Episode 90: Misconceptions with The Smith Maneuver: What You Need To Know For Tax Strategy in Canada 

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Are you leveraging your home equity to its fullest potential, or are you leaving valuable financial opportunities on the table?

In today’s challenging financial landscape, finding ways to build wealth while managing debt is a priority for many. This episode dives deep into the Smith Maneuver and other wealth-building strategies that could be the key to optimizing your financial future. Whether you’re looking to reduce mortgage interest, invest wisely, or create a flexible financial safety net, understanding how to effectively use your home equity is crucial.

As Kyle and Jon break down complex financial strategies like the Smith Maneuver, home equity lines of credit, and investment dilemmas, they provide actionable insights tailored to both seasoned investors and those new to the concept. If you’ve ever wondered how to make your money work harder for you, this episode offers a clear roadmap to maximizing your financial potential while minimizing risk.

• Learn how to use the Smith Maneuver to create wealth and reduce your mortgage costs through tax deductions.
• Unpack misunderstood strategies for managing and maximizing your home equity to invest in opportunities without jeopardizing your financial stability.
• Understand how the Smith Maneuver can be combined with other investment strategies.

Tune in now to discover how these proven financial strategies can help you unlock the hidden potential of your home equity and take control of your financial future!

Resources:

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

In this episode, Jon and Kyle delve into advanced wealth management strategies, discussing how retained earnings and capital gains can be optimized using the Smith Maneuver and Infinite Banking. They highlight the importance of managing debt, particularly in the context of inflation and the complexities of corporate tax in Canada, to maximize financial growth and stability.

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Detailed Episode Summary 

Smith Maneuver and Wealth Building Strategies

Jon and Kyle discussed the Smith maneuver, a strategy for creating wealth and reducing mortgage interest costs through tax deductions. They mentioned that they had previously covered this topic in several episodes and planned to share these in the show notes for listeners. A recent email from a listener, Mandy, prompted a deeper discussion of the Smith maneuver, with Kyle emphasizing that it’s an ongoing strategy. They also noted their regular interactions with clients and listeners seeking their advice on wealth building and related topics.

Home Equity and Investment Strategies

Kyle explained the concept of home equity and how it can be utilized for investment purposes. He clarified that borrowing against one’s home equity is not the same as the Smith maneuver, which involves borrowing and investing in a single step. He further discussed the flexibility of home equity lines of credit, which can be designed to suit individual needs, either by slowly increasing the credit limit as the mortgage is paid down or by taking a lump sum upfront. A question arose about a listener named Mandy’s scenario, where she had $300,000 of home equity available to her. Kyle suggested that she could reinvest this money, but the specifics of her situation, such as the amount still owed on her mortgage, remained unclear.

Mortgage and Equity Strategies Discussed

Kyle and Jon discussed their options regarding their mortgage and equity. Kyle suggested that it would be beneficial to maintain as much available access to equity as possible, even if it’s not immediately needed, as lenders are often willing to offer loans when one does not anticipate needing them. Jon agreed that this strategy could be useful as an emergency fund or for unexpected opportunities. They also clarified that there is no special plan needed to access the equity, as it is already secured against the value of the home. The idea of the Smith maneuver was discussed, but Jon felt it was not necessary if they were only planning to use a portion of the equity, like 100k.

Maximizing Home Equity Line of Credit Strategy

Jon explained his strategy of maximizing the home equity line of credit to create a gap between the value of his home and the mortgage, which he could then invest. Kyle clarified that this approach was not the Smith maneuver, as it involved borrowing against existing equity, not changing the traditional mortgage balance. He emphasized that this strategy would add more debt to the borrower’s load, with half of it being tax-deductible. The other key point Kyle wanted to address was a concept related to the setup.

Managing Home Equity Line of Credit Strategy

Kyle and Jon discussed the strategy for managing a Home Equity line of credit. Kyle advised that while no special plan is needed, it’s essential to document all transactions and keep things as clean as possible. He suggested directing the credit to a title company for property purchases, and tracking the interest paid. Kyle also recommended splitting the credit into different accounts for personal use and investment, whenever possible, to make it easier to track and manage. Jon seemed to understand and agree with these suggestions.

Investment Strategy Dilemma and Solutions

Kyle and Jon discussed the best approach to investing a large sum of money. Jon highlighted the dilemma of whether to invest the entire amount immediately or to dollar-cost average it over time, emphasizing the difficulty of timing the market. Kyle agreed, suggesting that if the initial investment didn’t perform well, it would be challenging to dollar-cost average anymore. He proposed starting with a smaller amount, then investing more if the initial investment performs well, while stressing the importance of having confidence in the investment strategy. They decided to consult Mandy in future discussions for further insights.

Discussing Client’s Mortgage-Free Goal

Kyle and Jon discussed their client’s goal of becoming mortgage-free within five years. They debated whether this goal included the 150,000 of interest and taxes that would be paid on their investment account, which currently holds 100,000. Jon suggested using the Smith Maneuver to make their investment tax-deductible, allowing them to pay down their mortgage faster while also increasing their tax-free investment income. Kyle agreed that this approach may align better with the client’s goal of becoming mortgage-free while also maximizing their tax benefits.

Strategic Financial Planning for Long-Term Goals

Kyle suggested a strategy for Jon to consider his long-term financial goals. Kyle proposed that Jon should maintain his current debt and invest a significant portion of his funds in the market with the belief that this investment will outperform the interest paid on the borrowed amount. Kyle further recommended Jon to implement the ‘Smith maneuver’, which involves using the same funds to pay down the mortgage while simultaneously investing in the market. Jon agreed with Kyle’s plan, recognizing the potential benefits of a long-term investment strategy. Both Kyle and Jon emphasized the importance of maintaining a conservative approach and educating oneself on financial matters. They also offered their services for further advice and assistance.

Transcript:

00:00:00:09 – 00:00:31:06
Jon Orr
Are you leveraging your home’s equity to its fullest potential or are you leaving valuable financial opportunities on the table? Stick around. In this episode, we’re going to unpack misconceptions around how to use a Smith maneuver and other wealth building strategies that could be the key to optimizing your financial future.

00:00:31:08 – 00:00:36:08
Kyle Pearce
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce and Jon Orr.

00:00:36:09 – 00:00:50:04
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.

00:00:50:09 – 00:01:11:02
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 OC.

00:01:11:02 – 00:01:37:15
Jon Orr
In this episode, we are going to unpack complex financial strategies like the Smith Maneuver, home equity lines of credit. How to incorporate that with other financial strategies. Specifically, we’re going to learn how to use the Smith Maneuver to create wealth and reduce your mortgage costs through tax deductions and misconceptions around using that strategy. You can unpack misunderstood strategies for maximizing and managing your home equity and begin to understand how the Smith Maneuver can be combined with other investment strategies.

00:01:37:16 – 00:02:00:06
Jon Orr
Here we go. All right. We’re going to do like a live analysis, a live kind of recommendation analysis for you listening right now. We’ve done a number of episodes on the Smith Maneuver. We are talking about using that to capitalize on creating a situation where it allows you to essentially take your mortgage interest and make it tax deductible.

00:02:00:08 – 00:02:16:14
Jon Orr
We’ve got a few episodes there and we’ll put those episodes in the show notes. So if you haven’t gone back and listen to the Smith Maneuver, the Smith maneuver is a great maneuver to create wealth. Like we talk about wealth building here on this podcast as well. Can hear, well, secrets and it is a it’s not really a secret, but it is a secret sauce move.

00:02:16:14 – 00:02:40:06
Jon Orr
And if you are wanting to create more wealth and you can be doing this by, say, creating this capital so that you may have had access to you, but you’re creating a little bit more every time you kind of utilize it. So we’ll let you go back and listen to the Smith maneuver. But this particular episode is we’ve had a person, a listener, so that listener might be listening right now to reach out to us and say, Hey, I’ve listened to these those episodes.

00:02:40:06 – 00:03:04:18
Jon Orr
I’m super interested. I’m super eager to learn more. And they tossed us a scenario, you know, and this is what we get all the time, right? Kind of like we always get emails about scenarios. We talk with people on a regular basis. Every single day. You are primarily on calls with clients, but also listeners of this podcast every single day, looking at scenarios, looking at what their wealth plan currently is and where it could go.

00:03:04:20 – 00:03:26:14
Jon Orr
So we got an email from a listener and we just today on this episode, we kind of want to take those questions one at a time because there is a number of questions in the email and we’ll just break it apart here and kind of talk about this live analysis so that you can hear and maybe this situation applies to you, but also be like, Hey, maybe I can learn a little thing or two about the Smith Maneuver and other tools along the way.

00:03:26:15 – 00:03:30:21
Jon Orr
All right. Kyle, hit us with the the email and let’s get into it.

00:03:30:23 – 00:03:47:13
Kyle Pearce
All right. All right. So this email came in from Mandy. I had had actually a couple conversations with Mandy in the past, and one of the things that came up as they were along their wealth building journey, they had a home, they had a mortgage. Those who are watching right now can see the email up on the screen here.

00:03:47:13 – 00:04:04:21
Kyle Pearce
We blocked off all the details so that you can identify who this person is. But one of the things that they were curious about is the idea of the Smith maneuver and something that I think is worth mentioning here. And for everyone who’s been listening, you’ve heard some of our previous episodes where we talk about the Smith Maneuver.

00:04:04:23 – 00:04:36:06
Kyle Pearce
Keep in mind it is an ongoing maneuver, borrowing against your home with home equity is not necessarily the Smith maneuver. That’s just borrowing money and then investing it in something one time. And that’s something that is commonly sort of misunderstood in terms of the Smith maneuver. So let’s read this out. It says, Hi, Kyle enjoyed this podcast. This was in response to our follow up Smith Maneuver episode and it said, Glad to hear your testing this out for yourself.

00:04:36:06 – 00:05:06:06
Kyle Pearce
We’ve secured our mortgage renewal and have a $300,000 home line at variable rate and it can be converted to affect so many of these types of sort of home equity sort of lines of credit that are attached to your traditional mortgage, those kind of work hand in hand. And they’re kind of flexible, right? Like you have this fixed portion that you pay like a traditional mortgage and it slowly opens up more and more credit to a home equity line of credit.

00:05:06:06 – 00:05:25:08
Kyle Pearce
Now, when you set this thing up, you can design it in a number of ways. So for some people they go, listen, I owe 300,000 and maybe I have 600,000 of equity in this home. And they say, I don’t want any line of credit off the bat. I just want to slowly open this line of credit up as I pay down the mortgage.

00:05:25:08 – 00:05:47:20
Kyle Pearce
You can do that or you can say, listen, give me this portion, maybe 300,000 here and then start my line of credit up to the maximum that you’ll give me. Usually that’s up to about 80% when you combine the traditional and the home equity line portion. So what we don’t know in this case is exactly what is going on in Mandy’s scenario yet.

00:05:47:22 – 00:06:07:19
Kyle Pearce
She said, Do I have to set up a special plan to take some of the 300,000 and use it to invest? So my gut here says that this is 300,000 of available home equity that she could like take out today, like she could go to the bank, say, hand me a bag of cash, Good luck. They’ll never. And your bag of $300,000 of cash.

00:06:07:23 – 00:06:27:13
Kyle Pearce
It’s hard to get $6,000 of cash these days without ordering it ahead. However, you get the idea she could take that and reinvest it. What we don’t know here is what is left on the mortgage currently. So it sounds like there’s already there’s still a mortgage going on in the background here, but that’s like a separate portion here.

00:06:27:13 – 00:06:52:18
Kyle Pearce
She’s got 300 to invest. And she said, since we already have this defined equity built up, I assume it’s not necessary to have the very advanced double mortgage, as I cannot see us using more than 100,000 for the strategy. So she’s got 300,000 available and she only wants to use up to 100. So I think the answer to that question is you’re right, you don’t need the advanced double portion now.

00:06:52:18 – 00:07:17:19
Kyle Pearce
I mean, for me and you, John, I think the logic in my mind is, is that I want to continue to have as much available access to my equity as possible. So if right now you’re handing me two options, even if I don’t have plans to use all 300,000, if every day I make a payment or every month I make a payment to my traditional mortgage, it’s going to open up a larger and larger line of credit.

00:07:17:24 – 00:07:38:16
Kyle Pearce
In my opinion, it’s better to take that option, right? Because I don’t know about you, John. We’ve talked about it on the podcast before, but lenders are amazing at letting you borrow money when you don’t need it. And when you actually need it is when they’re not as willing. So I would say if they’re going to give you that option, I’m certainly going to take it.

00:07:38:16 – 00:07:41:20
Kyle Pearce
Even if it’s not in my short or medium term plans.

00:07:41:22 – 00:07:59:09
Jon Orr
I completely agree because you never know. Like you can treat it like like we’ve talked about here specifically about emergency funds. You could be using it as your emergency funds and you never know when you might need to pull at it. Or all of a sudden an opportunity comes along and you wish you had a little bit more than what you say were locked in at.

00:07:59:11 – 00:08:17:24
Jon Orr
I think the Advanced Bell mortgage is a smart move. Now, that first question which said, you know, do I need to set up a special plan to use the $300,000 to invest, be like. No, that’s the nice part about your equity. Already done the pre-approval. You’ve already gone through all of that there, said, Hey, we’re securing this against the value of the home.

00:08:18:03 – 00:08:50:16
Jon Orr
That 300,000 is for you to withdraw. Do whatever you want. Like you said, bag of money if you want. There is no special need there to get access to that. But I think the idea here is if you’re only going to go 100 K, then there is no reason for you to even think about the Smith maneuver and it doesn’t really apply here because the Smith maneuver is I think if I kind of go down a barebones kind of scenario here and use their numbers or some numbers in a sense, be like, well, in your right call, we don’t really know exactly how much is here.

00:08:50:18 – 00:09:24:18
Jon Orr
That is the mortgage portion and how much the equity portion is. But it sounds like they already have 100 K of equity that they allowed to kind of utilize. Now, you Smith maneuver might be a good move if you’re a person where I currently don’t have any equity and I know that I want to use that 100 K now and more in the future, That’s when you go, okay, I want to like continually, like you said, I want that constant kind of change between the value of the mortgage, the traditional mortgage portion of my loan and the home equity portion.

00:09:24:18 – 00:09:44:11
Jon Orr
I want to continually create that gap or that value so I can take that and do what I was going to do an investment. Like if you were a situation where you grabbed your mortgage, it’s like your first fresh out of the gate and you’ve got the value of the home. Maybe you did an 80% LTV on that home, which means like you borrowed 80% already of the home’s value.

00:09:44:11 – 00:10:05:11
Jon Orr
And they’re like, give me the home equity line of credit. And you look at it and you say, Look, I’ve already got 80% borrowed. Therefore my home equity line of credit portion of my loans, that top value I would get for my home is actually like $0 because you’ve maxed out your 80% between your mortgage and your home equity line of credit right off the bat because you went 80% LTV.

00:10:05:13 – 00:10:30:18
Jon Orr
But then it’s like the Smith maneuver might be a great move for you if you’re like, Now I have no room to borrow money to put into, say, in this investment or this investment. So it’s like, let’s say I have my extra thousand dollars a month that I want it to go in this investment. Now it’s like, let’s put that on the mortgage that will create the thousand dollars on your home equity line of credit, because now it’ll say it will go from $0 available to $1,000 available.

00:10:30:24 – 00:10:36:18
Jon Orr
And now you go and put that in your investment and now you’re on your way to utilizing the actual Smith maneuver.

00:10:36:20 – 00:11:12:15
Kyle Pearce
Right? Absolutely. So, you know, kind of reiterating that what it sounds like here is that man, he’s looking to borrow some equity that she already has available. So she’s not actually performing this Smith maneuver because she doesn’t actually need as she’s sort of mentioned here, she doesn’t need the advanced portion in order to accomplish her goal. One thing I want to address here is that, again, if I’m doing Smith Maneuver, it’s like I am paying down some of my mortgage or with money I had intended to put into an investment in order to make some of my traditional mortgage payments.

00:11:12:17 – 00:11:33:16
Kyle Pearce
The interest on it to make it tax deductible. So what we’re doing is you’re like, you’re trying to swap it, right? So you’re basically taking the balance of your mortgage and you’re not actually changing what you owe on it. You’re actually just converting some of it to tax deductible interest instead of paying it down. So that’s really important to note here.

00:11:33:16 – 00:11:57:05
Kyle Pearce
So when you’re borrowing against your equity that you currently have, you’re not really performing a Smith maneuver at all. Your traditional balance is going to stay the same and you’re actually adding more debt to your debt load. So if you think about that, we don’t know what the traditional portion is on her scenario, but let’s say she owes 100,000 on her home and then she has a $300,000 line and she borrows 100.

00:11:57:05 – 00:12:24:16
Kyle Pearce
She’s now doubled the amount of debt she has. Half of it is tax deductible interest, the other half isn’t. But you’ve actually doubled your debt load, which is very different than taking $1,000 or 100,000 paying off the traditional portion and turning all 100,000 into tax deductible debt. So that’s a really important piece here. Now, I want to address one last thing before we move on.

00:12:24:18 – 00:12:43:19
Kyle Pearce
And it’s this idea of setting up how did she word it here When I bring it back up on the screen here, it was something like, do we have to set up a special plan to take some of the 300,000 and use it to invest? What I think that might mean, like what I think she’s after here is do I need to do anything special?

00:12:43:19 – 00:13:01:03
Kyle Pearce
You don’t have to, like, tell the bank. You don’t have to do anything like that. But you do have to do is you have to make sure that your documents ring what’s going on. So that means when you make that transfer from the home equity line of credit, in my opinion, it’s best to try to keep it as clean as possible.

00:13:01:03 – 00:13:23:14
Kyle Pearce
So if I’m going to send that to a title company to in the U.S. to buy property like we just did recently, it’s great to go straight from the line to the title company instead of, say, having it go from the line to your personal checking account. And then from there there’s still a paper trail you can still book keep that, you can still track that, but just trying to keep it as clean as possible is best for you.

00:13:23:14 – 00:13:41:02
Kyle Pearce
And that also means you’re going to have to track the actual interest that you’re paying, right? You could do this a number of different ways. You can get a statement at the end of the year that tells you how much interest you’ve been charged on that account, or you can actually just go through and calculate the interest only payments each and every month.

00:13:41:04 – 00:14:06:19
Kyle Pearce
However, the one thing that I think is important when we talk about setting up a special plan is that if I plan to borrow 100,000 and let’s say there’s a month down the road where I need to borrow for personal reasons, I need to borrow because the furnace when in the home or something on the personal side, it makes it muddy if you’re taking some money out personally.

00:14:06:21 – 00:14:33:19
Kyle Pearce
And now it’s like I have some interest being charged on this investment. Some interest is being charged on the money. I’m borrowing personally, that personal money, that interest is not tax deductible. So you have to be cautious there. And what we would recommend is you call the bank and say, listen, if I only want 100,000 to invest like Mandy has here, you could say, Hey, listen, Mr. Or Mrs. Banker, can you split this up into two different accounts?

00:14:33:24 – 00:14:52:06
Kyle Pearce
I want $100,000 over here. This is line of credit account number one. Just like credit or checking account number one. And then there’s home equity line of credit, account number two. And that’s going to have the other 200,000, which might be a rainy day fund down the road. You might decide, Hey, maybe I want to add another account.

00:14:52:06 – 00:15:18:09
Kyle Pearce
I can split it up even further. Most banks are pretty flexible like that. So if you know that you might use some for personal use, some for investing, having two separate accounts or more could make sense. Just so it’s easier to track nice and clean and if you ever get audited down the road, that it’s just an easier process to be able to say, here it is, here’s the interest that was written off and we’re good to go for sure.

00:15:18:09 – 00:15:40:15
Jon Orr
I would also recommend to that with the money, this can be, you know, a slug when the time comes. Let’s move on to one of our other questions here. It said another question. Would it be best to do the 100 K right away versus staggering over years since our timeline to pay off is less So to me, what she’s saying is like, okay, I have $100,000 to invest.

00:15:40:17 – 00:16:03:06
Jon Orr
And she hasn’t mentioned like where that investment is, whether it buying a property, whether we’re putting it into, let’s say, the stock market or an index bonds or other equities. So she’s basically saying to me, Kyle is should I dump this in now or should I dollar cost average this over a certain amount of time. So that’s a toughie because that’s like that’s the crystal ball.

00:16:03:06 – 00:16:17:04
Jon Orr
If you had the crystal ball and said, Hey, I’m at the very bottom of the market right now dumping a hundred K and would be great if I’m at the very top of the market right now, then maybe dollar cost averaging is the way to go at this point. But it’s like, are we at the bottom? Are we at a top?

00:16:17:04 – 00:16:49:20
Jon Orr
Are we on a bull run like you have to know those things. And that’s about timing the market versus say, let’s just get it in there and time in the market is the better move. But we’ve talked to you about if timing the market or if time in the market was in it is the bigger winner. But that first year, if you dump a big chunk of money in it drops within that year, it’s a long time to recoup, say, that initial amount, like when you have a really down year in year one, the data shows that it takes forever to recoup that and say get to those values instead of saying like, Hey, I’m

00:16:49:20 – 00:17:00:03
Jon Orr
in the middle and we dollar cost averaging at that point. So I don’t think we can be the the decider in this. But you got to kind of make that choice yourself.

00:17:00:05 – 00:17:20:12
Kyle Pearce
Yeah. And to be honest, it’s like again, kind of to your point, I reiterating it, it’s like taking 100,000. If you just came up with the idea, my biggest wonder would be is like, what are you investing it in? And how comfortable and confident are you to invest it in that thing now based on the plan here? Okay, now we’re speaking at high level.

00:17:20:12 – 00:17:39:08
Kyle Pearce
Really what we probably should have did is got Mandy to join us on this episode so we can ask some of these things. But here’s the sense I get, though. If your goal is to only invest 100,000, that’s your goal. That’s the limit that you’re willing to do by taking the hundred in. If tomorrow the market tanks, then you have to just hold on.

00:17:39:08 – 00:18:02:17
Kyle Pearce
There’s no more dollar cost averaging there. Right. So to kind of like really rubber stamp that, it’s like, okay, you got 100 in and great, if everything goes smoothly for the next few years because it sounds like you have a five year time horizon for retirement. It says here, if we read a little further down the email, they talk about the idea that you only want to put 100 into this strategy maximum.

00:18:02:19 – 00:18:24:09
Kyle Pearce
So really what I would want to do if I put 100 in today and then tomorrow, the market tanks 20%, I want to be able to put in 200 more if that was me. Right. So I would say maybe you want to put a small chunk to start and then decay from there. You really have to think about the strategy and you just have to be confident in what it is that you’re investing in.

00:18:24:11 – 00:18:46:09
Kyle Pearce
And after it says that, you’re hoping to be mortgage free in five years. Now, does that mean that you also want to have no balance going on this investment account? So you already have $50,000 leveraged investment already in some other asset? Right. And I do have it in the notes. I can’t remember what it was exactly, but so 50,000 is already in there.

00:18:46:09 – 00:19:15:07
Kyle Pearce
So 100,000 is the most that they want to add to this plan. So my big piece here would be is like, are you okay when you say you want to be mortgage free in five years, does that still include the 150,000 here that you’re going to be paying interest on and getting the tax deduction on? Because remember, Smith maneuver in a perfect world from a completely rational standpoint, the thought is you should keep the balance of your mortgage essentially forever because you want to write off all that interest.

00:19:15:08 – 00:19:36:07
Kyle Pearce
You have to pay taxes. So why don’t we just write off all the interest that’s actually going to make sense. But emotionally it might not make sense. So when I hear it’s like I want to be mortgage free, does that also include the 150? If so, then basically what you’re saying is that I’m going to take this hundred, I’m going to put it potentially all into something, say, today.

00:19:36:09 – 00:20:08:04
Kyle Pearce
And I’m hoping in five years that I have at least more than the 100 to pay that off. I’ve been paying off my mortgage at the same time, and then we’re kind of like debt free at that point. The question then becomes is like, is it realistic that that’s actually going to happen where you’ll be completely able to pay off the debt both on what you borrowed and what you while borrowed for investment, as well as what you’ve borrowed against your home just along the way with the traditional mortgage.

00:20:08:06 – 00:20:29:24
Jon Orr
I think this is where the Smith maneuver might make sense for them if their goal is to be mortgage free. And that’s just a mindset thing, then maybe they’re okay with borrowing for investment purposes. This is where you can make your investment tax deductible like it’s going to be tax deductible in, say, the line of credit if it’s earning income over in an investment.

00:20:30:01 – 00:20:50:02
Jon Orr
So maybe the goal is to pay down that mortgage as fast as possible with whatever funds you have, but go with the re advanced mortgage so that you can then use the Smith maneuver to dump more money into your investments. So let’s say in five years, officially your mortgage is paid off, but you’ve got this debt attached to your home that is really your mortgage.

00:20:50:02 – 00:21:07:08
Jon Orr
But mindset wise, it’s your investment. You’re making money off your investments, which maybe that’s what she’s thinking about. She’s thinking like, I want to be mortgage free, but she’s not going to be mortgage free unless she takes that 50 K out of there and it’s against the home. Right? Because that’s the reality of what you’ve done. You’ve transferred the debt from one account to another.

00:21:07:10 – 00:21:19:06
Jon Orr
But the Smith maneuver makes a lot of sense here. If you’re like, I want to invest, I can then use that investment for tax purposes and income purposes. And officially I have no mortgage.

00:21:19:08 – 00:21:49:11
Kyle Pearce
Right. Well, let me put it this way. What I’m going to do is reiterate what you’re saying in a slightly different way is like, if I have a five year time horizon right now and again, we’re making assumptions, maybe it is the plan is to keep this debt ongoing, but that five year time horizon, it suggests that. And if I considered even if it’s a thought that I’m going to take a 100,000, get it into an investment right away, be it real estate, be it the market, whatever it is that they’re deciding to do, if that’s what they want to do, they put that in.

00:21:49:13 – 00:22:09:24
Kyle Pearce
What that tells me is that you believe that the investment that you’re making over these five years is going to outperform, meaning you’re going to like have an arbitrage, a positive arbitrage in terms of what you’re going to earn versus what you’re going to pay in interest on that borrowed amount. Now, we’re not lumping in the traditional mortgage that has nothing to do with this investment.

00:22:10:01 – 00:22:33:08
Kyle Pearce
So the thought is the logic would suggest that if that’s true, that actually I probably shouldn’t have necessarily a $100,000 limit. Right. Just logically, emotionally. Sure. You have a limit here, But if you believe that this is going to be true over the next five years, then it would make sense to keep that investment for the long term and keep the debt for the long term.

00:22:33:08 – 00:23:05:22
Kyle Pearce
Right. Because this investment is going to continue to compound and grow, which over time is going to produce more income, which produces more taxable income, which produces an opportunity for us to write off this interest. And ultimately in my world, even if $100,000 is the goal, John, I’m going to give my sort of secret sauce here. What I think based on what we know and some of the assumptions we’ve made, and then I want to hear your thoughts, but I think instead of doing, as you mentioned, you’ve got a lot of equity there.

00:23:05:22 – 00:23:34:05
Kyle Pearce
Your goal is 100,000, I would say going smaller and going harder on the traditional mortgage with money, putting money harder onto that mortgage so that you’re opening up more line of credit room, assuming there’s a re advanced mortgage. And at the very same time you’re doing legit Smith maneuver, you’re taking that same amount of money and you’re putting it into the market and that would allow you to DCA, it will help you slowly scale into the market, right?

00:23:34:05 – 00:23:54:20
Kyle Pearce
So we’re not going to do this all at once. And because guess what? If that market tanks in a month and your decaying in, you’re going to be like, this is the best because now you might go, now’s the time. I want to put down a big chunk. I want to put down 30 K right now or I want to put down whatever that amount is that you want to put down at that time.

00:23:54:22 – 00:24:19:15
Kyle Pearce
But right now I would say just slow and steady is going to win the race. I also get the sense that based on I’ve had conversations with Mandy, John, I know we’ve chatted about these calls, but you weren’t on the calls. I get the sense based on the paying down the mortgage, wanting to get rid of debt, that sort of thing, that there’s a conservative ness here too, which decaying is just going to be more conservative.

00:24:19:17 – 00:24:28:16
Kyle Pearce
And honestly, I think in the long run it is almost always going to be better off because it’s so hard to predict what’s going to happen next in the markets. Right.

00:24:28:18 – 00:24:52:15
Jon Orr
I totally agree. And I totally agree with your plan here to continually get that mortgage paid down. But then dollar cost average into the market using that Smith maneuver, because you are assuming that this investment is a winner is a better player than say, you know, just leaving it in something else. So I love that. And I think that’s a great move from India.

00:24:52:17 – 00:25:18:24
Kyle Pearce
I think so, too. Hey, friends, listen, if you found some value in this episode or any other value in any other episodes, please leave us a rating and review on Apple Podcasts. It’s a huge, huge help for us. And remember, if you want to hop on a call chat about your next moves, we specialize in helping you incorporate and business owners free up the retained earnings that are trapped inside your corporate structure so that you’re paying less personal taxes over the long term.

00:25:19:01 – 00:25:35:02
Kyle Pearce
Reach out to us at Canadian Wealth secrets dot com forge slash discovery. And hey, if you’re looking for some personal assistance along the way, you can also reach out at the same spot Canadian wealth secrets dot com forward slash discovery and we look forward to hanging out with you soon.

00:25:35:04 – 00:25:51:16
Jon Orr
All right containing all secrets seekers. We’ll see you next time.

00:25:51:18 – 00:26:06:00
Kyle Pearce
Just a reminder, my friends, this content is for informational and educational purposes only. You should not construe any such information or material as legal, t&cs, investment, financial or other advice.

00:26:06:02 – 00:26:21:06
Jon Orr
John is a mortgage agent with Brick’s mortgage license number. m23006803. Kyle Pierce is a licensed life and accident and sickness insurance agent and VP of Corporate Wealth Management with the Pan Corp team that includes 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.

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