Here is the scoop on the Smith Manoeuvre.

Simply stated it is a process to convert home equity to debt. It is important to note that you don’t need a home equity line of credit to do that, although the process works fine.

The process is flawed in that if your primary purpose of the exercise is to make your home mortgage tax deductible, that opens you up to attack by CRA. GAAR; General Anti Avoidance regulations.

If some of your investment is in things that produce capital gains, you can not deduct the interest in your annual tax returns, but you can factor it in when you sell the asset to reduce the capital gain.

If you are going to do this kind of stuff, you need to set yourself up strategically. With your investments they need to be positioned as active business and not as investments. For your investment portfolio, you need to become an active trader.

You need to keep impeccable records. Keeping good records seems to be a little known process. Apparently WNBC is the only company that teaches this process.

You also need to know that CRA is aware of this program. When a tax strategy becomes popular with the population, it becomes popular with CRA. You will note that the law keeps getting tighter on tax reduction planning. Remember those income trusts?

The only strategy you can count on is under the flag of business. Make absolutely sure, you have very good advice that applies to you.

If you are an occasional or passive investor the Smith Manoeuvre could be a costly mistake for you to use it.

If you think that the Smith Manoeuvre is for you, it could be true. However if you rush in thinking that it is an easy slam dunk tax saving, then too late; you may figure out that there were better options to save taxes. There are options that perhaps you just never went looking for.

Ten years ago I was vocal about the dangers of the tax deferral donations programs and I was cursed by many. Today rescuing people who took the plunge is good for our business. CRA says they are going after every single Canadian who took part, and now that the law has changed, they are now ging after the promoters of the schemes.  I expect the same thing will happen with the Smith Manoeuvre.

How will CRA know who did the SM? Easy! Every Canadian not operating an active real estate business operation, or is an active trader who has high income expenses on line 221 of their tax return. *** and yes you can write off the interest on your rental real estate business. Just make sure you have impeccable documentation to show the money structure. CRA’s default attitude on everything is to look for reasons why you can not deduct things. Interest is just one of many fruitful targets for CRA.

What do I think? Hmmm… I love these things; they are good for my business which includes helping people who get in a mess with CRA. Long live the Smith Manoeuvre! 

See what CRA says about interest charges.Line 221 - Carrying charges and interest expenses You can claim the following carrying charges and interest you paid to
earn income from investments:·         Fees to manage or take care of your investments (other than administration fees you paid for your registered retirement savings plan or registered retirement income fund). ·         Fees that you paid to a bank or trust company for the safe-keeping of investments such as safety deposit box charges. ·         Fees for certain investment advice. See IT238, Fees Paid to Investment Counsel. ·         Fees to have someone complete your tax return but only if:o    you had income from a business or property; o    accounting was a usual part of the operations of your business or property; and o    you did not use the amounts claimed to reduce the business or property income you reported. ·         Most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends.

However, if the only earnings your investment can produce are capital gains,

you cannot claim the interest you paid.

For details, contact us. ·         Interest you paid during 2006 on a policy loan made to earn income. To make this claim, have your insurer complete Form T2210, Verification of Policy Loan Interest by the Insurer, on or before April 30, 2007. ·         Interest we paid you on an income tax refund. You have to report the interest in the year you receive it (see line 121). If we then reassessed your return and you repaid any of the refund interest in 2006, you can deduct the amount of interest you repaid, up to the amount you had included in your income. You cannot deduct on line 221 any of the following amounts:·         Interest you paid on money you borrowed to contribute to a registered retirement savings plan or a registered education savings plan. ·         The interest portion of your student loan repayments (although you may be able to claim a credit on line 319 on Schedule 1 for this amount). ·         Subscription fees paid for financial newspapers or magazines, or newsletters. ·         Brokerage fees or commissions you paid when you bought or sold securities. Instead, you use these costs when you calculate your capital gain or capital loss. For more information, see Capital Gains.