Episode 87: The Smith Maneuver Explained: A Case Study On Innovative Investment & Tax Strategies

Listen here on our website:

Or jump to this episode on your favourite platform:

Are you tired of high mortgage interest rates eating into your savings? Discover how the Smith Maneuver could turn your biggest expense into a powerful investment strategy!

In this episode, hosts Jon Orr and Kyle Pearce unpack a real case study to dive deep into the Smith Maneuver, a financial strategy that aims to convert non-deductible mortgage interest into tax-deductible interest. If you’re a homeowner struggling with high-interest rates or looking for ways to optimize your taxes, this episode is tailor-made for you. You’ll hear first-hand how their client navigates their options and gains clarity on how to potentially save thousands of dollars each year.

The episode also touches on the broader financial landscape, including high-interest rates’ impact on personal finances and the exploration of various strategies like infinite banking and index fund investments. Whether you’re an experienced investor or just starting, the insights shared in this conversation can help you make informed decisions to enhance your financial future.

What you’ll learn: 

• How to implement the Smith Maneuver to convert your mortgage interest into tax-deductible expenses.
• The potential benefits and risks of various financial strategies, including infinite banking and index fund investments.
• Practical advice on managing high-interest rates and optimizing your cash flow for long-term financial health.

Unlock the secrets to optimizing your mortgage and investments—listen to the latest episode now and start transforming your financial future!

Resources:

• Episode 44: Saving Taxes and Accelerating Your Investments with The Smith Maneuver 
• Episode 81: The Smith Maneuver in a High-Rate Era: Maximizing Canadian Income Tax Deductions
• Dig into our Ultimate Investment Book List
• 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!
• 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.  

Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

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 corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

Watch Now!

Detailed Episode Summary 

Smith Maneuver Discussion for Istiyak’s Case

Jon, Kyle, and Istiyak discussed the Smith maneuver and its potential applications in istiyak’s case. Istiyak, a real estate consultant and investor, had been exploring strategies to save taxes on interest paid on a primary residence in Canada. He had landed on the Smith maneuver and sought the expertise of Jon and Kyle to understand how it could be implemented. Kyle, who had recently recorded a deep dive on the Smith maneuver, expressed his interest in using istiyak’s situation as a case study. The team planned to delve into istiyak’s scenario to overcome any mental barriers and help the audience understand the strategy better.

Optimizing Taxes and Exploring Strategies

Istiyak shared his objective of optimizing his taxes by reducing his current high mortgage interest rate. He discussed various strategies he was exploring, including the Smith maneuver and other cash flow optimization techniques. However, he expressed uncertainty about the most effective strategy, as he was still in the exploration phase. Jon and Kyle acknowledged his thorough analysis and emphasized that it’s crucial to carefully evaluate all options before committing to a strategy. They also touched on the concept of analysis paralysis, which can occur when seeking the best possible solution.

Discussing High-Interest Rates and Financial Strategies

Kyle, Jon, and Istiyak discussed the impact of high-interest rates on their personal financial strategies. Kyle shared his experience with the concept of infinite banking, while Istiyak revealed his motivation for exploring alternatives due to his high mortgage interest rate. Jon inquired about istiyak’s long-term goals, and Istiyak shared his focus on retirement planning and strategizing his financial future. Kyle then proposed presenting an Index fund investment option, despite it not being a typical strategy for their group, as a potential solution for their situation.

Mortgage Rate Strategies and Investment Habits

Kyle and Istiyak discussed the high mortgage rate and potential strategies to manage their finances. Kyle proposed a “Smith maneuver” to convert non-deductible interest into tax-deductible interest, which would require prepaying more than their current mortgage payment. The additional funds could then be invested in the stock market. The discussion also touched on their typical investment habits, with istiyak sharing that he primarily invests in real estate for lending.

Smith Maneuver Consideration for Istiyak

Istiyak, Jon, and Kyle discussed the potential of utilizing the Smith maneuver for istiyak’s personal financial situation. Jon highlighted the importance of considering the return on investment and the potential tax benefits when deciding whether to implement this strategy. Kyle then presented a conservative estimate of how the maneuver could impact istiyak’s tax bracket, suggesting it could knock him into the 27.5% marginal rate. This discussion was to continue with a detailed analysis of istiyak’s specific situation.

Financial Strategy and Smith Maneuver Discussion

Kyle presented a financial strategy to Istiyak, suggesting that they apply an additional $2,500 per month to their mortgage, aiming to have it paid off sooner. The plan is to then direct the same amount into investments. Kyle noted the potential tax benefits and the advantage of a potentially higher return on investment, despite the initial costs and interest accrued. They also discussed the idea of utilizing the Smith maneuver, which involves borrowing the funds to invest, but acknowledged that this might be behind in the first year due to interest costs.

Financial Strategy for Debt-Free Home and Investment

Kyle presented a financial strategy that showed significant improvements and accelerated mortgage payments over a period of 13 years, resulting in a debt-free home and a substantial investment balance. Kyle suggested that at this point, depending on the individual’s financial situation and goals, they might want to consider paying off the remaining mortgage or continuing to invest. Istiyak agreed with Kyle’s assumptions and indicated that he would apply this strategy in the short term before potentially shifting to a different investment strategy. A point of contention was raised by Jon regarding a previous podcast episode, but the details were not given.

Managing Rising Interest Costs Strategy

Jon expressed concerns about the rising interest costs over time, particularly in the fifth year, and questioned whether he would have the funds to cover the almost $10,000 in interest. Kyle suggested a strategy to manage this, proposing to pay the interest throughout the year using a line of credit, and then use the annual refund to pay down the line of credit. This approach was considered as a way to handle the potential risk and prepare for future payments.

 Managing Interest and Strategic Investment

Kyle emphasized the importance of managing interest and being aware of its compounding effects. He discussed the potential of a strategy where a line of credit is used to make investments, with the aim of having the interest on the loan balanced out by the investment returns. He warned against letting the interest accumulate without making any payments, and stressed the need for having a plan and understanding the potential outcomes. Kyle also shared an exercise demonstrating the benefits of such a strategy, even with a 0% return on investment, highlighting that the strategy remains beneficial due to the reduction in interest payments.

 Kyle Explains Smith Maneuver Benefits

Kyle explained to Istiyak the benefits of the Smith Maneuver for his particular mortgage situation, highlighting that it would result in a lower interest rate and significant tax deductions. Kyle pointed out that even with a conservative investment return of 6%, Istiyak would still come out ahead due to the reduced interest payments and tax deductions. Istiyak responded by acknowledging the potential savings and expressing his conviction that there’s no reason not to pursue the strategy.

 Potential Investment Strategy and Follow-Up Call

Jon, Kyle, and Istiyak discussed a potential investment strategy that could yield significant benefits. Kyle proposed a follow-up call to further explore the next steps and potential hurdles, emphasizing that this could not only help Istiyak but also benefit the broader Canadian wealth seekers’ community. Istiyak agreed to this, expressing gratitude for the time and effort invested in his case. Jon confirmed that they would follow up on this in the near future.

Transcript:

00:00:00:06 – 00:00:36:21
Jon Orr
Are you tired of high mortgage rate interest eating into your savings? I know I am. In this episode, you’re going to discover how the Smith Maneuver, a popular topic we talk about here often on this podcast, can turn your biggest expense into a powerful investment strategy. We’re going to unpack a real life case study. We have a listener here with us who opted to get some feedback on some strategies they were thinking of, and we dive deep into this Smith maneuver and what they can do to strengthen their portfolios, strengthen their tax efficient strategies so that they can grow towards their financial freedom.

00:00:36:24 – 00:00:54:12
Kyle Pearce
Let’s go welcome to the Canadian Wealth Secrets Podcast with Kyle Pearce and Jon Orr.

00:00:54:13 – 00:01:08:08
Jon Orr
We are recovering high school mathematics teachers and education consultants whose entrepreneurial spirit led us to begin multiple businesses in real estate investing, digital courses and coaching and consulting after the bell rang at dismissal time.

00:01:08:12 – 00:01:29:05
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we can now help entrepreneurs, business owners and investors to grow their wealth into a legacy that lasts generations through hidden investment and tax secrets. Your financial advisors won’t believe our true.

00:01:29:07 – 00:01:47:14
Jon Orr
Hey there. Welcome to the Canadian Wealth Secrets Podcast. We’re excited to dig in because this is going to be one of those practical case study type episodes where we’re going to look at the numbers. We’re going to look at your scenario and kind of go down a little bit of a rabbit hole around What makes the most sense for you.

00:01:47:14 – 00:02:06:07
Jon Orr
I know you’ve been chatting with Kyle specifically around the Smith Maneuver and wondering specifically how that’s going to work on how you can make that work to come out ahead in the end. And we’ve done a little bit of homework for you, so we’re excited to kind of share that. But before we get into it, let our listeners know like where abouts you coming from?

00:02:06:08 – 00:02:09:24
Jon Orr
What’s your day job look like? And fill us in a few details there.

00:02:10:01 – 00:02:34:23
Istiyak Siddiqui
Thank you, John. And thank you to both of you. I’ve been listening to your podcast for quite some time and I love the content you guys create and appreciate the value you’re adding to your clients and your listeners. Thank you very much. My background is mostly in consulting full time, and I also do real estate. I do a lot of real estate investing.

00:02:34:24 – 00:03:03:13
Istiyak Siddiqui
That’s what brought me into real estate world and at the moment I think are some of the strategies about how we can save some taxes on some of the interest that we pay on the premiums. As we know in Canada, we can’t write that off, unlike the US. But I have been exploring some options and I happen to land upon this particular strategy with it works.

00:03:03:15 – 00:03:11:07
Istiyak Siddiqui
I did some digging and wanted to brainstorm with you guys and maybe if you guys can put some light in helping with how that works.

00:03:11:09 – 00:03:32:11
Kyle Pearce
I love it. I love it. And for those who are listening, this Deac and I had a couple of calls actually, and we were chatting just about strategy, and this was one of those that kind of popped up and I was super curious because John and I had recently recorded our most recent deep dive on the Smiths maneuver, and I thought this was a great fit for us to use as a case study.

00:03:32:11 – 00:04:01:24
Kyle Pearce
But just to give folks a little bit of a high level understanding. You also have your realtor license. So again, being a real estate investor, much like us doing the learning so that you can do the work yourself, understand the business, but then of course be able to help others as well. You’re incorporated, have some investments in the consulting space and also you have already taken advantage of permanent insurance as a strategy being corporately owned.

00:04:01:24 – 00:04:21:09
Kyle Pearce
So a lot of things in common here. So it makes sense that as a listener to the show that things are resonating with you. Full disclosure, you already had those permanent policies in place before listening to the show, so you’re well ahead of the curve, which is great. So for those who haven’t explored deeply, they’re definitely they should be doing so.

00:04:21:09 – 00:04:45:00
Kyle Pearce
But today, yeah, we’re going to dig in to the Smith Maneuver. So what I think we’ll do is we want to take a deep dive into your scenario and we want to talk about first and foremost, you are an incredibly intelligent person. I know this from the calls we’ve had, from your investments you’ve made, from how well you are along your journey, and yet this Smith maneuver has given you a little bit.

00:04:45:00 – 00:05:15:05
Kyle Pearce
It’s caused a little bit of pause. Well, at least not the maneuver itself, but maybe the environment that we are in. So can you set the stage for us? You’ve been exploring what did you obviously what you liked about it is writing off interest. I think we all can appreciate that. But where’s the stumbling blocks for you that sort of led us down this path to sort of explore your scenario and hopefully help the audience with overcoming some of these mental barriers that we might face as we explore a strategy like this one.

00:05:15:07 – 00:05:38:05
Istiyak Siddiqui
My first thought process was I was looking to optimize my taxes. That was my objective. And when I look at my interest payment based on the current mortgage interest rate that we all know we are in, it’s pretty high. And I was trying to find ways to reduce it. And then I found that there is a strategy there and we leverage try to dig into this.

00:05:38:05 – 00:06:03:19
Istiyak Siddiqui
There are there are variations and the ones and so that there are some accelerated schools like were I looked at a couple of them, some of them make sense, some of them dent some of them are very close to my situations. And at this point of time I was comparing between differing options. So the one sustaining maneuver and I wanted to see what is most optimized options for me.

00:06:03:21 – 00:06:29:10
Istiyak Siddiqui
Most of them work, but what is the most optimize? It might be that I put any cash flow into mortgage and borrowed back, invest it again. Right? That that that could be one strategy or one could be an options are where does that cash flow coming from because that ultimately you need a cash flow. Cash flow can be coming from your personal income, cash flow currently coming from your rental income.

00:06:29:10 – 00:06:57:19
Istiyak Siddiqui
Cash flow can be coming from not the corporate income, but let’s say unincorporated sole enterprise income, which is still your personal income or another good strategy that I found was that if you have personal investment in stocks from the personal name, so maybe you want to liquidate that footprint to your mortgage borrowing back and put it back in the investment so that way you can write off that interest and your investment is the same.

00:06:57:21 – 00:07:09:19
Istiyak Siddiqui
The basically you are swapping your debt from one investment to other investment. So all of these things have been trying to compare and find optimize option.

00:07:09:21 – 00:07:31:13
Jon Orr
Right? Right. Makes sense. Makes sense. Sounds like you’re a deep diver, a fact finder. You’re trying to figure out the best option. Now, if you think about all these kind of different ways to bring in the cash flow and think about trying to minimize those tax, if you’re saying I want to move forward with this Smith maneuver or I’m not sure, like what do you think is for you the thing holding you back right now?

00:07:31:14 – 00:07:41:03
Jon Orr
Like if you pick one thing right now going like this is the real reason I haven’t done or take an action here. What would you say that one thing is right now?

00:07:41:05 – 00:07:48:19
Istiyak Siddiqui
One thing is I’m not willing to which option is the best one. So I guess still in the it’s very centrist.

00:07:48:21 – 00:08:16:21
Kyle Pearce
Interesting. And I think sometimes that analysis paralysis in you and I had a discussion around this fact finders you are definitely like myself I like to go down the rabbit hole and we’ve talked about this on the podcast a number of times before. Sometimes when there’s multiple options because as you mentioned, there are different strategies or approaches that you can implement either in conjunction with the Smith Maneuver or as sort of like a means to getting to the same result.

00:08:16:23 – 00:08:43:16
Kyle Pearce
But sometimes as we seek out for that best option, the most optimal option time just keeps rolling by, right? And that was my journey in permanent life insurance. For example, I had discovered the idea of infinite banking over a decade ago, and I was like, I’m not sure what the best way to go is. And meanwhile, now I recognize I’m like, Shoot, if had I started any policy right, I probably would be a whole lot better off now.

00:08:43:16 – 00:09:13:00
Kyle Pearce
So with this one, if I had to guess so there’s different strategies, but what would you say? Talk to me about We’re in a high interest rate environment. Has that been something that has maybe also either put you to maybe take this strategy and put it on the back burner? Because here’s the other thing. It’s like when there’s other extraneous factors sort of influencing whether we want to do something or not or maybe impeding on our confidence as to whether it might be a good strategy or not.

00:09:13:02 – 00:09:34:24
Kyle Pearce
Talk to me a little bit about interest rates. If rates were low right now, would you be committing more time to exploring these options or because rates are high right now, are you feeling like it’s sort of a back burner idea that and maybe I’ll come back to maybe I won’t. Where’s your head at in terms of the essentially market that we’re in right now?

00:09:35:01 – 00:09:59:16
Istiyak Siddiqui
The challenging part is because of the very high interest rate and my mortgage is more than $1,000,000. So annual interest rate goes more than 50, 60, roughly $70,000 a year, which when I looked at the number and I’m like, this does not make any sense that it has to be a better way. So that was the figure, and then I saw it exploding.

00:09:59:19 – 00:10:26:07
Istiyak Siddiqui
Now, your question is, if the interest rate goes down, would I still continue to explore? I think yes, because there are some strategies that makes absolute sense. For example, debt swapping. If I have been listening, do I want to continue investing and not reducing my tax? No. I might might take this stock investment, put it in the mortgage, and even if I’m paying interest, not 50,000 on 10,000, I would try to reduce that, maybe use it in enlistment.

00:10:26:07 – 00:10:29:04
Istiyak Siddiqui
So if I can make it better, why not?

00:10:29:06 – 00:10:52:10
Jon Orr
Right. I like what you say. Like like think about ten years from now. 15 years from now is your ultimate goal just to save tax? Or is there other like what are some of the things that are on your plate right now in trying to help decide what option is the best? Because sometimes we’d be like, I want to minimize my tax, but I also need to have the tradeoff between how much money I can say live and pay my bills with.

00:10:52:12 – 00:11:08:09
Jon Orr
Can I make that happen or is my ten year goal to have obviously as much net worth as I possibly can? And I want to build that as big as I can. But in the short term, I’m going to be maybe paying a little bit more out of pocket in a way to kind of get to that option.

00:11:08:09 – 00:11:12:01
Jon Orr
Like tell me about like what, ten years down the road looks like for you?

00:11:12:03 – 00:11:43:07
Istiyak Siddiqui
Sure. So I think I’m working on my retirement outlook. I wouldn’t say retirement plan, but looks at retirement outlook, how it would look like, what would it look like after a five year tenure. So I have certain goals for my network. I have certain goals that I need that big part or to continue so that I can analyze at what point of time I can comfortably retire, whether it is 65 and I can reduce that to 60, can it annuities that lower.

00:11:43:11 – 00:11:56:12
Istiyak Siddiqui
So I’m working on that next 5 to 10 year plan that includes a lot of different factors and working with my bank or my financial planning. So I’m trying to strategize that the full financial planning as well.

00:11:56:14 – 00:12:26:00
Kyle Pearce
Awesome. So what I think we will do here, and I think for a lot of people, I mean a lot of these are very common like first of all, I think everyone’s going to say, yes, I want to pay less tax. Yes, down the road. I want to be in a better financial situation than I am today. And then the real I think the part that’s tricky in between is like convincing ourselves of the strategies that make sense and working out the details after I’m convinced that taking that action is important.

00:12:26:00 – 00:12:46:01
Kyle Pearce
So today what I’m hoping to do for you in order for you to have maybe in your mind this thought of, even if I don’t know the exact strategy I’m going to implement, like today, we’re going to present just a simple one. We’re going to present this index fund option, which someone who invests in real estate like yourself or like us.

00:12:46:02 – 00:13:09:11
Kyle Pearce
That might not be the go to strategy typically, or at least it’s not for us. But what we want to show is that in today’s environment, a lot of things that are holding people back from the Smith maneuver is the idea that, hey, I have a fixed mortgage rate or a variable mortgage rate at whatever that number is, and my line of credit is high and that number looks daunting.

00:13:09:13 – 00:13:36:09
Kyle Pearce
Now you’re in a unique situation. We’re going to set the stage here and actually explore and take a deep dive into your specific details here. And I’m sure there’s going to be some listeners that either have a similar scenario or they might be able to sort of extrapolate from this scenario for themselves. Right? If they maybe they have a lower fixed income rate or they maybe they have a higher one, but they’ll be able to kind of play with this idea in their mind to see whether this is worth exploring for them.

00:13:36:09 – 00:13:58:06
Kyle Pearce
So what I thought we would do is we’d actually take a look and I’m going to share my screen for those watching on the YouTube out there, and we’re going to look at a basic spreadsheet. Nothing fancy here. We’ve got an approximate value of your home right now, a very modest growth rate or appreciation rate. I would say almost too conservative given where you live.

00:13:58:08 – 00:14:18:01
Kyle Pearce
However, we’re going to just leave that to the side. This doesn’t really factor in much for us simply because that’s going to happen whether we do this Smith maneuver or not. Right. Our house is going to appreciate whether I borrow against it, whether I pay it all off. It’s going to do whatever it does. But you do have that about $1.1 million mortgage.

00:14:18:03 – 00:14:43:15
Kyle Pearce
We also have and just for people to get a sense of that, you are paying 6% variable rate now. So interest rate are still high even though we got a interest cut announcement recently from the Bank of Canada, that still leaves rates fairly high. They only took it down a quarter of a percent and you’re looking at payments of somewhere around, I believe, like 7300 bucks a month.

00:14:43:17 – 00:15:08:06
Kyle Pearce
And as you mention, that interest each year as of today is going to be somewhere in the 60 ish $65,000 mark, which is a big chunk of money. But that’s happening, right? This is something that we have to accept with our mortgages. We look at them go, Hey, that’s happening whether we do something or not, how can I restructure this and try to do it maybe a little bit differently?

00:15:08:08 – 00:15:39:08
Kyle Pearce
So what we’re going to do in this particular cases, we’re actually going to look and I had asked you before we got on this call, I said, hey, if you could prepay and we’re assuming here that you have the prepayment privileges to do so and you do have a re advanced double mortgage, which puts you in a perfect situation, I think you’re dealing with a step which I think is a Scotia product, if I recall, and you’re basically able to add money or pay down money on this property in order to open up a room.

00:15:39:08 – 00:16:09:01
Kyle Pearce
Now, the caveat, as we’ve explored in previous episodes, is that there has to be this extra money sitting around that I can actually apply to this mortgage, right? I mean, otherwise I’m just borrowing more money against my home. My debt goes up and I can reinvest it, which is fine, but it doesn’t actually accomplish the Smith maneuver. We’re trying to essentially convert this non tax deductible interest into tax deductible interest.

00:16:09:03 – 00:16:30:07
Kyle Pearce
And you had mentioned to me, you said, listen, I could probably do like let’s run the scenario at 20 $500 per month. So your thought is, hey, if I put an extra 20 $500 a month on my mortgage payment each and every month, it’s going to open up that extra 20 $500 of room and then I can grab that money.

00:16:30:07 – 00:16:56:03
Kyle Pearce
And we’re going to assume today that we’re going to fire it into the stock market index funds. Now, a quick question. I have and this is more just out of curiosity. Are you currently kind of a market investor or do you typically save all your investment dollars for real estate for lending? I know you do some lending. Give the audience sort of a back story on sort of like what is the asset classes that you typically invest in.

00:16:56:05 – 00:17:26:01
Istiyak Siddiqui
I have a quite a diverse, defined portfolio. I do invest in stocks. I do have our space obvious things, which are 100% invested in equities. I do self-manage them myself, so completely hands on investing. Then I do have some real estate investing portfolios. I do some filing here and there. So one of the other portfolio is private lending.

00:17:26:03 – 00:17:55:00
Kyle Pearce
Awesome, awesome. So you’re very hands on. I’m curious now when you think about the Smith maneuver, if we could show you today how you can put yourself net ahead, would you be thinking, I want to self manage this money because I’m just good at it? Or are you thinking like because it’s the Smith maneuver and it’s like I’m essentially transferring debt and the purpose is to get this tax deduction that you’d want something more safe, like let’s say, an index fund.

00:17:55:02 – 00:18:21:15
Istiyak Siddiqui
My target would be what ever investment gives me a better return. So, for example, if index fund on an average might give me 7 to 8%, maybe 10% this year, but definitely on 78%. And then my mortgage rate itself is about 6%. So I need a bit of a role. So plus tax and whatnot. So maybe if 6% moderate, you might need minimum 8 to 10% return, whatever that gives me.

00:18:21:15 – 00:18:23:01
Istiyak Siddiqui
If that gives me index fund.

00:18:23:03 – 00:19:01:17
Jon Orr
You’re right. I think knowing and trying to make sure that we are are thinking about what that return could be, it’s obviously a huge factor in whether this Smith maneuver makes sense or not. But we’re going to unveil some numbers here and look at the actual details specifically to your situation. But I think what’s important generally for this for the listeners as well is that the Smith maneuver works because you are going to take the money you were going to invest anyway and then create this gap that allows you to take advantage of the tax that you would say get in return on, say that investment.

00:19:01:17 – 00:19:19:16
Jon Orr
And I think that’s an important aspect to know, because if you are saying I’m going to going to put more money down on my mortgage and I’m not going to invest that, then all we might be doing is transferring. I think you said this before as well as that you’re transferring from one asset into another. You’re transferring from one debt to another debt.

00:19:19:16 – 00:19:43:07
Jon Orr
And the important part is to try to capture the almost like this arbitrage on the interest rate for, say, your line of credit. And then all of a sudden the effective rate after you take into account how much tax you’re going to pay on say your income, any income produced. So for example, what tax bracket would you say generally you’re in right now in Canada?

00:19:43:12 – 00:19:48:21
Jon Orr
Because I think that’s an important factor for us to consider here to kind of go what are the numbers going to look like for you?

00:19:48:23 – 00:19:52:24
Istiyak Siddiqui
I would be about 100 K So that is your 31.48, right?

00:19:53:05 – 00:19:53:23
Jon Orr
Perfect.

00:19:54:00 – 00:20:18:05
Kyle Pearce
Perfect. So we’re going to use that number here and actually we’re going to knock it down a little bit because if you’re going to start writing off interest something and we’re looking at Ontario for those on YouTube here, got the charts up. This is combined Ontario and federal, which is real fun to look at. But you’ll notice that, you know, depending how much interest you have and how much that’s going to knock down your income each year, right?

00:20:18:05 – 00:20:44:18
Kyle Pearce
As you convert this debt, you’re going to have more tax deductible interest paying down essentially whatever your actual income looks like. So you’re probably going to be a little short of the 31 and a half percent bracket might get down into the 29 and you might even get a little bit of that money into this 24.15 tax bracket, depending how low you go with that or how much of this you convert.

00:20:44:20 – 00:21:04:21
Kyle Pearce
So I’ve been super conservative here. I want to share with everybody in your scenario, we’re going to put you in a 27.5% margin or rate, meaning like this money that’s going to knock down, it’s going to knock it off the top, which is going to be in that last bracket. So we’re actually being conservative here in order to run some of these numbers.

00:21:04:23 – 00:21:29:24
Kyle Pearce
Now, you had mentioned to me in our communications that your mortgage is 6% and your line of credit, your home equity line of credit, that’s associate that is about 7.2%. So right there, it looks bad, right? Like it looks bad on paper. But what we’re going to do here, we’re going to apply this extra 20 $500 per month and we’re going to do this until the mortgage is essentially paid off.

00:21:29:24 – 00:21:59:18
Kyle Pearce
So you’re paying your mortgage anyway. Then we’re applying an extra 20 $500 per month, which is 30,000 per year until the mortgage is paid off. And then after that, we’re not even going to worry about it, because what we would recommend, of course, is you apply all of that money into investments, right? You’ve been used to this being your sort of routine that, hey, you would obviously supercharge your wealth, taking 10,000 into the market per month instead of just the 2500 however you choose to do it.

00:21:59:20 – 00:22:27:13
Kyle Pearce
So what we’re going to show with this tax deduction is that essentially because we’re going to be paying 7.2% interest and it’s going to be tax deductible, that’s going to be like paying a 5.22% real interest rate cost, because basically what we’re doing, as we mentioned in that previous episode where we went on a deep dive, we took a general scenario, we had used a mortgage rate of, I believe, 4% and it was 7.7%, I believe.

00:22:27:15 – 00:22:50:08
Kyle Pearce
And it actually hurt the numbers for the first couple of years. But then it quickly caught up here. You’re actually in a scenario that if you had infinite money sitting in the backyard or under the bed or between the sofa cushions or whatever, if you had infinite money, it would make sense for you to take all of that money and put it in on your mortgage, take all of that money and then put it into the market.

00:22:50:08 – 00:23:14:02
Kyle Pearce
And essentially you could do a balanced fund and probably beat your 5.22%, dare I say you could potentially put it into. Now, it would be tough to justify the tax refund on it, but putting it into a participating whole life policy, for example, that has a fairly consistent, fairly safe return or a GHC, for example, you would be in a better spot.

00:23:14:02 – 00:23:38:13
Kyle Pearce
So again, we don’t have infinite money, but if we could take that 20 $500 per month, we’re actually going to pay on paper more money in interest on that 2500, which next month is going to be 5000. And the month after that, it’s going to keep growing and growing, but you’re actually realizing a better interest rate after we take the tax deduction into account.

00:23:38:15 – 00:23:59:22
Kyle Pearce
And you could see, of course, there’s costs here and we have to be aware of that. And then we use 9% as an average rate for, say, an S&P equity type U.S. equity type fund. However, as you had mentioned, it sounds like self managing your own stock portfolio, that you’re actually doing much better than that. But we’re not going to make any of those assumptions here.

00:24:00:03 – 00:24:23:07
Kyle Pearce
But it’s good for you to note and you’ll see here that we have I’m calling it Equity without the Smith Maneuver. We’re just talking about the equity you’re building in your home, right? You’re paying off the mortgage. Obviously, that’s going to happen regardless. As soon as we compare that and we look at and say, okay, imagine this world where we keep paying off our home and we do so just like we normally would.

00:24:23:07 – 00:25:03:01
Kyle Pearce
We don’t increase payments and we just take the 2500 bucks and we invest it just like we are here. You’ll see that obviously you’re going to be in a better spot. You’re contributing more money into the market and therefore you’re getting a good return. However, when we actually consider the Smith maneuver. So if we actually put the money on to the home, borrow it back and put it into the same exact investment that we were going to put it into without the Smith maneuver, you’ll notice that in year one, we’re going to be a little bit behind, as you can imagine, because there is interest cost happening there compared to just investing straight up.

00:25:03:03 – 00:25:29:09
Kyle Pearce
But you’ll notice that in your case, specifically, based on this 9% return, you’re going to realize very quick improvements and very fast. So we look in year two, you’ve got a $33,000 improvement. That’s the end of year one is 33,000. By the end of year five, we’re looking at 226. As we do this, we’re accelerating the payments on our mortgage.

00:25:29:09 – 00:26:00:16
Kyle Pearce
Your mortgage would be fully paid off the traditional mortgage by the end of year 13, and you’d be just short of $1,000,000 ahead in terms of this 9% return will play with that rate in just a second. Just to show you, it doesn’t have to necessarily be that high either. But one thing that I want to share with you is that after year 13, you only have a line of credit balance of 420 So your mortgage, the traditional mortgage is paid off.

00:26:00:18 – 00:26:31:20
Kyle Pearce
Your line of credit is now at $420,000, which is going to continue to cost you interest, but it’s tax deductible interest. And at that point in your life, 13 years from now, John asks the ten year question like, what do you envision ten years from now if you’re 13 years from now, you’ll probably have to look and analyze your situation and say, Am I showing a lot of income personally, or have I developed enough tax efficient buckets?

00:26:31:22 – 00:26:54:20
Kyle Pearce
And again, some of your buckets are participating whole life, for example, where if that’s going to be part of your income strategy, especially if we use a double leverage strategy with your corporate own policies and you’re starting to leverage in that way, you might be in a position where it makes sense to take this more than three quarters of $1,000,000 investment that you’ve made over these 13 years.

00:26:54:20 – 00:27:21:19
Kyle Pearce
It might make sense for you to pay off that for 20 and just pay it right off because maybe you don’t have enough showing income for that to make sense for you. That’s fine. But guess what? Now you’re completely debt free on your home. I’m going to argue that a guy like you and guys like us are probably going to look at that and go, My house is now worth what, 3.7 million at a conservative 2% appreciation rate.

00:27:21:19 – 00:27:39:22
Kyle Pearce
You might actually be going, What the heck am I doing leaving so much debt equity in there but have more flexibility. You’ll have more write offs, which it’s never bad to have more interest to write off than not enough because sometimes there’s windfalls, right? You have a windfall of income in a year and sometimes you can’t help it.

00:27:39:24 – 00:28:08:01
Kyle Pearce
And this can definitely be helpful for you. Now, I’m going to pause there before we play with a couple of numbers, because this will be the secret sauce not only for you on this episode, but also for people listening and watching. But I just want to get where your head is at currently. Is there anything here that’s maybe a big takeaway or is there maybe a question that you have you’re looking and you’re going to something here is just not working out for me that we want to dig into a little bit more deeply.

00:28:08:03 – 00:28:37:16
Istiyak Siddiqui
I think your assumptions are quite on the line, so including investment returns, including the investments under the assumptions are pretty good. And when I look at your last column, which of course makes me happy, but that looks really good. And as you said, yes, this the strategy is I don’t think I would continue for 13 years. This is a start on the strategy when we get off of this high interest rate market and then we’ll use the investment strategy somewhere else.

00:28:37:18 – 00:28:55:13
Jon Orr
Got it. Got us. So you’re thinking like you’re going to do this until things kind of evened out a little bit and then pivot from here. Now the thing that I get kind of hung up on myself and I think we talked about this column on that podcast episode, I think it was 81 is trying to make sure that we can handle this.

00:28:55:14 – 00:29:19:18
Jon Orr
You know, let’s say it’s year seven. If we look at the year seven for the next seven years, even in year five, like five years from now, we’re saying been putting the 20 $500 a month, which is $30,000 a year. But you also have that real interest cost like that year, you’re going to pay $9,000 just in interest, which is in addition to the 20 $500 a month that you’re paying on top of the mortgage.

00:29:19:18 – 00:29:42:00
Jon Orr
So it’s like I get concerned of going like, okay, so if I plan, it seems easy in year one, hey, the interest is only 1500 dollars, but by the time you get to year five, you’re paying almost just shy of 90 $500 in interest, just a loan in that year. Can we make sure that I have the funds available to have that available so that I can pay that off in that year?

00:29:42:00 – 00:29:53:19
Jon Orr
Otherwise, I’d be like in five years, will I be making, you know, all of a sudden have this extra $10,000 ready to go? It’s sometimes being like, Ooh, I don’t know if that’s even possibility. Then you might be like, Well, maybe I want to rethink it.

00:29:53:21 – 00:30:15:23
Kyle Pearce
100%. And I was going to also mention and this is to your point, John, because I think a lot of people at home might be thinking the same thing. Something interesting is that we actually have to remember that you’re actually paying this column out of pocket, right? So this is happening throughout the year and then we have to wait for JT and his buddies to tell us that we’re going to get this back.

00:30:16:00 – 00:30:39:22
Kyle Pearce
But this could also be a great strategy in how to handle that as you prepare to be paying this throughout the year. And you can actually compound this. And what I mean by that is essentially capitalizing the interest rate. And you go, okay, I’m actually going to borrow from the line of credit to pay the interest throughout the year, which a lot of people might be like, ooh, that feels risky.

00:30:39:24 – 00:31:06:19
Kyle Pearce
But hear me out on this. I do that. I go, I’m only doing that for now. And when the refund comes in each year, I put the whole refund on the line and you use it like, this isn’t money for you. This isn’t even maybe money to go back into the market that comes back to you. It’s actually just money that you’re going to put down on the line so that it eats up interest and more potentially or at least a good chunk of that interest.

00:31:06:21 – 00:31:24:22
Kyle Pearce
And it knocks that down and it kind of solves a little bit of that problem because I wouldn’t recommend necessarily letting it compound forever without ever paying a dollar down of it. I think what you want to do is you want to kind of keep that under wraps so that, you know, the balance of your line of credit is going to remain around a certain number.

00:31:24:22 – 00:31:44:22
Kyle Pearce
So it’s a little more predictable in your mind, like compound interest can get out of control fast rate. And we really want to see this compounding out of control. We want to see the investment compounding out of control. So I think the moral of this story, the secret sauce here is for us to be aware and prepare for it.

00:31:44:22 – 00:32:06:04
Kyle Pearce
We don’t want to go into the scenario without running it first, getting a game plan and sort of like knowing what to expect because the numbers can look daunting right? But here’s the reality. Like after 13 years, you could look at this line of credit interest and go, wow, $30,000 in deductible interest seems like a bad idea. You’re like, That’s a lot.

00:32:06:10 – 00:32:29:10
Kyle Pearce
You were claiming a hundred thousand in income. So we’re saying like a third of that income we’re saying is going to interest. But here’s the crazy part. Right now, this mortgage is costing over 60,000 an interest per year. So we’re waiting 13 years to get to a place where there’s no other interest on this house. There’s only 30,000 on it.

00:32:29:12 – 00:32:51:18
Kyle Pearce
And you get to decide at that point or earlier, like you had said, you might choose earlier to change the strategy if interest rates change, if an opportunity comes along. But the reality is, is that in the worst case scenario, you’ve still you’ve been working up to more than half of the interest going away and it’s tax deductible.

00:32:51:18 – 00:33:15:19
Kyle Pearce
So it actually feels more like $22,000 in interest. Now, the last little move I wanted to share with everyone, I’m going to put this on YouTube. You’ll see our green column there, mostly green column. The very first row is red in the red, but then it very quickly turns green. We had that investment at 9%. And some people that might be like, what if that doesn’t work out?

00:33:15:21 – 00:33:39:20
Kyle Pearce
I want to show you what happens if we have a 0% return on this investment that you do each and every year, Meaning all you did was you took the money, you paid off more on the mortgage, you borrowed it back, and then you put it into an investment that’s giving you nothing, which is maybe cash. You put it in cash in your money market account or whatever, which is going to be more than zero, by the way.

00:33:39:22 – 00:34:01:24
Kyle Pearce
But if it’s zero, you’re still ahead. And when I did this, I was like, why is that? And I went back and I was I had to check all my formulas. I’m like, there has to be an error. But when we actually scroll over and we go, Well, because your real interest cost is 5.2% and your mortgage cost is six.

00:34:02:01 – 00:34:41:01
Kyle Pearce
So just by borrowing it and putting it under the couch now mind you, you can’t justify putting money under the couch as an investment. The C.R.A. won’t let you write that off. But if you did do that, and if they were allowing you to invest under your couch, you would essentially be realizing a big enough tax deduction in your bracket that it would actually save you enough money where it justifies and you actually get growth because you’ve been more aggressively paying down your mortgage as a side effect here, where $2,500 more, the principal goes down and then I’m taking that money and I’m just putting it here and earning nothing on it.

00:34:41:01 – 00:35:03:09
Kyle Pearce
But I’m getting a deduction to make my interest rate on that amount even lower than what I’m paying today. So over the next couple of years and we even played with some negative numbers, like you can have like a pretty bad investment year after year after year and you’re still going to be net ahead because you’re saving money on the mortgage interest you should have paid.

00:35:03:11 – 00:35:28:05
Kyle Pearce
Plus you are also getting the tax deduction as well that we’re factoring in here as well. So you’re in a very I’ll call it a sweet spot on your particular case, like 6% on your mortgage. Not a sweet spot, but a sweet spot for Smith Maneuver to be actually incredibly helpful for you. Not to mention that you had mentioned returns in the teens.

00:35:28:05 – 00:35:50:22
Kyle Pearce
Right. If you’re like at 15%, then obviously you’re going to see a much more dramatic outcome here over the next 13 ish years. If you were to stick with that strategy. So I want to turn it back to you, my friends, for for any final thoughts. What is maybe been the big takeaway from this exploration here on behalf of everyone who’s listening?

00:35:50:22 – 00:36:11:10
Kyle Pearce
Because I’m sure that they’re thankful that you came in with this scenario so they can kind of look at another opportunity. Maybe it’s an opportunity for them or it’s for you. But what would you say is maybe your big takeaway or something that’s resonating with you after exploring this particular scenario, given your mortgage situation.

00:36:11:12 – 00:36:26:08
Istiyak Siddiqui
The moment you turn that the investment returns to zero and I can see that I will be ahead. I think that is the key that I’m convinced basically there is no reason not to do it. Absolutely no reason.

00:36:26:10 – 00:36:50:20
Jon Orr
Right. Right. What would you say? This is what I think turned our heads a couple of weeks ago when we looked at these tables in their scenario. And I think you may declaration on that podcast, you were like, I have to be putting money away into this maneuver because it doesn’t make sense not to because you’re going to come out ahead as long as you have this extra pocket of money that’s sitting here and you were going to do the investment with it anyway, huge gain.

00:36:50:20 – 00:36:58:10
Jon Orr
What would you say is your next step? What do you think is your next move here? Knowing this info now.

00:36:58:12 – 00:37:00:22
Istiyak Siddiqui
How to set it to the next step?

00:37:00:24 – 00:37:02:22
Jon Orr
I love it. I love it.

00:37:02:24 – 00:37:26:20
Kyle Pearce
So what I think we should do then is maybe a next step for you and I as we have another call and we chat about that a little bit more, try to figure out what are the hang ups now. And I think what it will be is not only beneficial for you, but I think it will be beneficial for the audience as well, because it’s going to help us help more people to kind of if they are convinced when their scenario and they’re like, So now what do I do?

00:37:26:22 – 00:37:50:23
Kyle Pearce
We can kind of go through that together and try to figure out like, where are those little hang ups? Because I’m sure there’s many of them along the path and we want to try to help clear that path for more Canadian wealth Secrets seekers is I must thank you a great deal. You’re coming to us from the GTA area, but sharing some awesome, awesome experiences here with the entire Canadian Wealth Secrets community.

00:37:51:00 – 00:38:12:01
Kyle Pearce
Thank you so much for spending some time with us. And pay. Is it okay if we potentially check in with you on the podcast maybe 912 months down the road to see if you did utilize this? Maybe this is a little motivation to actually follow through. Maybe that’s the accountability partner that you needed. Give us your thoughts on that and then we’ll say our goodbyes.

00:38:12:03 – 00:38:22:04
Istiyak Siddiqui
I’ll be more than happy to do that. And I really appreciate you guys taking time and spending time to run through this simulation for me. Got to be really appreciate that. Thank you.

00:38:22:06 – 00:38:40:21
Jon Orr
Awesome. We will definitely follow up with you. And again, thank you so much for chatting with us here on the podcast. And we hope you enjoy the rest of your day. Hey there, folks. I hope you enjoyed that case study with us this week. We delve deep into his personal situation and thinking about the strategies he wants to apply.

00:38:40:21 – 00:38:58:00
Jon Orr
And I’m sure that you’re thinking about what are the takeaways for you? And that’s what we encourage you to have right now is like, what does it take away that you took away from this particular episode? Is there an action that you want to learn more about? Is there an idea that you want to start employing into your portfolio, into your strategies?

00:38:58:02 – 00:39:15:06
Jon Orr
You know, what is that strategy? I’m going to encourage you to kind of think on that. That’s your takeaway is what is that strategy or what is that thing that you can take away from this particular? If we would love to hear about what that is, you can reach out to us on all social media platforms Twitter, YouTube, Instagram, Facebook, tik-tok.

00:39:15:06 – 00:39:32:18
Jon Orr
Let us know. You just search for Canadian wealth secrets over there. Follow us over there. Let us know by a comment or a private message we want to hear about. What is the secret sauce you took away from this episode? And if you would love for us to dig into your situation, you know, I have a look at your portfolio.

00:39:32:18 – 00:39:55:12
Jon Orr
Have a look at what strategies you are employing and dig into that with you so that you will walk away from that meeting with us, knowing exactly what to focus on and exactly what to strive for. Head on over to Katy. Well secret dot com for such discovery they are booked meeting with us and we’ll be glad to talk about those strategies with you so that you feel confident moving forward using the tools that we talk about here on this podcast on a regular basis.

00:39:55:14 – 00:40:32:07
Jon Orr
Links and resources in the transcript in this episode can be found over at Clean well secrets dot com forward slash episode L seven that’s cable secrets dot com for episode 87. All right Kenny Well Secret seekers we’ll see you next time. Just as a reminder, the content you heard here today is for informational purposes only, you should not construe any such information or other material as legal tax, investment, financial or other advice.

00:40:32:09 – 00:40:45:15
Jon Orr
John or his mortgage agent with bricks. Mortgage license number 23006803. Cal Pierce is a licensed life and accident sickness Insurance agent, VP of Corporate Wealth Management Bancorp Team Clinic, Corporate Advisors and Pan Financial.

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.

OPTIMIZE YOUR FINANCIAL FUTURE