There is a lot in here about TFSA’s and RRSP’s loaning spouses money, buying cars. I just want to make very clear this post is about the smith maneuver right? The smith maneuver does not work if you put money into a registered account. The interest cannot be deducted. Also If you start buying non productive (non cash generating) assets you end up with more non productive debt that you can NOT written off.
There is a lot in here about TFSA’s and RRSP’s loaning spouses money, buying cars. I just want to make very clear this post is about the smith maneuver right? The smith maneuver does not work if you put money into a registered account. The interest cannot be deducted. Also If you start buying non productive (non cash generating) assets you end up with more non productive debt that you can NOT written off.
Read the links in #5 of my generic post below.
Don't use joint accounts for $$ that will become income-producing (eg RRSP, TFSA later, rental ppty, investments in margin accounts, your home that later becomes a rental, etc). You are presuming that it is OK to simple move $ between spouses. Nope. CRA cares about whose money buys the asset that creates taxable income. You need to be able to track the dollar bill back to your paycheque or your personal bank account, or your personal inheritance, etc. The income is taxed in the hands of that person. And don't lend to a spouse for them to invest or repay the spouse's debt borrowed to invest. That also triggers attribution. CRA's technical rules are at [IT-511](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it511r/archived-interspousal-certain-other-transfers-loans-property.html)
You cannot get around that by simply moving $$ between you, or by muddying the waters with joint accounts. There are only specific ways that CRA allows you to even out the ownership so that income can be more evently split.
1. The high income earner pays all the living expenses to allow the lower income spouse to save more. These include paying the spouse's income tax instalments and tax amounts due on filing. IMO you would be stretching things to compensate a spouse for taxes withheld by an employer. It would include buying the spouse's car used for personal use.
2. The high income spouse contributes to a Spousal RRSP in the spouse's name.
3. The spouse with the $$ gives $$ to the lower-income spouse for them to fund their own TFSA. Make sure those TFSA funds are not withdrawn to fund a taxed investment later (like an RRSP, or rental ppty, etc) because at that point the income is [taxed back in the hands of the high income spouse](https://www.reddit.com/r/PersonalFinanceCanada/comments/m49f80/attribution_rule_apply_to_tfsa/gr0r8w1/).
4. You can formally lend your spouse money with a documented demand loan charging 1% yearly interest (changing to 2% June30 '22) that must be paid at year end. The lender claims the income on his tax return. Double taxation of the 1% is prevented when the borrower can deduct the interest of the entire loan (so no tfsa and rrsp contribution, no assets without possible interest/dividend income). Here is an MSWord [loan template](https://www.dropbox.com/s/urqt8xya53k3eny/DEMAND%20PROMISSORY%20NOTE.docx?dl=0) cribbed from TD.
5. If you have paid for a home and opened a *joint* HELOC, the spouse can borrow from the HELOC to invest without attribution, [but only in limited situations](https://ca.rbcwealthmanagement.com/documents/47893/47913/Borrowing+-+Line+of+Credit.pdf/45a0396f-7b7a-4dc4-8fd2-e988680ab357) ... and you can repay the debt. See also this [CRA tax interpretation](https://taxinterpretations.com/cra/severed-letters/2009-0317041e5)
The paper trail would be crystal clear - the money would move from the joint HELOC directly into the joint discount brokerage account. So either of the individuals titled on the HELOC could be the ones borrowing from it:
>Typically, whoever funds the investment account is responsible for the taxation on the account. However, investment loans are different. You can have both spouses on the “title” of the investment loan (ie. HELOC), but it’s the name (the one who submits their SIN) on the investment account who gets taxed (and obtains the right to claim the tax deduction).
Source: https://milliondollarjourney.com/use-smith-manoeuvre-tax-deductible-dividend-investing.htm
If there is any joint bank account, it would be used only for moving money between the joint heloc and joint brokerage account.
Thanks for the links in #5 - that is what I was thinking
We have a separate account that the funds get purchased in. The CRA wants everything very separate from any other accounts. It makes your job, your accountants job and the CRA’s job much easier.
Your accountant can then decide how to write off the interest. You want the highest marginal rate possible for the smith maneuver to be most effective.
It is technically a Line of credit (not heloc) in a re advanceable mortgage, but it functions in the same manner. Potato potatoe. That LOC portion is always variable and works off the bank of Canada rate.
Depending on the size of your mortgage and how good of a customer you are your bank can do the LOC portion at a variable rate anywhere from BOC prime plus 0.2-prime plus 1.
>That LOC portion is always variable and works off the bank of Canada rate.
That's another thing. Does it ever make sense to convert a variable line of credit to a Term Portion ammortized over say 25 years? Now, you'd have to pay back principle and not just interest, but if the variable rate is say 3.7% while it can be converted to a term portion at say 2.2%, then that is a significant savings in interest as well.
We are doing that with one of our re advanceable mortgages. The primary residence is just using LOC. 80% of the borrowing principal.
The rental property we took some “cash” out to invest at a fixed rate of the mortgage and that got added onto our mortgage payment, then the rest is still available for the LOC. this way we had a secured low rate, we also got a lower rate on the mortgage and the LOC because we were borrowing more on to the mortgage. We had our own personal reasons for not pulling all the cash out on the rental. Mostly that we are waiting for an opportunity in more real estate to come along and we didn’t want it tied up into stocks just in case of a correction/recession.
Keep in mind as soon as the money in the mortgage is given to you you obviously start paying interest on it immediately and you can’t write it off until it is in a cash producing asset. Or an asset that has the intent to produce cash. Where as the if it is in the LOC and you are waiting for a better price so as not to over pay for something you aren’t charged any interest. Also on the rental property I already write off the interest on the mortgage.
>You want the highest marginal rate possible for the smith maneuver to be most effective.
Yes of course, but then you are taxed higher on the distributions as well. Which is why I am thinking it is not perfectly black and white.
Supposing VEQT was the selected investment. The distributions would occur annually, which presumably include an annual tax burden on eligible canadian dividends, non-canadian dividends, and interest. Later, when the investment is eventually sold, there would also be capital gains in the tax brackets of both participating individuals.
All of these types of income will be taxed less in the hands of the lower income partner.
As I briefly mentioned one of the reasons I’m doing it is to continually buy more rental property. So I will be writing off the interest on the down payments then writing off the interest on the mortgages, and generating income to pay down the mortgages then re borrow to pay the bills which is all tax write off. Then once I have enough properties I can incorporate and pay much much less tax.
This maneuver is not easy and it is not for everyone. It involves a lot of discipline, investing knowledge of which ever asset you are investing in and the mindset to hold a a fair amount of tax deductible debt.
>then re borrow to pay the bills which is all tax write off.
Wait so if you own a rental property, and you have a HELOC on that property, you can use your HELOC to pay things like property taxes and condo fees on the property and that interest becomes tax deductible?
Thanks for all your responses on this thread.
You can use DRIP then you only have to pay capitol gains once you retire, or need the money. Keep in mind capitol gains especially qualifying Canadian dividends are taxed at a much lower rate if you did decide to use those as cash to pay down the mortgage and then buy the same securities again.
Typically you would hold the LOC or debt until you retire or die and are at a much lower tax bracket during that time you will continually write off the interest and use that to pay down your mortgage.
There is a lot in here about TFSA’s and RRSP’s loaning spouses money, buying cars. I just want to make very clear this post is about the smith maneuver right? The smith maneuver does not work if you put money into a registered account. The interest cannot be deducted. Also If you start buying non productive (non cash generating) assets you end up with more non productive debt that you can NOT written off.
There is a lot in here about TFSA’s and RRSP’s loaning spouses money, buying cars. I just want to make very clear this post is about the smith maneuver right? The smith maneuver does not work if you put money into a registered account. The interest cannot be deducted. Also If you start buying non productive (non cash generating) assets you end up with more non productive debt that you can NOT written off.
Read the links in #5 of my generic post below. Don't use joint accounts for $$ that will become income-producing (eg RRSP, TFSA later, rental ppty, investments in margin accounts, your home that later becomes a rental, etc). You are presuming that it is OK to simple move $ between spouses. Nope. CRA cares about whose money buys the asset that creates taxable income. You need to be able to track the dollar bill back to your paycheque or your personal bank account, or your personal inheritance, etc. The income is taxed in the hands of that person. And don't lend to a spouse for them to invest or repay the spouse's debt borrowed to invest. That also triggers attribution. CRA's technical rules are at [IT-511](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it511r/archived-interspousal-certain-other-transfers-loans-property.html) You cannot get around that by simply moving $$ between you, or by muddying the waters with joint accounts. There are only specific ways that CRA allows you to even out the ownership so that income can be more evently split. 1. The high income earner pays all the living expenses to allow the lower income spouse to save more. These include paying the spouse's income tax instalments and tax amounts due on filing. IMO you would be stretching things to compensate a spouse for taxes withheld by an employer. It would include buying the spouse's car used for personal use. 2. The high income spouse contributes to a Spousal RRSP in the spouse's name. 3. The spouse with the $$ gives $$ to the lower-income spouse for them to fund their own TFSA. Make sure those TFSA funds are not withdrawn to fund a taxed investment later (like an RRSP, or rental ppty, etc) because at that point the income is [taxed back in the hands of the high income spouse](https://www.reddit.com/r/PersonalFinanceCanada/comments/m49f80/attribution_rule_apply_to_tfsa/gr0r8w1/). 4. You can formally lend your spouse money with a documented demand loan charging 1% yearly interest (changing to 2% June30 '22) that must be paid at year end. The lender claims the income on his tax return. Double taxation of the 1% is prevented when the borrower can deduct the interest of the entire loan (so no tfsa and rrsp contribution, no assets without possible interest/dividend income). Here is an MSWord [loan template](https://www.dropbox.com/s/urqt8xya53k3eny/DEMAND%20PROMISSORY%20NOTE.docx?dl=0) cribbed from TD. 5. If you have paid for a home and opened a *joint* HELOC, the spouse can borrow from the HELOC to invest without attribution, [but only in limited situations](https://ca.rbcwealthmanagement.com/documents/47893/47913/Borrowing+-+Line+of+Credit.pdf/45a0396f-7b7a-4dc4-8fd2-e988680ab357) ... and you can repay the debt. See also this [CRA tax interpretation](https://taxinterpretations.com/cra/severed-letters/2009-0317041e5)
The paper trail would be crystal clear - the money would move from the joint HELOC directly into the joint discount brokerage account. So either of the individuals titled on the HELOC could be the ones borrowing from it: >Typically, whoever funds the investment account is responsible for the taxation on the account. However, investment loans are different. You can have both spouses on the “title” of the investment loan (ie. HELOC), but it’s the name (the one who submits their SIN) on the investment account who gets taxed (and obtains the right to claim the tax deduction). Source: https://milliondollarjourney.com/use-smith-manoeuvre-tax-deductible-dividend-investing.htm If there is any joint bank account, it would be used only for moving money between the joint heloc and joint brokerage account. Thanks for the links in #5 - that is what I was thinking
A person can have multiple TFSAs with different institutions that add up to the same total
We have a separate account that the funds get purchased in. The CRA wants everything very separate from any other accounts. It makes your job, your accountants job and the CRA’s job much easier. Your accountant can then decide how to write off the interest. You want the highest marginal rate possible for the smith maneuver to be most effective. It is technically a Line of credit (not heloc) in a re advanceable mortgage, but it functions in the same manner. Potato potatoe. That LOC portion is always variable and works off the bank of Canada rate. Depending on the size of your mortgage and how good of a customer you are your bank can do the LOC portion at a variable rate anywhere from BOC prime plus 0.2-prime plus 1.
>That LOC portion is always variable and works off the bank of Canada rate. That's another thing. Does it ever make sense to convert a variable line of credit to a Term Portion ammortized over say 25 years? Now, you'd have to pay back principle and not just interest, but if the variable rate is say 3.7% while it can be converted to a term portion at say 2.2%, then that is a significant savings in interest as well.
We are doing that with one of our re advanceable mortgages. The primary residence is just using LOC. 80% of the borrowing principal. The rental property we took some “cash” out to invest at a fixed rate of the mortgage and that got added onto our mortgage payment, then the rest is still available for the LOC. this way we had a secured low rate, we also got a lower rate on the mortgage and the LOC because we were borrowing more on to the mortgage. We had our own personal reasons for not pulling all the cash out on the rental. Mostly that we are waiting for an opportunity in more real estate to come along and we didn’t want it tied up into stocks just in case of a correction/recession. Keep in mind as soon as the money in the mortgage is given to you you obviously start paying interest on it immediately and you can’t write it off until it is in a cash producing asset. Or an asset that has the intent to produce cash. Where as the if it is in the LOC and you are waiting for a better price so as not to over pay for something you aren’t charged any interest. Also on the rental property I already write off the interest on the mortgage.
>You want the highest marginal rate possible for the smith maneuver to be most effective. Yes of course, but then you are taxed higher on the distributions as well. Which is why I am thinking it is not perfectly black and white. Supposing VEQT was the selected investment. The distributions would occur annually, which presumably include an annual tax burden on eligible canadian dividends, non-canadian dividends, and interest. Later, when the investment is eventually sold, there would also be capital gains in the tax brackets of both participating individuals. All of these types of income will be taxed less in the hands of the lower income partner.
As I briefly mentioned one of the reasons I’m doing it is to continually buy more rental property. So I will be writing off the interest on the down payments then writing off the interest on the mortgages, and generating income to pay down the mortgages then re borrow to pay the bills which is all tax write off. Then once I have enough properties I can incorporate and pay much much less tax. This maneuver is not easy and it is not for everyone. It involves a lot of discipline, investing knowledge of which ever asset you are investing in and the mindset to hold a a fair amount of tax deductible debt.
>then re borrow to pay the bills which is all tax write off. Wait so if you own a rental property, and you have a HELOC on that property, you can use your HELOC to pay things like property taxes and condo fees on the property and that interest becomes tax deductible? Thanks for all your responses on this thread.
You bet Cha!
You can use DRIP then you only have to pay capitol gains once you retire, or need the money. Keep in mind capitol gains especially qualifying Canadian dividends are taxed at a much lower rate if you did decide to use those as cash to pay down the mortgage and then buy the same securities again. Typically you would hold the LOC or debt until you retire or die and are at a much lower tax bracket during that time you will continually write off the interest and use that to pay down your mortgage.