# Smith Manouvre Rental to Rental?



## sharp21 (Aug 6, 2009)

I am in the process of renovating my current home, then will be moving & renting it out. If I am already doing the SM on this property in conjunction with my other rental property would it be okay to continue even though it is no longer my primary residence? 

And fyi I will not be buying another home when I move. I'll be traveling for at least a year.

Thanks
S.


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## Sampson (Apr 3, 2009)

As long as the funds borrowed are used to invest into vehicles meeting CRA's criteria you should be fine. So continuing the SM you already are doing will not be an issue.


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## andrewf (Mar 1, 2010)

You can accelerate the conversion, actually. Cash flow damming, ie, using the gross rent to pay down the non-deductible mortgage, while paying expenses out of the deductible loan.

Do you intend to live in the home again in the future? You probably want to do a few things when you move out, such as getting an assessment done (as you lose the primary residence capital gains exemption). You can also do some transactions to convert the entire mortgage+SM into an investment loan (though there are transaction costs associated with doing this).


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## sharp21 (Aug 6, 2009)

Thanks for the replies. I will be cash damming as well between the 2 properties. 

I plan to get an assessment when moving out, after the current renos are complete. We may move back into the home in the future but not definitely

S.


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## cardhu (May 26, 2009)

Sure you could continue the SM transactions if you wanted to, but there wouldn’t be much point in doing so … the tedious repetition of small transactions involved in the SM can be worthwhile if you’re managing to convert non-deductible debt into deductible debt ... but to merely shift already-deductible debt from one account into another, doesn’t seem worth the trouble. 

If the remainder of the mortgage on your current home still reflects the original purchase, or other capital expenses (ie. your current renovations) then just start deducting the interest, as soon as the property starts generating income. No transactions required. 

Cash damming also serves no purpose when all your debt is already deductible.


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## andrewf (Mar 1, 2010)

cardhu, from what I understand, you cannot simply begin deducting interest from a mortgage used to buy a primary residence once you begin renting it out. The money was originally used to buy an asset for personal consumption, not investment.


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## cardhu (May 26, 2009)

Sure you can ... the original intended use of the asset is ancient history .... its current use is what matters ... once it becomes an income-producing asset, the interest on any remaining debt becomes deductible. Where it could get muddy is if the mortgage no longer reflects the original purchase of the home, such as if the home was refinanced to consolidate credit card debt, to buy a car, to fund a vacation, to marry off the daughter ... etc. etc. ... in which case all the usual headaches regarding commingled debt come into play.


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## Four Pillars (Apr 5, 2009)

I agree with Andrew. It seems the CRA is mainly interested in what the borrowed funds was original used to purchase ie was the mortgage to buy a primary residence (non-deductible) or was the money borrowed to buy an income earning property (deductible).

Not being a tax expert, I can't verify that Andrew is right, but his thinking seems to go along with various case studies I've seen in the media.


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## andrewf (Mar 1, 2010)

I would recommend running that by a good accountant--it doesn't sound right to me.


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## cardhu (May 26, 2009)

By all means, check and verify ... CRA is usually a pretty reliable resource for such things. As discussed, it is the current use, not the original use, that determines interest deductibility. Various decisions in the courts have confirmed this. 

But just for fun, lets follow your logic down a slightly different path, to see where it leads us ... if the original use is the key, and if borrowed money is originally used to purchase an income property, then would the interest on that debt remain deductible forever, even if the owner evicted the tenants after 6 months and made it his personal residence?!? ...if true, this could put the Smith Maneuver out of business ... what would we call this, the Andrew Maneuver, or the FP Maneuver?


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## andrewf (Mar 1, 2010)

No, I think the CRA takes the most conservative/least accommodative approach. Can you refer to cases or CRA opinions that support your position?


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## cardhu (May 26, 2009)

No, they take a consistent approach ... if they flipped back and forth with each different taxpayer, they'd get ripped to shreds in the courts. 



Canada Revenue Agency* said:


> the relevant use is the current use and not the original use of borrowed money.


* CRA doc IT533- Interest Deductibility


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## chaudi (Sep 10, 2009)

Travelling for a year. Do you know how long that is in dog years?


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