Make Your Mortgage Tax Deductible

Announcer:

Welcome to the I Love Winnipeg Real Estate Podcast, your premier resource for buying, owning, and investing in Winnipeg's real estate market. And now here's your host, Adrian Schulz, who loves all things real estate, property management, and mortgage financing

Adrian Schulz:

On today's episode of the I Love Winnipeg Real Estate Podcast, I'm joined by Robinson Smith. Robinson, welcome to the show.

Robinson Smith:

Thank you, Adrian. Pleasure to be here.

Adrian Schulz:

Robinson, can you tell us a little bit about yourself and your organization?

Robinson Smith:

Yeah. Smith Consulting Group Limited is a company that my father founded many years ago to help Canadians implement the financial strategy that he developed way back when in the mid '80s. He moved on in 2011 and I took over the business. For a little while from 2006 until he passed away in 2011, he and I worked side by side as investment advisors helping Canadians implement The Smith Manoeuvre strategy. I kept ongoing after he passed away until the middle of 2018.

Robinson Smith:

Prior to being an investment advisor, I was living and working in China for about eight years. But yeah, dad called me back in 2006 because he said my mom missed me. So that's when I started my advisory career. Came out with my book Master Your Mortgage for Financial Freedom on The Smith Manoeuvre in November of 2019. Number one in 22 categories on Amazon, on launch day. What do you think of that, Adrian?

Adrian Schulz:

That's impressive. Is that all hard copy or also is there a digital copy?

Robinson Smith:

Well, that was on Amazon. There is a digital copy on Amazon, but we sell the book through the website smithman.net because it's a bit better priced than on Amazon.

Adrian Schulz:

That's how I got mine.

Robinson Smith:

There it is. Yeah. All good. That book came out in 2019. Concurrently with my efforts to make every Canadian homeowner aware of this strategy, which can add several hundreds of thousands of dollars for their net worth improvement, take years off the amortization of their mortgage all without no new cash required from them. But concurrently, I wanted to build out a network of Smith Manoeuvre certified professionals across Canada. And currently we have 65 in six provinces from BC out to Nova Scotia.

Robinson Smith:

This is important to me because over the years, many financial professionals have helped their clients implement at the Smith Manoeuvre, but they've done it incorrectly. They haven't understood it. Maybe they thought they did, but they didn't, or they haven't maximized the efficiencies. A lot of stories about it being done incorrectly.

Robinson Smith:

We're training up realtors, mortgage brokers, investment advisors, accountants, insurance brokers, all the financial professionals that a Canadian should surround themselves with anyways, specifically in the Smith Manoeuvre so that they help local Canadians implement the strategy.

Adrian Schulz:

Now, you've mentioned it by name. From a high level perspective, what is The Smith Manoeuvre and who is it for?

Robinson Smith:

Well, any Canadian who owns a home and has a mortgage should look into it. It's a debt conversion strategy. As you'll know very well, Adrian, when we Canadians go and borrow from the bank to buy a house, we've got this mortgage, but the interest on that mortgage is not tax deductible. Unlike our American cousins who can deduct a good portion of their interest on their mortgage, we Canadians cannot. And that's a big disadvantage to Canadians.

Robinson Smith:

But what The Smith Manoeuvre does is it allows the Canadian homeowner to convert that non-deductible interest into tax deductible interest. And by doing that, you reduce your tax bill significantly, of course, and you're able to apply that tax savings as a prepayment it against the mortgage. But in order to generate these tax deductions, you must use the equity in your home. As fast as you're creating it, you must use it to invest with a reasonable expectation of generating income.

Robinson Smith:

And that means we're investing. We're investing starting now rather than the typical Canadian. They've got it in their head that they need to be clear title. They need to mortgage free. And what that means is over the course of 25 or 30 years, while we're busy making our mortgage payments and trying to get rid of this mortgage, we're necessarily not getting invested because there's limited income for Canadians.

Robinson Smith:

I mean, we're consistently in or around the top five highest tax paying citizenry on the planet. So not a lot of resources. And if we're busy making mortgage payments, we're not busy investing and we're missing out on compound growth.

Adrian Schulz:

In your book Master Your Mortgage for Financial Freedom, you mentioned various ways to make a primary residence mortgage tax deductible, at least the interest portion. Why don't banks or accountants educate us about these strategies?

Robinson Smith:

Well, as I alluded to earlier, there are many, many financial professionals who are helping their clients with this strategy or think they're helping their clients with the strategy, but it's not something that someone like the big banks are going to implement for their client base. I mean, they're not going to take a financial strategy that was developed by someone else called The Smith Manoeuvre and say, "Hey Canadians, we're going to implement The Smith Manoeuvre for you."

Robinson Smith:

Firstly, it's trademarked. But the big banks, accountants, investment advisors, there's a lot of people who aren't introducing this to their clients, and one of the main reasons is a lot of people, financial professionals, just continue to do business as usual. They've had their practice for years and years and years. They're somewhat successful. They feel no real need to step out of their comfort zone, for example, and learn a new strategy which can assist their clients in improving their financial wealth.

Robinson Smith:

They continue to do business as they always have. And I've had a lot of professionals contact me and say, "Hey, what's The Smith Manoeuvre Certified Professional Network you're creating?" And I always ask, "How did you find us?" "Well, I had a client ask me about The Smith Manoeuvre." I had to screw up my eyes and say, "I'm sorry, I don't know anything about this. Let me look into it." It's inertia.

Robinson Smith:

A lot of professionals just do business the way they always have and they make a decent living out of it.

Adrian Schulz:

How old is the strategy?

Robinson Smith:

Oh, back in the mid '80s.

Adrian Schulz:

Okay.

Robinson Smith:

That's when my dad developed it. Now, he put his private clients into it quietly for 15 years. That's how he made his living. Word really only started getting out in 2002 when he released his book on the subject and he did some book promotion, and strategy promotion and he talked to a number of investment advisors, et cetera, about The Smith Manoeuvre for their clients, but he never set up a training program. And he came back out of retirement in 2005 to go back into advising.

Robinson Smith:

Again, for a good number of years, there was no one named Smith who is standing up on their soapbox with a megaphone shouting out across Canada to Canadian homeowners about this strategy. Now that I'm doing so, word is really getting out. And a lot Canadians are looking into the strategy and starting to implement it with our Smith Manoeuvre Certified Professionals.

Adrian Schulz:

You mentioned the professionals. What is the primary distribution channel for the strategy? Is it the financial planners, or is it the mortgage brokers or the realtors? Who's the primary driver of the interest in it?

Robinson Smith:

Primarily it's mortgage brokers. The strategy relies on the homeowner having the appropriate type of financing, the right type of mortgage. All the banks have what's called a readvanceable mortgage. There are also a bunch of non-bank lenders who have readvanceable mortgages. But the issue is if you don't have the readvanceable mortgage, you can't implement the strategy full stop. The mortgage brokers are really getting out there educating the public about the strategy.

Robinson Smith:

It's important to use someone who's been trained in the strategy because every person is different. Everyone's personal financial situation is different. And the mortgage broker is able to look at this and say, "Okay, for you, Bill, this readvanceable mortgage from this lender is appropriate. For you, Mary, the readvanceable from that lender is appropriate."

Robinson Smith:

Whereas if you simply go into your bank and say, "I want to do The Smith Manoeuvre. I need a readvanceable mortgage," the banker is going to say, "I don't know what The Smith Manoeuvre is, but we got to a readvanceable mortgage," and they're not going to know how to apply it. The mortgage brokers are the primary driver, but a lot of clients are going to see their investment advisor and saying, "Hey, I want to look into this."

Robinson Smith:

And then the SMCP investment advisor will connect with the mortgage broker at the right time or the accountant, et cetera.

Adrian Schulz:

In September of 2021, the average Winnipeg house price was just over 311,000. With a high ratio insured mortgage using just the 5% down payment, which is pretty typical on a 25 year mortgage at a 3% interest rate, a borrower would pay over $128,000 of interest, also known as the cost of borrowing on a mortgage of about $307,000. That's almost 42% of the original purchase price being paid to the lender, just to borrow the funds to achieve the North American dream of home ownership.

Adrian Schulz:

In the US, some mortgage loan interest is in fact tax deductible. What about here in Canada?

Robinson Smith:

Yeah. Well, the exercise you just went through, Adrian, is the math that no Canadian homeowner or potential homeowner really wants to do, because they know it's going to be scary. And it is. It's outrageous. I mean, we're happy the banks and the lenders are there. Without them, we wouldn't be able to own a home. But it is hugely expensive. And then you throw in the fact that the interest you're paying is not tax deductible and it is just outrageous the cost of home ownership.

Robinson Smith:

That is precisely a problem that The Smith Manoeuvre solves. Now, one of the things, as I mentioned earlier, this disadvantage that we Canadians have is that the Americans can deduct a portion of their interest. Now, on the other hand, when they sell their principal residence, they don't get that capital gains exemption that we Canadians do.

Adrian Schulz:

Okay.

Robinson Smith:

Right? Now, when we apply The Smith Manoeuvre, we still do get the capital gains exemption when we sell, but we also get to deduct the interest on our mortgage. We get the best of both worlds. The advantage swings to the Canadian now.

Adrian Schulz:

Do we know if the Canadian government has ever considered making a part of the interest tax deductible? And if not, why they won't?

Robinson Smith:

Well, yeah, I believe they've looked at it in the past. It didn't really go anywhere. I think one of the reasons is that it would be a giveaway. And the government is not in the business of giving money away.

Adrian Schulz:

They take about half of our income, right?

Robinson Smith:

Well, yeah. More than food, clothing and shelter combined, the basic necessities of life. But if we look at what The Smith Manoeuvre accomplishes, if the Canadian government ever came out and say, "Hey, we're going to allow you to deduct the interest on your mortgage, Canadians," we would be very, very happy, but they would lose a lot of revenue and they would get nothing in return.

Robinson Smith:

But with The Smith Manoeuvre, we Canadians still get to enjoy those tax deductions, but we are investing for our future, meaning we are making ourselves better off to the tune of $300,000. And if you employ some of the accelerators, we're looking at over a million dollars net worth improvement. We're making ourselves better off, which means we're better able to take care of ourselves in our old age, in retirement. We're not so reliant on CPP, OAS, all these social assistance programs, right?

Robinson Smith:

A better off Canadian is a better off Canada. The Smith Manoeuvre, yes, gives the taxpayer a tax break, but only because we are making ourselves financially stronger to the benefit of Canada as a whole.

Adrian Schulz:

The Manoeuvre is primarily for people that have a mortgage on their primary residence. Is there anything to be done for people who own their property free and clear?

Robinson Smith:

Yeah. Firstly, the requirement to get the appropriate financing is at least 20% equity. You can't get a readvanceable mortgage with less than 20% equity. But if you have that capability, when you're buying your first home, if you've got at least 20% equity, you can implement it, or you can refinance from a mortgage that doesn't work for the strategy into one that does. I forgot your question, Adrian.

Adrian Schulz:

It was just in regards to if you own your property free and clear, is there a maneuver to be applied to that?

Robinson Smith:

Got you. The answer is maybe. The Smith Manoeuvre is a debt conversion strategy. So if you have a non-deductible mortgage, you have the ability to convert it. It relies on you having a mortgage. If you're clear title to the home, there is no bad debt to invert to good debt. And therefore, there's no place for The Smith Manoeuvre here.

Adrian Schulz:

Maybe a cottage or a second property.

Robinson Smith:

Well, and there you go. On your principal residence, your clear title. Yes, you could get a HELOC and pull that out and invest. That's just straight leveraged investing. That's not The Smith Manoeuvre. However, firstly, if you have a cottage that's recreational, you're not driving income from it, then the mortgage on that is not tax deductible, right? So yes, there's an opportunity to convert your recreational property.

Robinson Smith:

And also if you are a clear title on your principal residence, have a look at your other debt, your consumer debt. I got a $30,000 car loan. I got a $15,000 line of credit balance. I got $10,000 on credit cards. Well, I can refinance into a readvanceable mortgage and then convert that debt to investments and generate tax deductions.

Adrian Schulz:

Right. Yeah. It's a big maybe. It's looking at the full financial picture.

Robinson Smith:

Exactly. That's what Smith Manoeuvre Certified Professionals do. One thing I'll add is a readvanceable mortgage is not just useful for implementing The Smith Manoeuvre. If I'm implementing The Smith Manoeuvre on my principal residence, but I also have a rental property, if I have a readvanceable mortgage on that rental property, then it's like I'm refinancing that rental property each and every month because I'm able to access the equity I'm pulling down in order to get it invested.

Robinson Smith:

And I'm implementing the Cash Flow Dam Accelerator with my rental property, which means instead of 25 year amortization, we see quite often less than 10 years getting rid of that non-deductible mortgage debt.

Adrian Schulz:

It's interesting. The way I became aware of your maneuver was actually someone who had or is applying the cash damming strategy on their rental property. And I went and started researching and then came across, of course, your organization, but that cash damming on the rental proper is what led me to you. It's interesting. How many different strategies are part of The Smith Manoeuvre?

Robinson Smith:

Well, we've got five accelerators. The plain Jane Smith Manoeuvre in its most basic form is after your regular monthly mortgage payment reduces the principle on your mortgage, say a thousand bucks, you borrow back that thousand dollars and you get it invested. You take the tax refund that you get, you prepay your mortgage each tax year, and then you borrow that out to invest as well. But there are a number of accelerators.

Robinson Smith:

There's the debt swap, cash flow diversion, cash flow dam, the drip, the prime, the pump. And that's all outlined in my book. We've got a homeowner's course on the on smithman.net as well. We've got the Smithman Calculator. It's a very powerful tool in showing you what you can expect from your own personal Smith Manoeuvre using your numbers. But every Canadian homeowner is likely going to have access to at least one of these accelerators.

Robinson Smith:

And each of them in their own right are very, very powerful in getting rid of that non-deductible debt faster, improving your cashflow and getting invested on a monthly basis now rather than later. We want to invest our equity now rather than consume it later via a reverse mortgage, for example.

Adrian Schulz:

You may have given us already the answer, but what is the official first step to implementing The Smith Manoeuvre? And how can people reach you or one of these certified professionals?

Robinson Smith:

Yeah. We do have currently a Smith Manoeuvre certified professional in Winnipeg, just so your listeners know. But the first step is to go to smithman.net. You can buy the book there. That's a great starting point. If someone is listening and they're interested, but they don't want to buy the book for whatever reason, go to the library and check it out for free.

Robinson Smith:

But the first step is learning, getting comfortable with the strategy, understanding it, and deciding if professional. You click that. You submit a form, and then we connect you with a local Smith Manoeuvre Certified Professional to help you get going.

Adrian Schulz:

Thank you for your time today, Robinson.

Robinson Smith:

It's been a pleasure, Adrian.

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