# Smith Manoeuvre & Daycare Allowance



## carllecat (Aug 3, 2010)

Just a quick question here… I went through the book Is your mortgage tax deductible by Fraser Smith and am planning to apply the Smith Manoeuvre on my new home. A couple of weeks ago, I found out that my employer is providing some of its employees with No-interests Housing Loans for up to $50,000. I applied for the loan and got it. For the next five years, salary deductions of $833 will be taken directly on my paycheque in order for the employer to recoup its $50,000. I went to TD bank and got approved an HELOC for a total of $400,000.

It was decided to we would keep our condo as an investment since we cannot break even as we bought right before the peak (Alberta). I am planning on paying down lump sums on that mortgage in the next two years so I can implement the Smith Manoeuvre on the condo.

I was wondering if it is possible to implement the Smith Manoeuvre on the home I will live in and if the interests are going to be tax deductible? I have a feeling that it will not be the case.

My wife is pregnant with the third one and is not going back to work; she will start a daycare when the newborn will turn 1yo. She will incorporate a company and maybe I could arrange something so that the company would rent the house to us (wife and I) so it would be seen as an investment property to the CRA???!

The other thing is that through work, I get a daycare allowance of $2,000 per child, but according to the CRA “where child care services are provided by an individual, the individual cannot be; the child’s mother or father, your spouse or common-law partner if you are the father or mother of the child; a person under 18 who is related to you.” In your opinion, if my wife incorporates a company, who is going to be the daycare provider, my wife, who is going to be an employee of the company or the company itself?

So Smith Manoeuvre on the house or not? Incorporate the daycare to get the daycare allowance or not?

Any thoughts?


----------



## GeniusBoy27 (Jun 11, 2010)

That's a lot of information.

1) Can you do a Smith Manoeuvre on your principal home? Absolutely. You just borrow to invest and deduct the interest on the loan, and use the dividends/gains to offset the principal on your home. It wouldn't be a Smith Manouevre on your investment. The whole idea of the Smith Manouevre is to make your non-deductible interest on your principal home, deductible via the attribution of the interest loan to an investment vehicle.

2) I don't think you can get the daycare allowance for your child, if your wife takes care of the child, even if it's in a daycare she runs under a company. But I'm not sure, and that's something others may know better.

3) I'm not sure I would be looking at my principal condo (once you turn it into an investment) as a profit maker or not (on the original investment). That shouldn't be the deciding principle. 

The question is when I convert it into an investment property, is it cash-flow positive or not? If it is, it makes sense to keep it. If not, then, will the property appreciate enough for me to subsidize the investment? If the answer to this, is still no, then sell it. If yes, then the question is, are you willing to keep subsidizing it until it becomes worth it. Don't get attached to investment property, even if it was your original home. The second it becomes investment property, work out the numbers and see if it makes sense to keep it.

(As a side note, we did work out the numbers and it was cash flow positive, so we kept the property.)

4) Why would you incorporate your home into a company and then loan it back? There may be tax benefits ... yes. But it also means that the asset is never yours, and then, you'd have to go through expensive costs to maintain your incorporation (i.e. quarterly filings, tax auditing, etc.). Is it worth it? Probably not for 1 house. If you have large land holdings, it may make absolute sense. I think to save a few tax bucks, you're going to be costing youself a lot more. Employ the KISS principle in this case.


----------



## carllecat (Aug 3, 2010)

Thanks Genius for the input. 
We bought our condo in 2007, right before the market peaked in Edmonton. We bought the place for $275,000 and it would not probably be worth around $225,000. Our mortgage payments are $700 bi-weekly and we thinking renting the place for $1,300/month. Therefore, we would have to pay the extra $100/month to cover the mortgage payments and also pay the condo fees of $170/month to keep it. 

Since the market in Edmonton is extremely bi-polar, I am hoping to see it go up again in the long run. I believe that taking that huge $50,000 loss could hurt a lot don't you think so? If this is not a good idea and I don,t have the $50,000 to pay the bank back, what are the options here?

As for the daycare allowance, since our 3 child are going back to the daycare in 1 year and that I am entitled to get $2,000 per child, thus $6,000/year, I was hoping to get the daycare incorporated so the CRA would see the daycare taking care of the kids and not my wife, who will be running the company. Even a $6,000 allowance per year would not make it interesting?

In order to clarify certain points, should I get advice from a CA and a fiscal lawyer or just a CA might be good enough?

Many thanks for the help.


----------



## carllecat (Aug 3, 2010)

Anyone using the TD HELOC for the Smith Manoeuvre? 

Is it possible to keep the investment portion of your HELOC separate from everything else? Otherwise, is it possible to create “sub accounts” within the HELOC.

What I need is a readvanceable mortgage that consists of an installment portion + a HELOC that increases its credit limit as the installment portion of paid down.

Cheers


----------



## MoneyGal (Apr 24, 2009)

You cannot take the child care DEDUCTION where child care is being provided by (one of the listed people in the CRA circular). 

This has nothing to do with whether your work will pay you the child care ALLOWANCE if your wife is the one providing the care. (Keep in mind that for tax purposes, that child care allowance is taxed as ordinary income. The fact that it is a "child care allowance" is strictly between you and your company; CRA does not care.)

However, my money would be on "no:" I suspect you will not be reimbursed for an expense which you do not actually incur. 

As for incorporating a daycare: seek professional advice from a CA. There are a lot of considerations, particularly around cash flow. You should develop a couple of scenarios taking all costs into account before you decide to incorporate or not. You are not required to incorporate in order to run a child care and, practically speaking, it does little to limit your wife's personal liability.


----------



## carllecat (Aug 3, 2010)

I have just called several Chartered Accountants and they do not even have a clue about the Smith Manoeuvre and one told me he knew a bit about it and that it was not worth it as the market is not strong enough to support the idea. Another one told me I have to have a business to make it work...

It seems that even some CAs do not know they are talking about, even though some are charging $350/houré Is it really worth it???

What is the first step I should take here in order to make it work, go to a financial planner or try to find a CA that can help me?

Thanks,


----------



## Four Pillars (Apr 5, 2009)

carllecat said:


> I have just called several Chartered Accountants and they do not even have a clue about the Smith Manoeuvre and one told me he knew a bit about it and that it was not worth it as the market is not strong enough to support the idea. Another one told me I have to have a business to make it work...
> 
> It seems that even some CAs do not know they are talking about, even though some are charging $350/houré Is it really worth it???
> 
> ...


The "Smith Manoeuvre" is just a marketing term. It's really just leveraged investing. That's what you should be asking your CA's about.


----------



## DavidJD (Sep 27, 2009)

Four Pillars said:


> The "Smith Manoeuvre" is just a marketing term. It's really just leveraged investing. That's what you should be asking your CA's about.


Is a HELOC not a sort of Smith Manouevre?

Just a matter of how much equity you have accessible...


----------



## Four Pillars (Apr 5, 2009)

DavidJD said:


> Is a HELOC not a sort of Smith Manouevre?
> 
> Just a matter of how much equity you have accessible...


Many financial advisors come up with terms to describe their methods which are used for marketing, Fraser Smith included. Nothing wrong with that.

My point is that most CAs (or anyone else for that matter) aren't going to be familiar with the "Smith Man" or the "Four Pillar Shuffle" or the "ABC [cute name] investment plan" because they are not the generic term.


----------



## DavidJD (Sep 27, 2009)

So a conventional HELOC serves the same purpose?

Are there any significant differences (Advantages or disadvantages)?

I pulled 20K from my HELOC and plunked it on an income trust that was trading around $12.50. It had a yield at that time of 14.5% it has now risen to $15 and my yield remains the same. My HELOC was at 3.25% and is now at 3.75% which leaves me with a taxable gain of close to 11%/yr and an amount I can write off as a cost of investing of 3.25-3.75%. Ruff and dirty an revenue of 6-6.5%

Why would I bother with a Smith Man?


----------



## MoneyGal (Apr 24, 2009)

Getting back to the OP (but feel free to continue discussing the Smith Manoeuvre!!!) - you've outlined some fairly significant questions in your original post...real estate investing, the SM, incorporating a daycare, questions about the childcare allowance, etc. 

I was a little surprised to hear that you were "phoning around" to various CAs to ask about the SM. It seems to me that a good first step for you would be to find a personal accountant that you are going to be comfortable with. I don't know what kind of answer you can expect from an accountant who has never meet you and is just answering questions over the phone. Get some people around you that you can trust and rely on!


----------



## andrewf (Mar 1, 2010)

David: you're already doing 'a Smith Man' except you are not withdrawing the taxable distributions from the investment account (likely there is some return of capital in there) and using that to accelerate principle mortgage amortization. SM is a marketing term to describe a process of borrowing to invest in an income stream that can be used to accelerate non-deductible mortgage amortization.


----------



## carllecat (Aug 3, 2010)

Thanks Moneygal, I appreciate that piece of adivice. I am usually the type of guy that like the DIY format, but I do not want to compromise my family's future for somethign I do not fully understand. 

It is somewhat hard to find a good advisor, liek a woman looking for a good hair dresser! 

Should I aim for a CGA - CMA and save some money or or pay more considerably more to hire a CA that is supposedly very knowledgeable of the tax laws?

Cheers!


----------



## MoneyGal (Apr 24, 2009)

Hey, thanks! I never know whether advice offered here is going to be well-received or not. However, you aren't paying anything for it!

As far as CGA/CMA/CA - personally, I would be most comfortable with a CA...but probably the most important features are that you are comfortable with the person, and they have demonstrated knowledge in the areas you need and want advice in. 

As for the expense - getting bad advice can be VERY expensive.


----------



## GeniusBoy27 (Jun 11, 2010)

carllecat said:


> We bought our condo in 2007, right before the market peaked in Edmonton. We bought the place for $275,000 and it would not probably be worth around $225,000. Our mortgage payments are $700 bi-weekly and we thinking renting the place for $1,300/month. Therefore, we would have to pay the extra $100/month to cover the mortgage payments and also pay the condo fees of $170/month to keep it.
> 
> Since the market in Edmonton is extremely bi-polar, I am hoping to see it go up again in the long run. I believe that taking that huge $50,000 loss could hurt a lot don't you think so? If this is not a good idea and I don,t have the $50,000 to pay the bank back, what are the options here?
> 
> ...


1) My response to the first point is that when you convert to an investment property, the question is what is the impact on overall cash flow. You're losing at a minimum $3000 per year (and probably more, with time costs, maintenance costs, etc.) Yes, a $50,000 loss isn't good, but if it kills your cash flow to maintain the property, it's better to take the loss sooner rather than later (and taking the capital loss that goes with this).

2) I agree with MoneyGal on this. I doubt that CRA will allow you to "take care of your 3 kids and allow you a $2000/kid allowance", by incorporating on the same property. But once again, I'd talk to a CA with tax expertise. (not a CGA/CMA -- they're not tax experts), or do what I do, and talk to friends who know CAs, and get to know them ...

3) You don't need a tax lawyer for this. A good CA is more than sufficient.


----------



## carllecat (Aug 3, 2010)

I still should have a positive cashflow of $1,500 to $2,000 even after loosing that $400/month on the condo rental. If in 6-7 year, I cannot break even, my decision to keep the condo will have been a bad one.

Is there a reason why I should not try to apply the Smith Manoeuvre on my investment condo? Is it because I am not planning on keeping it for a long time?

I have an appointment with a CA tomorrow and I will share all on the concerns I have and I hope that he will save me money, because he is charging a mergre $350/hour... I understand that rich people have good lawyers and accountants for advisors, but I am not there yet!


----------



## MoneyGal (Apr 24, 2009)

I'd meet with a couple of CAs before you put any money on the table. 

A professional is in this for the long haul: giving out up to an hour for an initial meeting (without providing any actual advice, just describing how the advice would be provided and what the person's qualifications are) is pretty normal. 

Good luck!


----------



## GeniusBoy27 (Jun 11, 2010)

carllecat said:


> I still should have a positive cashflow of $1,500 to $2,000 even after loosing that $400/month on the condo rental. If in 6-7 year, I cannot break even, my decision to keep the condo will have been a bad one.
> 
> Is there a reason why I should not try to apply the Smith Manoeuvre on my investment condo? Is it because I am not planning on keeping it for a long time?
> 
> I have an appointment with a CA tomorrow and I will share all on the concerns I have and I hope that he will save me money, because he is charging a mergre $350/hour... I understand that rich people have good lawyers and accountants for advisors, but I am not there yet!



1) The cash flow comment is on your investment property alone. It's not cash flow positive, so you better hope your appreciation on your property offsets it. In my opinion, if you're draining $30-35 K ($3000/year + 10% maintenance fee) to get $50,000 appreciation (with its inherent risk), I'd honestly sell it. 

2) You can do any sort of leveraged investment on anything. However, the benefit of the Smith Manouever is the tax benefit component on the investment loan (i.e. you can deduct the interest of an investment loan).

It makes sense in 2 sorts of scenarios: 1) Higher tax brackets, and 2) you anticipate the markets will rise.

If the markets fall, like any leveraged investment, you'd be hit hard and also lose money faster! In the long run, markets will rise (at least, historically that's true). The question is if you're hit hard, can you make the interest payments, etc on your HELOC.

3) I agree with Money Gal. Take time finding the right accountant, and if he can't afford an hour to meet with you for your long-term business ... then he's probably not the right guy for you.

I pay my accountant to copy my taxes (yes, I do my taxes first, and he checks it over). But then again, he answers all my basic questions throughout the year at no cost, and charges me for the complicated things I may need to do (like incorporating, etc.). My first accountant knew nothing. I would tell him things, and he'd say, I don't know. Wait a second -- if you're doing my taxes, you should know these things!


----------



## andrewf (Mar 1, 2010)

The other reason SM is popular is that houses, as collateral, can be highly leveraged and used to borrow at low rates. This makes it easier to make the leveraging beneficial. If you're leveraging at 7% interest with 8% expected return, that is pretty risky, and quite possibly not worth it.


----------



## Eclectic12 (Oct 20, 2010)

carllecat said:


> I still should have a positive cashflow of $1,500 to $2,000 even after loosing that $400/month on the condo rental. If in 6-7 year, I cannot break even, my decision to keep the condo will have been a bad one.
> 
> Is there a reason why I should not try to apply the Smith Manoeuvre on my investment condo? Is it because I am not planning on keeping it for a long time?
> 
> [...]


Yes - the SM is aimed at using equity in your home to convert the non-deductible mortgage interest into deductible investment interest. A side-benefit is that the income from the investments can be used to pay down the non-deductible mortgage earlier.

When you move out of the condo and convert it to an investment, the interest becomes tax deductible. So in the bigger picture, there is no need for the SM on the condo. The SM should be focussed on the non-deductible interest (i.e. mortgage).

A couple of notes to think about:

1) Get an appraisal of the condo before moving out. If the condo is sold in the future, the capital gain between what it was sold for and what it was valued at when you converted it from your principal residence (capital gains free) will need to be reported as a capital gain.

2) Since your principal residence mortgage is not tax deductible, having separate mortgages for the investment condo versus your home will be helpful at tax time. If it is one big mortgage, as your financial institution if they can report the amount separately.


----------



## Eclectic12 (Oct 20, 2010)

carllecat said:


> I have just called several Chartered Accountants and they do not even have a clue about the Smith Manoeuvre and one told me he knew a bit about it and that it was not worth it as the market is not strong enough to support the idea. Another one told me I have to have a business to make it work...
> 
> It seems that even some CAs do not know they are talking about, even though some are charging $350/houré Is it really worth it???
> 
> ...


The SM is really just a specific application of writing off interest on money used to earn income (i.e. Line 221 on the tax return).

IMHO, it's key features are using a Home Equity Line of Credit (HELOC) to obtain a good interest rate (my regular LOC is 3% higher than my HELOC) and to apply the income earned from the investments to pre-pay the mortgage. 

The effect of this plan is to convert most of the non-deductible mortgage interest into deductible investment interest and to a lesser degree use the pre-payments to avoid interest, all while building up investments.


----------



## sprocket1200 (Aug 21, 2009)

the condo is an anchor, cut it loose.

your wife won't get an allowance for taking care of your own kids. i have kids of my own, I will not pay for yours.

forget all the fancy maneuvers and just learn the basics and practice them religiously. there are lists of books on this forum that you can get for free from the library.

you should really consider the health of your family more. having a daycare (or your kids in daycare) will just ensure they are sicker than dogs!!!


----------



## GeniusBoy27 (Jun 11, 2010)

sprocket1200 said:


> you should really consider the health of your family more. having a daycare (or your kids in daycare) will just ensure they are sicker than dogs!!!


But healthier when they're older! It's a tradeoff ... get the bugs early, or get them late?


----------



## Eclectic12 (Oct 20, 2010)

DavidJD said:


> So a conventional HELOC serves the same purpose?
> 
> Are there any significant differences (Advantages or disadvantages)?
> 
> ...


The advantage of the HELOC, whether it is SM, generic or whatever is the interest rate. Case in point, my regular Line of Credit is 3% higher than my HELOC. This gives me more room to buy more investments plus have more income for the same interest charge.

You don't mention if you are writing off the HELOC interest charges. If not, you can do so as the income trust is earning income. 

If you have a mortgage, doing the other parts of the SM will shift the bulk of the non-deductible mortgage into deductible investment interest and the income applied to pre-paying the mortgage will pay the mortgage off earlier. This means you'll have two assets, the house plus the investments and be able to write-off the interest.

If you don't have a mortgage, then yes - there is no point in the additional steps.

BTW - if you are already do or are starting to write off the interest charges, a point to keep in mind is that the income trust is likely paying return of capital (ROC) as part of the distribution. This will mean that to keep 100% of the interest charges
tax deductible, you will need to:
a) buy additional investments to match the ROC portion of 
each distribution.

or b) pay back the HELOC loan to match the ROC portion of each
distribution.

Note that a lot of trusts are converting to corporations to avoid the tax changes in Jan 1, 2011 - so if you are checking the distributions, check a couple of years. A couple of my trusts were preparing for the conversion so when I checked the 2009 distriubtions, there was no ROC where in earlier years there was.


----------

