# What's on your Smith Manoeuvre buy list?



## kassam (Apr 3, 2009)

I just noticed a lot of people were saying that they were starting up a SM portfolio or we're looking to buy before this little run.

I started my SM portfolio right before things crashed in Oct 08 with an initial investment of 15k and have invested up to 22k. I keep a watch on stocks I would like to add as I build up funds and keep a 'buy list' of stocks I'd like to add.

Current Holdings
Royal Bank of Canada (RY)
Arc Energy Trust (AET.UN)
Avenir Difersified Income Trust (AVF.UN)
Riocan Real Estate Trust (REI.UN)
Encana (ECA)

I've noticed a lot of volatility with income trusts and I don't really want anymore exposure to them. I've doubled up on REI.UN in one of my other portfolios but I've built up enough funds to start looking at picking up another holding. The ones I find most interesting are:

TD Bank - the banks are paying great dividends right now and have such a great history of not decreasing them. RY is more a business bank and I think TD would give me another bank that is concentrated more on personal banking.

Enbridge (ENB) - solid, reliable, through thick and thin. Hasn't looked this attractive in awhile.

Fortis (FTS) - I don't really know their business well but they are in utilities and they should have a steady stream of income in bad and good times to keep the dividend payments coming.

I believe all three are Dividend Aristocrats so I just have to make a decision.

What do you guys think?

What's on YOUR buy list?


----------



## wx_junkie (Apr 3, 2009)

HOW are you holding income trusts in your SM portfolio?!?!

That must be an absolute nightmare for tax-deductabilty tracking...

For my SM Leveraged Portfolio, Canadian (to maximize the dividend tax credit), Dividend (to accelerate mortgage paydown) paying equities are my prerequisites, and I'm trying to buy at a yield of between 4% and 7%.

Staying away from income trusts for the tax deductabilty implications.

Oh, Fortis and Enbridge are both on my short-list of first-purchases.


----------



## FrugalTrader (Oct 13, 2008)

As I already hold a lot of financials in my *SM portfolio*, I'm waiting for ENB and CNR to correct again.


----------



## kassam (Apr 3, 2009)

Well I started the portfolio in October 2008 so I haven't had to do any of the tax stuff yet.

I was attracted to the dividend yield of the income trusts for the most part.

For Riocan, I couldn't really find a dividend paying stock that would give me exposure to real estate.

Although the volatility of the dividends in income trusts has turned me off those instruments.

Is difficult tax deduction tracking really a good enough reason to not buy an otherwise sound investment?


----------



## CanadianCapitalist (Mar 31, 2009)

I don't do SM but the investing part is the same as building any other portfolio. With a severe correction the expected returns from stocks is higher than it was before. The only difference is that I'd probably skip government bonds:

*DIY Smith Manoeuvre*

Speaking of bonds, it might make sense to pick up corporate bonds through a corporate bond fund, since the spread over government bonds is significantly higher now.


----------



## Canadian Finance (Apr 3, 2009)

Since I have 2-3 months before I start my SM, I wouldn't call it a buy list, just a watch list for now...

AGF Management - AGF.B
ATCO - ACO.X
Bank Of Montreal - BMO
Bank Of Nova Scotia - BNS
BCE Inc - BCE
Canadian Utilities - CU
CIBC - CM
CN Rail - CNR
Corus Entertainment - CJR.B
CP Rail - CP
Emera - EMA
Enbridge - ENB
EnCana Corp - ECA
Husky Energy - HSE
IGM Financial - IGM
ING Canada - IIC
Magna International - MG.A
Manitoba Telecom - MBT
Manulife Financial Corp - MFC
National Bank Of Canada - NA
Power Corp. Of Canada - POW
Power Financial - PWF
Royal Bank Of Canada - RY
Russel Metals - RUS
Shaw Communications - SJR.B
Sun Life Financial - SLF
Telus A - T.A
Toronto-Dominion Bank - TD
TransAlta - TA
TransCanada Corp - TRP


----------



## kassam (Apr 3, 2009)

Thanks for all the replies guys.

@Canadian Finance
I was looking into HSE - Husky as well, the stock looks very attractive from a valuation perspective.

But I looked into their dividend history and it looks like there is a lot of changes, upwards and downwards. It seems like they have more of a reactive approach. But I love the upside on the stock price.

Generally speaking, buying stocks for your SM portfolio, capital gains usually take a back seat to the dividend amount and history but if there is an opportunity to make money otherwise and still get the tax deduction why not?


----------



## lb71 (Apr 3, 2009)

Canadian Finance said:


> Since I have 2-3 months before I start my SM, I wouldn't call it a buy list, just a watch list for now...


A lot of financials on the list, so try not to concentrate too much on them in your final portfolio. Also, be careful with Magna as the auto industry will be unpredictable for some time.


----------



## Canadian Finance (Apr 3, 2009)

lb71 said:


> A lot of financials on the list, so try not to concentrate too much on them in your final portfolio. Also, be careful with Magna as the auto industry will be unpredictable for some time.


Good points lb71, these are strictly for the dividends as part of my SM. I plan to put REITs into my TFSA. I have TD's eFunds for bonds, US equities and interenational equities in my RRSP.


----------



## daveking (Apr 3, 2009)

With the current market condition I look for stocks with low P/E and low marketprice / 52weekhigh ratio.

Made a pretty nice profit all of March 2009 with the following:

Bank of Nova Scotia BNS.TO
Canfor Pulp Income Fund CFX.UN
Manulife Financial MFC.TO	
Research In Motion RIM.TO
Teck Cominco Ltd. TCK.B

Then again March was a good month for everybody.


----------



## ethos1 (Apr 4, 2009)

without going into detail, I use a discount broker, I hold Canadian banks plus YLO at an average price of $5.04

The trade structure on the banks (and maybe we should have another thread opened on this) is to buy the stock (BMO is my choice at present) to then option it long covered call just in the money. I pick up a premium on the long contract (time factor & protection on the downside) as well as collect dividends along the way. Going Canadian with Banks, I have found this to be the less risk approach that works for me.


----------



## The Financial Blogger (Apr 4, 2009)

I actually left stock picking for my RRSP and decide to go with index mutual fund. Why not using ETF's instead? It would be cheaper, but I am buying $500 per month so I am better off with index mutual funds (Altamira has 0.53% MER's) and I don't have to worry so much about stocks.

here's how I invest right now:
Smith Manoeuvre Investment

It gives me a YTD of 4.2% as of this morning.

Good luck with your investment!


----------



## Financial Highway (Apr 3, 2009)

kassam said:


> Thanks for all the replies guys.
> 
> @Canadian Finance
> I was looking into HSE - Husky as well, the stock looks very attractive from a valuation perspective.
> ...


I have been holding HSE for a while now and yea you are right their reactive with their dividend payouts, I just had a recent dividend reduction. But their dividend payments will increase as Oil prices moves up. So far I have been a happy shareholder, although taken a beating lately.


----------



## moneygardener (Apr 3, 2009)

I own Husky as well and I really like the company because they seem to have a real focus on shareholder value and dividends. They are well managed and owners have real skin in the game. 

In my opinion, if you want exposure to oil, a company that pays healthy dividends is a great choice because you receive the benefit of high oil in real time versus paper gains with the fickle oil price. Husky also has paid special dividends in the past.


----------



## MoneyEnergy (Apr 5, 2009)

Great thread. I've been keeping a watch list, though I am done with my "investing cycle" at the moment (do this about every 4-6 months right now). My dividend reinvestment plans are still at work for me, though.

I'm watching: Encana (ECA), Husky Energy (HSE), Johnson & Johnson (JNJ), NewAlta (NAL), Shoppers Drug Mart, Cineplex Galaxy (CGX.UN). Quite a few others. It's too bad it takes a while to acquire everything. I'm aiming to get up to a 100-stock portfolio that I manage myself - all dividend-payers, of course.


----------



## ethos1 (Apr 4, 2009)

moneygardener said:


> I own Husky as well and I really like the company because they seem to have a real focus on shareholder value and dividends. They are well managed and owners have real skin in the game.



Husky was downgraded recently by BMO, although I tend to agree they are a long hold.

Did not check, but what is the current dividend they're paying?

M.G, you indicated that you're holding HSE, are you just buy & hold and reinvesting the dividends or are you adding covered calls to this position?


----------



## Financial Highway (Apr 3, 2009)

ethos1 said:


> Husky was downgraded recently by BMO, although I tend to agree they are a long hold.
> 
> Did not check, but what is the current dividend they're paying?
> 
> M.G, you indicated that you're holding HSE, are you just buy & hold and reinvesting the dividends or are you adding covered calls to this position?


HSE is paying $1.2 annual dividend so yield about 4.3%. I am just buy and hold.


----------



## moneygardener (Apr 3, 2009)

Buy & Hold here. I like oil long term with the growth of developing markets. As green technologies are developed I believe the world will still need to lean on oil for a long time.


----------



## Shawn Allen (Apr 5, 2009)

*SM = Smith Manouver*

Would have been easier for me if you spelled that out in the Topic...

Also why not just same income portfolio?


----------



## kassam (Apr 3, 2009)

Hey Shawn,

What do you mean by same income portfolio?

Cheers,
Kassam


----------



## Rickson9 (Apr 9, 2009)

I apologize if this sounds silly, but what is a "SM" buy list?

My wife and I only buy U.S. stocks. You can find what we hold on the blog linked in my sig.


----------



## FrugalTrader (Oct 13, 2008)

Rickson9 said:


> I apologize if this sounds silly, but what is a "SM" buy list?
> 
> My wife and I only buy U.S. stocks. You can find what we hold on the blog linked in my sig.


SM = Smith Manoeuvre, a leveraged investment strategy that uses a HELOC.


----------



## Rickson9 (Apr 9, 2009)

FrugalTrader said:


> SM = Smith Manoeuvre, a leveraged investment strategy that uses a HELOC.


Ah! Gotcha! I'm so clueless. Thanks FT!


----------



## kassam (Apr 3, 2009)

Thanks for clearing that up FT, is there any way to update the thread name so that Smith Manoeuvre is in there?

I can't seem to find any way to do it.

Cheers,
Kassam


----------



## FrugalTrader (Oct 13, 2008)

kassam said:


> Thanks for clearing that up FT, is there any way to update the thread name so that Smith Manoeuvre is in there?
> 
> I can't seem to find any way to do it.
> 
> ...


Done!


----------



## wx_junkie (Apr 3, 2009)

SM related question:

How long after I borrow from the HELOC, must an investment purchase be made in order to not get CRA cranky. Surely, I can't pull from a HELOC, start claiming interest paid right away, and have the money just sit there in a cash account *waiting* for an investment opportunity forever? What's a reasonable amount of time to have it sit around, or, if I want to stage in cash, which should I have the last of it consumed by?

1) The transfer from my BMO HELOC to BMO acct = instant.
2) Write a cheque to myself, and deposit it into CIBC cash account - takes 7 days to clear (guess).
3) Tranfer from CIBC cash to Investors Edge Acct = 1 day.

I want to have the cash in my Investors Edge acct now, so I can buy on weakness. I don't want to have to wait 8 days, otherwise the weakness will surely be gone.

Thanks.


----------



## kassam (Apr 3, 2009)

With most of my trading accounts, I receive a small percent of interest on my cash holdings.

Technically in this case you are borrowing the money to produce income, albeit very small, from the moment it is in the account.

I don't really have any experience with CRA but I would always imagine worst case scenario?

With my HELOC (RBC), I can write one cheque a month with no fees. I can then deposit that cheque immediately into my TD Waterhouse trading account.

The cheque takes a few days to clear but Waterhouse gives me the benefit of the doubt and makes the cash available for purchases before the cheque has cleared usually.

If CIBC does not allow this maybe you can transfer to a different brokerage?

I know if you are transferring enough funds over, the recieving bank will usually reimburse you for transfer fees, at least with TD.


----------



## wx_junkie (Apr 3, 2009)

wx_junkie said:


> SM related question:
> 
> How long after I borrow from the HELOC, must an investment purchase be made in order to not get CRA cranky. Surely, I can't pull from a HELOC, start claiming interest paid right away, and have the money just sit there in a cash account *waiting* for an investment opportunity forever? What's a reasonable amount of time to have it sit around, or, if I want to stage in cash, which should I have the last of it consumed by?
> 
> ...



As it turns out, all of this is Moot.

I write a cheque directly from my HELOC and deposit to my CIBC cash acct, and right away I have access up to $10,000 to xfer to Investors Edge account, without having to wait 5 days for the cheque to clear. I can make an investment about 2 hours after I deposit cheque. All is well.

Crisis averted.


----------



## Rickson9 (Apr 9, 2009)

wx_junkie said:


> As it turns out, all of this is Moot.
> 
> I write a cheque directly from my HELOC and deposit to my CIBC cash acct, and right away I have access up to $10,000 to xfer to Investors Edge account, without having to wait 5 days for the cheque to clear. I can make an investment about 2 hours after I deposit cheque. All is well.
> 
> Crisis averted.


This is interesting. I actually place barriers to prevent buying fast. I have many steps I need to complete to get cash into my trading accounts. This forces me to have a cooling off period to think about things.


----------



## wx_junkie (Apr 3, 2009)

Rickson9 said:


> This is interesting. I actually place barriers to prevent buying fast. I have many steps I need to complete to get cash into my trading accounts. This forces me to have a cooling off period to think about things.



Excellent tactic. I 100% agree with you that this is a very good idea. For my monthly SM investment, I'm only looking at about $750 at a time, so it's not like I'm blindly dumping a whack of money into a company on a whim. Just dumping a little bit of money into a company on a whim.  Kidding aside, I appreciate your strategy. I'm actually determining about a week in advance the 4 or 5 companies I want to buy that time around, then whatever one showing some weakness that day or week, I'll buy.


----------



## splitmind (Apr 11, 2009)

I've just added some Yellow Pages YLO.UN.TO. Its trading below $6 and pays out .0975 monthly or just under 20%. However I don't think you can drip this income trust.


----------



## wx_junkie (Apr 3, 2009)

Here's my "own" list as of current. There are 2 that don't pay dividends (Timminco and Paladin), but I'm hoping someday they'll be payers. Ironically, those are my biggest gainers of the whole lot thus far. My average dividend right now is 4.96%.

Leveraged Holdings for SM:
Fortis Inc
Enbridge
TransCanada Corp.
TransAlta
Russel Metals
BCE Inc
AGF Management
EnCana
Brookfield Properties
Bank of Montreal
Toronto Dominion Bank
CIBC
AECON
Husky Energy
Leons
Sunlife Financial
IGM Financial
Timminco Ltd (no dividend currently)
Manatoba Telecom
Rogers Communications
Canadian National Rail
Onex Corp
Manulife Financial
Telus
National Bank of Canada
Power Corp of Canada
Paladin (no dividend currently)
Loblaws
Shaw Communications
Bank of Nova Scotia
Great West Lifeco
Shawcor
Biovail


Next to buy (watch) list:
Some more of what I have already purchased, plus
Royal Bank
Canadian Western Bank
Power Financial Corp
Suncor
Talisman
Imperial Oil
Canadian Natural Resources
Nexen
Bombardier
Toromont
SNC-Lavalin
Shoppers Drug Mart
Canadian Tire
Reitmans
Agrium
Claymore Global AG
Potash
RIM (not a dividend payer currently)
Sandvine (not a dividend payer currently)
Teck Resources (not a dividend payer currently)
Emera


----------



## whitegoodman (Apr 22, 2009)

I am surprised nobody has interpipeline IPL.UN on their list .... it's payout has been consistant and has traded in a $7-$9 range for quite sometime. New project completions that are coming on-line should allow for share price appreciation and they appear to be set up for the coming govt. regs.

This is one of my largest positions.


wg


----------



## wx_junkie (Apr 3, 2009)

whitegoodman said:


> I am surprised nobody has interpipeline IPL.UN on their list .... it's payout has been consistant and has traded in a $7-$9 range for quite sometime. New project completions that are coming on-line should allow for share price appreciation and they appear to be set up for the coming govt. regs.
> 
> This is one of my largest positions.
> 
> ...


I, as well as many many others I believe, stay away from income trusts in a leveraged portfolio. The tax-deductability for interest becomes a nightmare I've heard. I'm "keeping it simple stupid" so that I don't have some fancy-dancy nightmareish calculations or spreadsheets to do at tax time. I claim 100% of my interest, and that's it.


----------



## jensencylin (Apr 4, 2009)

wx_junkie said:


> I, as well as many many others I believe, stay away from income trusts in a leveraged portfolio. The tax-deductability for interest becomes a nightmare I've heard. I'm "keeping it simple stupid" so that I don't have some fancy-dancy nightmareish calculations or spreadsheets to do at tax time. I claim 100% of my interest, and that's it.



I don't get this, why would it be any different from stocks giving regular dividends?


----------



## FrugalTrader (Oct 13, 2008)

jensencylin said:


> I don't get this, why would it be any different from stocks giving regular dividends?


These articles may help:


Income trust distributions and taxation
Key Considerations on an Investment Loan
Return of Capital Explained


----------



## jensencylin (Apr 4, 2009)

FrugalTrader said:


> These articles may help:
> 
> 
> Income trust distributions and taxation
> ...



Crap I didn't realize the ETF i was targeting had ITs in them...Can I still buy the ETF? what are the impacts on the SM?

Do I even bother? Or should I go with just stocks?


----------



## Investor (Apr 13, 2009)

*Computer Modelling Group - CMG*

A growth company that is also a dividend achiever in the making


----------



## Jon Chevreau (Apr 4, 2009)

A 3-year old competitor to Smith -- TDMP or Tax Deductible Mortgage Plan -- has just been named one of PROFIT's 100 fastest growing Canadian companies. Details in my blog today:

http://network.nationalpost.com/np/...age-plan-growing-at-award-winning-levels.aspx


----------



## PoorFella (Apr 3, 2009)

It was actually my mortgage broker's mention of TDMP that started my investigation of the SM.

For me, the TDMP fees are too high, so I implemented the SM myself.


----------



## Tryzik (Apr 3, 2009)

What stock screener is everyone using to help them select these stocks and notify them when the fundamentals reach their desired level?

Thanks!


----------



## Riff Raff (Sep 5, 2010)

question about SM.

I know leveraging the HELOC for CDN Stocks and/or RE is well documented.

Does anyone know anything about using SM to invest in a small business? Bad idea?


----------



## andrewf (Mar 1, 2010)

Riff Raff said:


> question about SM.
> 
> I know leveraging the HELOC for CDN Stocks and/or RE is well documented.
> 
> Does anyone know anything about using SM to invest in a small business? Bad idea?


Elaborate. Is it your small business?


----------



## Riff Raff (Sep 5, 2010)

andrewf said:


> Elaborate. Is it your small business?


I would own it. Friend would buy in over time and run it.


----------



## andrewf (Mar 1, 2010)

Sounds like an investment loan. SM is a rather specific transaction designed to replace your non-deductible mortgage with a deductible investment loan. If you want, look into cash damming, which is probably more relevant to you. 

http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm


----------



## Riff Raff (Sep 5, 2010)

andrewf said:


> Sounds like an investment loan. SM is a rather specific transaction designed to replace your non-deductible mortgage with a deductible investment loan. If you want, look into cash damming, which is probably more relevant to you.
> 
> http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm


bummer. we will fund it I suppose. Time to look into the rules.


----------



## andrewf (Mar 1, 2010)

No bummer. If anything, cash flow damming is better than SM. It is certainly good for rapidly converting a non-deductible mortgage into a deductible one, depending on the revenues from the business. You just can't incorporate...


----------



## Riff Raff (Sep 5, 2010)

andrewf said:


> No bummer. If anything, cash flow damming is better than SM. It is certainly good for rapidly converting a non-deductible mortgage into a deductible one, depending on the revenues from the business. You just can't incorporate...


thanks andrewf. I read up on this - looks good.


----------



## Eclectic12 (Oct 20, 2010)

wx_junkie said:


> SM related question:
> 
> How long after I borrow from the HELOC, must an investment purchase be made in order to not get CRA cranky. Surely, I can't pull from a HELOC, start claiming interest paid right away, and have the money just sit there in a cash account *waiting* for an investment opportunity forever?
> 
> ...


My understanding is that the SM uses Line 221 - Carrying Charges and Interest Expenses, which are for investments/investment activities. So I'd be doubtful that cash in a brokerage account would be accepted. 
CRA Link -> http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html


As for waiting 8 days, has the bank/brokerage confirmed this?

The steps I follow are:
a) Place my order in my cash account and note when it goes through.
b) The following day or max two, write a HELOC cheque for the amount 
minus commission and deposit to my linked bank account.
c) Go online to transfer the amount of the cheque + commission from the
linked bank account to the brokerage.

The HELOC and bank/brokerage are two different institutions, though for
ease of money movement, the bank/brokerage are the same family.

I think the worst case was I bought Tuesday pm and deposited/transfered
Friday morning.

Though being conservative, I haven't leveraged everything so the fact I've got securities and/or deposits that exceed my biggest purchase of $10K may be why I haven't had a problem.


A couple of other tips/reminders:

a) Make sure you don't include the brokerage commission in your 
HELOC cheque as it is not tax deductible. (It is an expense in 
the capital gains calculation, so it is already excluded from the
capital gains taxes.)

b) Avoid investments that have a stated policy of "no dividends" as 
it becomes CRA's judgement as to whether the interest is deductible.
Note that should CRA decide the investment can only have a capital
gain, then the interest is not tax dedcutible.

c) Avoid investments that pay ROC as the ROC portion is a capital gain and is 
not deductible. This means on a HELOC, each ROC payment would have 
to be paid back asap - which is a bookkeeping and logistical nightmare.


----------



## Eclectic12 (Oct 20, 2010)

kassam said:


> Well I started the portfolio in October 2008 so I haven't had to do any of the tax stuff yet.
> 
> I was attracted to the dividend yield of the income trusts for the most part.
> 
> ...


Okay ... I'm confused. My understanding of the SM maneuver was that a HELOC was used to setup an investments that paid dividends so that the dividends could paydown the mortgage early and the interest could be written off against income.

So if you started the portfolio in 2008, starting with your 2008 tax return the interest amount for the year should be reported in line 221 as an Interest Expense (i.e. the tax deduction). This in my mind would be "tax stuff" - the final capital gains tax calculation won't happen until the investment is sold but there is year by year tax reporting.

Moving on to income trusts, my understanding is that since capital gain only investments are not eligible as a Interest Expense, a trust distribution that identifies an ROC portion (which is a capital gain) has to be paid back asap against the loan. In this case, there is only the logistics of keeping on top of the amounts that have to be paid back. 

A worse case is it is not paid off. Then painful calculations come into play. You'd have to keep track of the ROC amounts and manually deduct from the amount claimed on each tax return, until it is removed from the loan. The ROC is still on the loan, so the non-deductible interest that can't be claimed 
is growing with each interest charge, in addition to each future ROC payment.

Having a partially tax deductible loan instead of completely deductible loan is a bad implementation, IMHO.


When you look at the calculations and work involved, I'd look at alternatives
that involve few calculations. I've usually got enough to do taking care of what I have, maintaining a proper paper trail in case of audit and looking for new opportunities.

But hey, if you've got the time and energy for it, more power to you.


----------



## Eclectic12 (Oct 20, 2010)

wx_junkie said:


> I, as well as many many others I believe, stay away from income trusts in a leveraged portfolio. The tax-deductability for interest becomes a nightmare I've heard. I'm "keeping it simple stupid" so that I don't have some fancy-dancy nightmareish calculations or spreadsheets to do at tax time. I claim 100% of my interest, and that's it.


I'm glad your keeping it simple. Just to be clear, the nightmare is the constant adjustments and calculations.

If the trust distribution is monthly, with ROC monthly, then ideally - the ROC amount would need to be repaid monthly to keep the entire interest deductible.

If not, then the calculations get complicated as the ROC amount plus any interest would have to be calculated and deducted from the interest charges.


Then too, regardless of whether the trust units are leveraged or not, the ROC has to be deducted from the ACB. If the ROC payments reach the point that the ACB is zero or negative, then the ROC payments have to be reported as a capital gain, on a yearly basis.


So in short - anything that pays ROC requires more than "usual" calculations. Holding these types of investments in a leveraged position adds to the headache.

This is why I'm moving all of my trust units to my TFSA or RRSP. Once they are transfered, they are deemed to have been sold - the calculations are done one last time to report the capital gain and then are not required anymore!!


----------



## andrewf (Mar 1, 2010)

Eclectic, I'm under the impression that if ROC is used for reinvestment within the same account (ie, DRIPing, or buying another eligible security), it does not affect the deductibility of the loan. I don't think there is a big problem if small amounts of ROC are kept as cash in the account and applied against the original loan somewhat later (ie, wait until tax season once funds/trusts report what portion of their distributions are ROC). I don't think CRA is overly unreasonable.

It's also the first I've heard that commissions need to be paid separately. Maybe a tax expert can chip in on that assertion.


----------



## Jungle (Feb 17, 2010)

andrewf said:


> It's also the first I've heard that commissions need to be paid separately. Maybe a tax expert can chip in on that assertion.


I don't call my self a tax expert, but I have read this from the CRA website and on the CRA link posted above:

You cannot deduct on line 221 any of the following amounts:

the interest you paid on money you borrowed to contribute to a registered retirement savings plan, a registered education savings plan, a registered disability savings plan, or a Tax-Free Savings Account (TFSA);
the interest part 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, magazines, or newsletters; and
*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.

I guess what he's saying is you can't have the loan pay for the commissions, therefore it would make sense to keep them separate when calculating the total interest borrowed.


----------



## Hosebag (Nov 5, 2010)

Just got my mortgage arranged and setup for the Smith Manoeuvre.
Made my initial buys 2 days ago, here is what I picked up:
CM
BMO
TA
BCE
SLF
HSE
MFC

My strategy is Canadian dividend paying blue chips that will hopefully have some modest growth.

Cheers!


----------



## wx_junkie (Apr 3, 2009)

Eclectic12 said:


> A couple of other tips/reminders:
> 
> a) Make sure you don't include the brokerage commission in your
> HELOC cheque as it is not tax deductible. (It is an expense in
> ...



Whoa... didn't think of this. I'll have to "un-do" this one... 

I'd better make an equivalent cash deposit from my pocket equal to all the commissions I've paid since implementing the SM in May 2009 ($28.95 x 11) into my account and add it toward my next stock purchase. And.. fix it going forward.

Thanks Eclectic!!


----------



## jason26 (Apr 6, 2009)

I'm curious, what would be an easy way to keep commissions out of the equation? First thought that comes to mind is add up any commissions and other fees at the end of the month and deposit that much from my personal account into the brokerage account. Would that be a sane way? Rather than having to divvy up the interest from the HELOC as money that went into investments and money that went into fees?


----------



## Jungle (Feb 17, 2010)

Hosebag said:


> Just got my mortgage arranged and setup for the Smith Manoeuvre.
> Made my initial buys 2 days ago, here is what I picked up:
> CM
> BMO
> ...


Hey congrats on diy!


----------



## Jungle (Feb 17, 2010)

jason26 said:


> I'm curious, what would be an easy way to keep commissions out of the equation? First thought that comes to mind is add up any commissions and other fees at the end of the month and deposit that much from my personal account into the brokerage account. Would that be a sane way? Rather than having to divvy up the interest from the HELOC as money that went into investments and money that went into fees?


Yes. And just pay it separate in the future. For your 2010 tax return, just re-calculate the true cost of the interest, including capitalizing on interest. (If you did that)


----------



## Eclectic12 (Oct 20, 2010)

jason26 said:


> I'm curious, what would be an easy way to keep commissions out of the equation? First thought that comes to mind is add up any commissions and other fees at the end of the month and deposit that much from my personal account into the brokerage account. Would that be a sane way? Rather than having to divvy up the interest from the HELOC as money that went into investments and money that went into fees?


The easy way, IMHO is to take the commissions out of each transaction.
This way, it's taken care of "as-it-happens".

For example, a while back I liked MFC at $11.50, so I bought, in the following way:

a) buy 100 MFC @ $11.50 (100x$11.50+$9.99, for a total of $1159.99)
in my cash brokerage account.
b) deposit a HELOC cheque for total - commission to my linked bank account
(i.e. $1159.99 - $9.99 which is $1150.00).
c) same day internet transfer $1159.99 from the bank account to 
the brokerage account.

CRA is happy because I can show that:
1) the loan is for the MFC purchase (I use the comment on the cheque to help with this)
2) the loan does not have the commission included 
and 3) the brokerage is happy as they are paid the full amount.

This seems the easiest to me as it is a tiny bit of extra to add to what is already being done. If it is deferred, I'm far to likely to forget.

When I sell for a profit (say $2000), for the HELOC, I pay back the $1150.

When the year end taxes are filed, if I only hold MFC as part of this transaction, the Schedule 3 Capital Gains is proceeds - acb - commissions, 
which is $2000 - $1159.99 - $9.99 for
a capital gain of $830.02

If I already own another 100 shares of MFC purchased at $15, same commission, the ACB has to take the total shares into account. 
The ACB becomes $1334.99, 
which is $2000 - $1334.99 - 9.99 for 
a capital gain of $655.02


----------



## andrewf (Mar 1, 2010)

Can that capital gain be withdrawn without compromising the deductibility of the remaining balance on the HELOC (if you repay the initial loan+capitalized interest)? Most say no, but this makes no intuitive sense to me.


----------



## jason26 (Apr 6, 2009)

Eclectic12 said:


> The easy way, IMHO is to take the commissions out of each transaction.
> This way, it's taken care of "as-it-happens".
> 
> For example, a while back I liked MFC at $11.50, so I bought, in the following way:
> ...


Do you use the cheque to provide a more concrete paper trail? I just ask, cause everything I have is at TDW, and I could accomplish the same flow of money with a few clicks, but I lack the cheque with the comment.

I'm still doing my research. I don't actually have a mortgage, just the HELOC, so it wouldn't be an SM but I believe the same rules apply.


----------



## coffeeordeath (Apr 3, 2009)

*SM with RBC - a little boring, but...*

Hi,

We are running everything through RBC - life is crazy busy, and this keeps things as simple as possible. For nearly two years we have been purchasing Canadian Dividend Fund (RBF266) through RBC. A bit dull, but no fees, instant transactions (everything is within the Homeline plan) and so far a decent return.


----------



## Riff Raff (Sep 5, 2010)

made our first SM moves w/ RY, TA and COS.UN all of which I think are trading at good value with room to grow (again). Bank, Re-newable Energy and Oil.


----------



## Jungle (Feb 17, 2010)

Riff Raff said:


> made our first SM moves w/ RY, TA and COS.UN all of which I think are trading at good value with room to grow (again). Bank, Re-newable Energy and Oil.


Hey congrats on starting the SM. How much are you starting out with?


----------



## Sustainable PF (Nov 5, 2010)

Jungle said:


> Hey congrats on starting the SM. How much are you starting out with?


Not much unfortunately. We just bought our first house (together - i'd bought one a month before meeting my (now) wife - we wanted to buy one together. 

I've only just started really looking into my personal finances since we put our house on the market in June (sold 28 days later). Pretty keen on finances now and trying to learn as much as I can! (hence why i'm registered on this forum hehe). I may be in my mid 30s (wife in her mid 20s) but I hold this true: The best time to start was 10 years ago, the 2nd best time to start: today!


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> Eclectic, I'm under the impression that if ROC is used for reinvestment within the same account (ie, DRIPing, or buying another eligible security), it does not affect the deductibility of the loan. I don't think there is a big problem if small amounts of ROC are kept as cash in the account and applied against the original loan somewhat later (ie, wait until tax season once funds/trusts report what portion of their distributions are ROC). I don't think CRA is overly unreasonable.
> 
> It's also the first I've heard that commissions need to be paid separately. Maybe a tax expert can chip in on that assertion.


Hmmm ... interesting idea - I haven't investigated this possibility.

At the time, I had so many other items that didn't have ROC that were good investments that I didn't investigate. Then too, some of my previous stocks converted to trust units and I have just discovered I needed to calculate how much my ACB was being reduced by the ROC, so that if it hit zero, I'd know to report the future ROC as a capital gain. Bottom line was that as I had easy alternatives, I choose to go the simple route.

Off the top of my head, I'd think this should be okay as long as:
a) not too much cash is left too long in the account (ex. a DRIP that 
does only whole shares will accumulate some excess that would need 
to be moved into a suitable investment).
b) the ACB/ROC calculations are done to know for each tax year if 
reporting any ROC as a capital gain is required.

But as I say, I wanted to reduce my headaches, so I didn't look for ways to make the trust units work.


As for the paying the commissions separately, the CRA URL included in the previous message lists that for Line 121 - Interest and Carrying Charges, interest on commissions is not allowed.

This makes sense as the commission is either going to increase your cost for the ACB or be subtracted from the proceeds, so it isn't being taxed as part of the investment.


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> Can that capital gain be withdrawn without compromising the deductibility of the remaining balance on the HELOC (if you repay the initial loan+capitalized interest)? Most say no, but this makes no intuitive sense to me.


Odd ... as you point out, the loan plus the capitalized interest needs to be paid off but I haven't seen a source that says the remaining HELOC interest is no longer deductible.

I'm thinking the same way as you as the CRA bulletin mentions that in some special cases, even when the shares have been sold, interest that usually is no longer deductible as the shares are gone *may* still be deductible. So if CRA is willing to accept interest accrued after the shares are sold, I'm not sure why the HELOC that is strictly shares plus their related interest could be a problem.

I'll have to check around ...

*** new info *** ... okay, based on Canada Revenue Agency's bulleting IT533 - "Interest Deductibility and Related Issues", I think yes, the capital gain can be withdrawn

Section eighteen, example five says that if there is a gain that's used to buy multiple properties (i.e re-invested), it's up to the taxpayer to decide how to allocate the borrowed money. I don't see any difference between selling for a profit, buying another eligible investment with the original amount to keep the loan 100% deductible and using the excess capital gain for other purposes. Note you'd have to report/pay the capital gain tax but that's the cheapest to pay.

This also means that the trust unit ROC, re-invested or DRIP'd, is good too. 
For that matter, it seems that as long as the original loan amount is rolled over into a new eligible investment, the loan interest remains 100% deductible.

One of the comments on the article is saying the same thing.
http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

Though in the main article, the author interprets some examples from Tim Cestnick as saying something different. Unfortunately, there is not enough info and I haven't seen the examples. 

If you have some links to others that agree with Tim Cestnick, especially if the are more details. I'm headed to the library on the weekend - maybe I can find his book/the examples.

In any case, I'm not a tax expert so it's always a good idea to get a professional's advice - especially if there's big money involved.


----------



## Eclectic12 (Oct 20, 2010)

jason26 said:


> Do you use the cheque to provide a more concrete paper trail? I just ask, cause everything I have is at TDW, and I could accomplish the same flow of money with a few clicks, but I lack the cheque with the comment.
> 
> I'm still doing my research. I don't actually have a mortgage, just the HELOC, so it wouldn't be an SM but I believe the same rules apply.


I'm of the "bury them in paperwork" to make a future audit easier philosophy, if it's available. So in my case, it is more that the process includes the cheque so I'm going to use it to make the paper trail as complete as possible.

A few clicks should be fine as long as there are statements to show the movement of the cash. Example, HELOC statement showing on date A, $2000 was taken and a matching investment account statement showing on or before data A the purchase for $2030 and on date A or later, the $2030 coming in.

I'd think you'd also want to:
a) keep on top of the statements for errors. If the statements or electronic
versions are your trail, you will want any errors corrected asap.

b) keep notes for each transaction. If an auditor says "show me", the notes 
will make life easier - especially if there are any follow-up transactions to
correct errors. 


Hmmm ... if you have a HELOC but no mortgage then I'm guessing your mortgage is paid off (if you don't mind me asking)? 

In any case, the tax write-off is from Line 121, so that rules would be the same. The differences are that you are likely getting a favorable interest rate from the HELOC and the income isn't earmarked for the mortgage.


----------

