is going to trigger him basically $250,000 of tax on that $1 million capital gain. Not a very smart move to be pulling all of that in any given single year. Here’s the thing. If she took on all these investments,

and she did the same thing, she’s gonna have the same problem because she’s pulled a million dollar capital gain in a single year and now they’re in the same boat anyway. So these are some of the sort of decisions that we have to make when we’re planning so that we don’t, let’s say, try to just pick the easy route and not really analyze what is likely to take place down the road.

Jon Orr: I get that scenario, but it’s likely that she’s not going to cash in, come retirement, all of these capital gain assets, how at once you’re going to drip them out as if anybody would in terms of pulling from your retirement accounts.

Kyle Pearce: No, exactly. And let’s take another more realistic scenario. Right now, the household’s bringing in about $500,000. Now, some of that money is obviously going away to tax, right? So his income, for example, is getting chopped almost in half, right? So he’s taken home about $200,000, let’s say. She’s going to take home about maybe $70,000-ish, let’s say. So about $270,000 after tax. If they…

continue to require that. I’m gonna argue that into retirement, no more private school, not supporting the kids, those types of things. Maybe they need 200,000. Again, total assumption at this point, until they know what they’re spending and they really think through and plan through what they intend to spend into retirement, we can deal with inflation later, let’s just pretend in today’s dollars, until we know that, it makes it really difficult for us to compare. But let’s pretend it’s 200,000 that they need.

Right? If he takes the full 200,000 in his name, yes, that’s going to pop him into a high tax bracket. Is he taking it as ordinary income? Some of it, yes, because the RRSP is going to be taxed as ordinary income. However, some of it may be capital gains, as we had mentioned. So even if he’s in a higher tax bracket, it’s still only going to be about half of the ordinary tax rate, given that we only pay on 50 % of the capital gain.

So we really have to figure out what does this look like and sound like and what kind of interest do we anticipate to be paying every year that is still tax deductible. So as we pay off this or as we start pulling from this investment, we do have to keep in mind that, you know, as we pull from the investment, that means less of that interest is going to be a write off, right? Cause you’re now pulling that investment out and spending it in some way. So there is a lot of analysis to be done here. I would argue.

that if he’s taking a hundred and she’s taking a hundred, then obviously they’re going to pay less tax later. There’s a real calculation that needs to be done here in order to figure out where do we go next and what is the right move. And I’m telling you, John, my hunch is we always say that usually the answer lies somewhere in between. And my thought is why not look at how much money you’re bringing in, how much money your spouse is bringing in and find somewhere in the middle to go, you know what, if we’re going to borrow,

$300,000 to do this Smith maneuver. Maybe 100,000 is in her name, maybe 200,000 is in his name. Since he’s bringing in more of the money in his name currently, that’ll give him a slight tax advantage on the write-off for the next 15 years. However, she’s going to get a slightly less advantageous tax write-off for the next 15 years. But then the rules will flip when we hit the time where we start pulling income out, right? He might get taxed slightly higher, but she’ll be getting taxed slightly lower.

Jon Orr: Yeah. I like that approach because I think what you’re doing is you’re waiting the, you’re waiting, you’re using a weighted average here between the two different accounts. if, and it’d be honest, if you were not married and you were going into a deal with a partner, that’s the way you would structure it. Like you would structure it based off how much you’re contributing or how much, you know, part is yours. and in that, in that way, you know, that, that makes a lot of sense, but also

it gives you a little bit of both, you know, the best of both worlds. So he’s going to be able to write off that interest now, but then you’re also going to be building the account on her side to be able to pull more money come income splitting time. So all of a sudden it’s like now when we both retire and we know what the number is, because we did the vision planning work, we know what number we need to pull. Now we can go, let’s pull equal amounts because we both have a bigger accounts than what we may have had if we had just dumped it all into his account, you know, so.

Kyle Pearce: I think one of the big takeaways here from this episode and why we wanted to share it, and we’re not done here, because there’s a lot more work to be done here around visioning. They’re talking about whether their families has enough protection in place and a few other nuances that we wanna go into in the next episode. But the big takeaway I want you to have here is that, you know, the idea of the Smith maneuver on its own,

is one that sometimes is fairly complex and takes some time for people to think about. But then there’s some nuances here in terms of whose name, you know, takes on the investments and what is it going to be invested in and what’s when do I plan to start pulling from that? Like all of these variables are going to have an impact on what happens next. And even the investment that you put your borrowed funds into is going to have an impact. So

As of now, there’s really no clear cut answer we can give because there isn’t enough clarity around that piece. So in the next episode, we’re gonna dig into the visioning piece and helping this individual, we’re calling him Daniel and his family to determine what is that vision? What does it look like and sound like? How can you get on the right path? And then also let’s make sure when we look at stage four, how do we ensure that we’re gonna protect the family now? protect the family and the assets into the future as well. So stick around for that and we look forward to continuing the conversation.

Jon Orr: If you want to know more about the pathways and the stages that we just talked about, stages one and vision, stage two in optimizing your wealth reservoir, stage three, and thinking about your optimization structures that you have access to in the fourth stage, which is your legacy and estate planning, then head on over to CanadianWealthSecrets.com.com.org slash pathways and take that assessment and you will get a report that gives you where, you know,

an assessment of where you are on those stages and some next steps. just a reminder, the content you heard here today is for informational purposes only. should not construe any such information or other material as legal tax investment, financial or other advice. One more reminder, Kyle Pierce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management at Canadian Wealth Secrets.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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