The Smith Manoeuvre: how it works and its risks

Topic: Investing Deep Dive · Part 8 of 8 · ⚫ Expert

In one sentence

The Smith Manoeuvre is a strategy where homeowners borrow back the mortgage principal they pay off, through a home equity line of credit, and invest it, so the interest may become tax-deductible.

Read this first: the risks

This is borrowing to invest, secured by your home. It is a high-risk strategy. Talk to a licensed professional before trying this, such as a qualified financial planner and a tax professional.

Leverage: you invest borrowed money. Losses are your losses, and the debt stays.
Market drops: your investments can fall 30% or more, while you still owe the full amount.
Rate rises: most HELOCs have a variable rate. Your lender can change it. Your interest cost can jump.
Cash flow: you must pay the HELOC interest every month, even if you lose your job.
Your home: the HELOC is secured by your home. If you cannot repay, the lender may take possession of it.
Tax risk: if your records are poor or you mix money, the CRA can deny your interest deduction in an audit.
Total debt does not go down. You swap non-deductible debt for deductible debt. You stay in debt longer.

Words to know

HELOC (home equity line of credit): a loan secured by your home. You can borrow, repay and borrow again up to a limit.
Readvanceable mortgage: a mortgage joined with a HELOC. Each time you pay down the mortgage principal, your HELOC limit goes up by the same amount.
Tax-deductible interest: interest you can subtract from your income, which lowers your tax.
Purpose test: the CRA looks at what you used the borrowed money for, to decide if the interest is deductible.

Step 1: Understand the tax idea

In Canada, interest on a mortgage for your own home is not tax-deductible. But the CRA says you can usually deduct interest on money you borrowed and used to try to earn investment income, such as interest and dividends.

What counts is how you use the borrowed money, not what secures the loan.
If an investment can only produce capital gains, you cannot claim the interest.
Interest on money borrowed for an RRSP, TFSA or FHSA is not deductible.

The CRA’s detailed technical guide on this is Income Tax Folio S3-F6-C1, Interest Deductibility. A tax professional can explain how it applies to you.

Step 2: Set up a readvanceable mortgage

According to the FCAC, a HELOC can be up to 65% of your home’s value. A HELOC combined with a mortgage needs at least 20% equity. With a readvanceable mortgage, your available credit rises as you pay down mortgage principal. It must be from the same lender.

Ask about the HELOC rate, any fees, and whether the lender can change your limit.

Step 3: Borrow the principal you paid and invest it

Each month, part of your mortgage payment pays down principal.
Your HELOC limit grows by that amount.
Borrow that amount from the HELOC and move it straight into a separate non-registered investment account.
Buy investments that can reasonably be expected to pay income, such as dividends.
Pay the HELOC interest every month.

Step 4: Use the tax refund (optional)

At tax time, claim the HELOC interest as a carrying charge (line 22100). Some people put the tax refund on the mortgage as a prepayment. That raises the HELOC limit again, and they borrow and invest that too. This speeds up the process, and the risk.

Step 5: Keep perfect records

Use the HELOC (or a separate HELOC part) only for investing. Never pay personal bills from it.
Move money directly from the HELOC to the investment account. Mixing it with your bank account makes it hard to trace.
Keep every HELOC and investment statement, and your tax returns.
If you sell investments and spend the money, interest on that part usually stops being deductible.

Example

These are illustrative round numbers, not a forecast.

Your home is worth $500,000. Your mortgage is $400,000.
In year 1, you pay $12,000 of principal ($1,000 a month). Each month, you borrow $1,000 back from the HELOC and invest it.
End of year 1: mortgage $400,000 − $12,000 = $388,000. HELOC $12,000. Total debt: $388,000 + $12,000 = $400,000, the same as before.
Year 2: HELOC interest at 6%: $12,000 × 6% = $720. If it is deductible and your tax rate is 30%, the tax saving is $720 × 30% = $216.
Your investments pay 3% dividends: $12,000 × 3% = $360, which is taxable.

Now the risks, after 10 years with a $120,000 HELOC:

Interest at 6%: $120,000 × 6% = $7,200 a year. At 9%: $120,000 × 9% = $10,800 a year. That is $3,600 more a year from your budget.
If the market falls 30%: your investments are worth $120,000 × 0.70 = $84,000. You still owe $120,000.

Who it might suit, and who it doesn’t

It might suit someone with a very stable income, a large emergency fund, a long time horizon, already-full TFSA and RRSP room, and the calm to hold through big market drops.

It usually doesn’t suit someone with an unstable job, little emergency savings, plans to sell the home soon, high-interest debt, or anyone who would sell in panic. Many people are still building credit, savings and job stability, so it is common to wait.

Common mistakes

Using HELOC money for a car or vacation, which mixes personal and investment borrowing.
Buying investments that pay no income and assuming the interest is deductible.
Planning on today’s interest rate staying the same.
Thinking the strategy lowers your total debt. It does not.

✅ My checklist

☐ I understand this is borrowing against my home to invest.
☐ I calculated my interest cost if rates rise by 3 points.
☐ I can keep paying the HELOC interest if I lose my job.
☐ I will keep the HELOC and investment account separate, with full records.
☐ I will talk to a fee-only planner and a tax professional before starting.

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There are no affiliate or referral links in this post. This is general information, not financial, tax or legal advice; everyone’s situation is different. Figures were checked in October 2026 and can change.

Sources: FCAC: Home equity lines of credit · CRA: Line 22100 Carrying charges and interest expenses · CRA: Income Tax Folio S3-F6 Interest (Chapter 1: S3-F6-C1 Interest Deductibility)