The Smith Maneuver: Turning Your Mortgage Into a Tax-Deductible Investment Strategy in Canada

For Canadian homeowners looking to build long-term wealth and improve their tax position, the Smith Maneuver offers a unique, legal way to convert your mortgage into a tax-deductible investment loan. While it’s not without complexity or risk, when implemented correctly under the guidance of tax and financial professionals, this strategy can be a powerful wealth-building tool. This article will explore how the Smith Maneuver works, who it’s best suited for, the benefits and risks involved, and how to get started.

What is the Smith Maneuver?

Developed by Canadian financial planner Fraser Smith in the 1980s, the Smith Maneuver is a financial strategy that allows Canadian homeowners to make the interest on their mortgage tax-deductible—something that’s typically only available to business or investment loans in Canada.

The core idea is to gradually replace your non-deductible mortgage with a tax-deductible investment loan, allowing you to:

Write off interest costs on your income tax return,

Invest regularly and potentially grow your wealth, and

Pay off your mortgage without increasing your cash outflow.

How It Works – Step by Step

The Smith Maneuver relies on a readvanceable mortgage, which is a mortgage that includes a home equity line of credit (HELOC). As you pay down the principal of your mortgage, the credit limit on the HELOC increases by the same amount, and you can then re-borrow that amount to invest.

Here’s a simplified step-by-step breakdown:

Set Up a Readvanceable Mortgage

You’ll need a mortgage product that allows you to access increasing credit as you pay down the principal—available from most major banks. This product bundles a traditional mortgage and a line of credit together.

Make Your Regular Mortgage Payments

Continue to make normal mortgage payments (ideally with accelerated payments to reduce the principal faster).

Reborrow Paid-Down Principal via the HELOC

As the mortgage balance decreases, the available room on the HELOC increases. You withdraw that newly available credit.

Invest Borrowed Funds

Use the withdrawn funds to invest in income-producing assets like stocks, mutual funds, ETFs, or real estate investments.

Deduct Interest on the Investment Loan

Because the funds are borrowed with the intention of generating investment income, the interest on the HELOC becomes tax-deductible.

Recycle the Tax Refund (Optional but Powerful)

Use any tax refunds from the deductible interest to make extra mortgage payments, accelerating the paydown and increasing HELOC room.

Over time, your non-deductible mortgage shrinks, your investment portfolio grows, and your HELOC balance rises—but it’s now a tax-deductible investment loan.

Example Scenario

Let’s assume you have a $500,000 mortgage. Each month, your principal payment is $1,000.

After your first payment, you have $1,000 in new HELOC availability.

You withdraw that $1,000 and invest it.

The interest on the $1,000 investment loan (let’s say 6% or $60 annually) becomes tax-deductible.

You continue this every month, and over the years, your mortgage decreases, while your investment portfolio grows.

You receive annual tax refunds from the deductible interest, which you reinvest or use to pay down the mortgage faster.

Who is the Smith Maneuver Best For?

The Smith Maneuver is not a one-size-fits-all solution. It’s best suited for individuals who:

Have significant mortgage debt and a long time horizon for repayment,

Are comfortable with investment risk and understand market volatility,

Have stable and sufficient income to manage potential fluctuations in interest rates and investment returns,

Have good credit to qualify for a readvanceable mortgage product, and

Want to actively build wealth and reduce their tax burden.


It’s particularly appealing to high-income earners who are looking for additional ways to optimize their tax strategy and build investment portfolios without increasing monthly expenses.

Key Benefits

1. Tax Deductibility of Interest

This is the biggest draw. In Canada, mortgage interest is generally not tax-deductible, but investment loan interest is—if the loan is used to earn investment income.

2. Accelerated Wealth Building

By investing regularly using borrowed funds, you start compounding returns sooner and increase your long-term financial potential.

3. Mortgage Paydown Optimization

When combined with strategies like recycling tax refunds or making lump-sum prepayments, the Smith Maneuver can help reduce mortgage duration and interest.

4. No Additional Monthly Costs

Because you’re recycling your own principal payments into investment capital, you’re not increasing your monthly outflows—just reallocating them more effectively.

Risks and Considerations

As with any financial strategy, the Smith Maneuver carries risks and is not suitable for everyone. Here are some to consider:

1. Investment Risk

Markets fluctuate. If your investments underperform or lose value, you’re still responsible for repaying the borrowed funds.

2. Interest Rate Risk

HELOC rates are variable and can increase. Rising rates mean higher interest costs—even if they are tax-deductible.

3. Complexity

This isn’t a set-it-and-forget-it strategy. It requires discipline, careful tracking of interest for tax purposes, and sound investment knowledge.

4. CRA Scrutiny

While the Smith Manoeuvre is legal, the CRA requires a clear and direct link between borrowed funds and income-generating investments. Mixing personal and investment use of the HELOC can disqualify deductibility.

5. Risk of Over-Leverage

There’s a psychological temptation to treat the HELOC as “extra money” and overspend. Discipline is essential.

Getting Started: Working with a Professional

If you’re considering the Smith Manoeuvre, it’s crucial to work with professionals who understand its legal and financial nuances:

Mortgage brokers who can set up the right readvanceable mortgage,

Financial advisors who can design a suitable investment strategy,

Tax professionals who can ensure proper tracking of deductible interest and maximize your tax benefits,

Accountants who can help prepare your returns in compliance with CRA requirements.


Your accountant can also help you understand how the tax deductibility plays out in your specific income bracket, and how best to handle refunds, repayments, and investment income reporting.

Common Myths and Misconceptions

“Isn’t this only for the wealthy?”
Not necessarily. The strategy is scalable and can work for middle-income Canadians who have a home and want to build long-term wealth.

“Is it too risky?”
It does involve risk, but like any investment strategy, risk can be mitigated with education, diversification, and professional guidance.

“I’ll have to pay two debts now.”

Not exactly. You’re not taking on a new monthly payment; you’re reusing the room freed up on your HELOC. The strategy is about cash flow efficiency, not adding new costs.

Final Thoughts

The Smith Maneuver is a uniquely Canadian strategy that turns one of the biggest non-deductible expenses—your mortgage—into a tool for long-term tax savings and wealth building. While it’s not for everyone, with the right financial circumstances and professional support, it can transform how you approach home ownership, investment, and taxes.

As an accounting firm, we help clients understand not just whether the Smith Maneuver is viable, but also how to implement it correctly to remain compliant and maximize its benefits.

If you’re curious about how this strategy could work for you, contact our team of tax and financial experts today for a personalized consultation.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. The Smith Manoeuvre involves investment and borrowing risks and should be implemented with professional guidance.

Photo by Harper van Mourik on Unsplash