# Slide debt from my mortgage to my investments, for tax savings.



## feetfats (Jan 3, 2013)

I've never heard of anyone doing this so here is my situation.

I have a home that I owe about $260k on. 
I have stocks, bonds and ETF's worth about $270k. 
I have no debt other than the mortgage.

Obviously I cannot write off the interest that I pay on the mortgage but if I somehow slid that debt over so that it was for the investments and not the house then couldn't I write off that interest? This also shouldn't increase my risk in any way because I wouldn't owe any more money.

Do you guys have any thoughts on this? Is it even possible? Hopefully this makes sense.


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## OhGreatGuru (May 24, 2009)

I think this has been discussed on other threads. In principle, it can't be done, because mortgage interest on your residence is not tax-deductible in Canada, and CRA views this as a circumvention of that rule. (Remember, you are already getting a capital gains tax exemption on your house. In the USA you can deduct mortgage interest, but you have to pay capital gains.)

If you search other threads you may find references to a way of doing this legally through certain vehicles.


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## CalgaryPotato (Mar 7, 2015)

Google smith maneuver, you definitely didn't invent it.


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## feetfats (Jan 3, 2013)

CalgaryPotato said:


> Google smith maneuver, you definitely didn't invent it.


Ah! there is a name for it. Thanks, this makes searching much better.


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## nobleea (Oct 11, 2013)

Yes, you can. It's very simple and just semantics really. It's a modified Smith maneuvre.
Sell the stocks, use the proceeds to pay off the mortgage. Get another mortgage and use those proceeds to buy the stocks again. Voila, 100% deductible mortgage.


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## feetfats (Jan 3, 2013)

nobleea said:


> Yes, you can. It's very simple and just semantics really. It's a modified Smith maneuvre.
> Sell the stocks, use the proceeds to pay off the mortgage. Get another mortgage and use those proceeds to buy the stocks again. Voila, 100% deductible mortgage.


So I will need to create a trail that proves the loan went towards the purchase of the stocks?

Some of this is in RRSP's so if I actually have to sell and move that particular money out it would be not great.


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## andrewf (Mar 1, 2010)

You can't claim interest deduction for investments made in registered accounts like RRSP or TFSA. But by all means, anything that is in non-reg, sell and use proceeds to pay down mortgage. Then take a loan to invest once again in non-reg accounts.


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## feetfats (Jan 3, 2013)

andrewf said:


> You can't claim interest deduction for investments made in registered accounts like RRSP or TFSA. But by all means, anything that is in non-reg, sell and use proceeds to pay down mortgage. Then take a loan to invest once again in non-reg accounts.


Do I absolutely need to sell the investments? If I have the room on the equity could I create the new loan, call it a loan for investments, and then pay that back on the mortgage?


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## OptsyEagle (Nov 29, 2009)

feetfats said:


> Do I absolutely need to sell the investments? If I have the room on the equity could I create the new loan, call it a loan for investments, and then pay that back on the mortgage?


Of course not or all you would end up needing, to make your mortgage tax deductible, would be money. In other words, all rich people's mortgages would therefore be tax deductible, by simply saying they are, and poor people would have to pay their mortgage interest with after tax dollars. How well do you think that would go over?

No, the paper trail requires the sell and re-buy and you can be sure that it will be nitpicked very closely by the auditor who is paying his/her personal mortgage with after tax dollars.


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## Eclectic12 (Oct 20, 2010)

feetfats said:


> So I will need to create a trail that proves the loan went towards the purchase of the stocks?


That's part of it ... the investments bought have to qualify and at times, actions taken can reduce the amount of interest that is deductible.

For example, a stock company with a policy to not pay dividends/income does not qualify while a similar company that has no statements/policy CRA will allow the interest deduction as they may pay dividends in the future. Another example is income paid that is classed as return of capital reduces the amount of the loan that is tax deductible, where the recommendation is to use the RoC portion to repay the loan to keep it 100% deductible. Where the RoC is keep within the account and re-invested, CRA does not seem to worry about it as this is close to paying off the RoC portion then taking the same amount out to re-invest.

https://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
https://www.canada.ca/en/revenue-ag...ax-folio-s3-f6-c1-interest-deductibility.html


If you have big CG from the investments you have, you probably want to sell some losing investments to balance the CG and CL as much as possible, giving more after-tax dollars to pay down the mortgage. I haven't run the numbers but if CG can't be avoided, spreading it out over several years to avoid paying higher tax rates may work better. For example, if $120K of the portfolio value is CG with with $20K CL to reduce the taxable CG to $100K then there will be $50K of extra income that will be taxed.




feetfats said:


> ... Some of this is in RRSP's so if I actually have to sell and move that particular money out it would be not great.


Then exclude the RRSP amount. Withdrawing mean reporting the $$ as income (more heavily taxed than the same $$ as a CG). Going forward, for the interest to be tax deductible, the investments have to be held in a taxable account, with income being taxed yearly and CG from selling deferred to when the sale happens.

The TFSA can help you out as selling in the TFSA has no tax implications, giving the full proceeds (minus selling commissions). This gives more after-tax $$ to pay down the mortgage compared to the taxable account or an RRSP withdrawal.


Some other items to figure out:

a) are there going to be penalties for breaking the mortgage? How much? 

b) can you wait for a renewal to avoid the penalties?

c) is there a way to end up with a Heloc as usually when the house is collateral for the loan, the interest rate is lower than a run of the mill loan (more buffer for being able to make payments). Another advantage of the Heloc that allows interest payments as the minimum is that you decide how fast the principal is paid down - which keeps the tax deduction high.



Cheers


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## Eclectic12 (Oct 20, 2010)

feetfats said:


> Do I absolutely need to sell the investments?


The cash loaned with it's going forward interest has to be traceable to the qualified investments bought in a taxable account. These investments were bought with other money so there is no way to provide the trace ability without selling then having loan money rebuy them.

Where one has the cash to pay off the mortgage, one could pay off the mortgage then get a loan to buy other investments but the existing investments would have no interest to deduct ... only the additional investments. 




feetfats said:


> ... If I have the room on the equity could I create the new loan, call it a loan for investments, and then pay that back on the mortgage?


If you mean you have a Heloc that allows borrowing against the home equity then yes. 

Since you would have two loans (i.e. mortgage and investment loan) as well as two portfolios (i.e. non-deductible previously held investments and qualifying investments), you will have to take care to make sure the $$ borrowed are documented to specific shares about. Having a separate brokerage account would make it easier to track.

You will have to take care to make sure that for the tax deductible portfolio, the only income used to pay the mortgage down is dividend income. Using other types such as RoC would mean less than 100% of the loan is tax deductible.


Cheers


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> Of course not or all you would end up needing, to make your mortgage tax deductible, would be money ... No, the paper trail requires the sell and re-buy and you can be sure that it will be nitpicked very closely by the auditor who is paying his/her personal mortgage with after tax dollars.


Where the idea is taking out a loan makes the already owned investments what the loan was for ... I agree. There won't be a traceable use of the loan money as the investments were bought in the past.

What will be traceable is if the new loan $$$ buy additional investments.


Maybe a better way would be to:
1) sell whatever existing investments the OP can negate the CG for with CLs and/or is willing to pay the CG on. T
2) use proceeds can then pay down the mortgage, increasing the equity.
3) borrow from the equity to buy qualified investments.

There will be income from whatever has not been sold plus the tax deductible investments to pay the minimum loan interest and for dividends, pay the the mortgage plus make extra payments.

Over time, this can be repeated to keep the CG at an acceptable rate instead of one big lump sum. As time goes on, the non-deductible mortgage will be reduce and the deductible investment loan with it's associated income will be increasing.


Cheers


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## feetfats (Jan 3, 2013)

So most of the stocks are in registered accounts. Here is the rough breakdown:

$80,000 my TFSA
$77,000 wife TFSA
$30,000 my RRSP
$30,000 wife RRSP
$52,000 non registered


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## Eclectic12 (Oct 20, 2010)

The $60K in the RRSP are the ones I likely wouldn't use as withdrawing them is adding a big chunk to your tax bill.
My guess is that the $52K in the non-registered is FMV. The question is now much of the $52K is CG as this will also add to your tax bill. If you have some capital losses from selling or from previous years, these can be used to reduce the CG to maybe something more reasonable.

The $157K in the two TFSAs can be sold then withdrawn to have the full $$ available.


Have you figured out what early payments options are on the mortgage? Or what fees/penalties breaking the mortgage will have?
Is there a Heloc already setup on the mortgage?

Once the mortgage capital is reduced or retired, whatever if borrowed must be used to buy qualified investments in the non-registered account. Depending on the factors, it may make more sense to do a bit each year until the renewal then complete the process of getting rid of non-deductible mortgage interest to replace it with deductible interest for investments.


Cheers


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## feetfats (Jan 3, 2013)

I can do $52k lump sum on mortgage per year with no penalty, plus I could double up on the payments. Last time I looked I think it was gonna cost $5k to buy out of the mortgage completely, but I have since renewed into a different one with the same lender. This term has 4 years 3 months remaining. 

There is currently no HELOC or anything like that. I owe no other money other than the $260k mortgage. The house was worth about $460k when I bought it, but now it's worth about $260k due to severe economic downturn here. It's just coincidence that the mortgage and the current value of the home are about the same now. I would think this could make pulling equity out of the house pretty difficult because the economy did chew up all of it. It just depends on how in tune that big bank is with this little town I'm in, they might still consider the value to be what I paid.

CG isn't a problem because I still have CG losses available from other years. 
All numbers are FMV yes, I don't consider the values to be what I paid, they are what they are today.

So if I peel all the money out of the TFSA's and then pay down the mortgage etc. then pull it back out of the new loan will I will have to invest in Non-Reg and can't use the TFSA's? Putting that money into a taxed account could definitely chew away at some of the benefits of doing this.

I like the idea of doing this a bit at a time over a few years.


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## feetfats (Jan 3, 2013)

@Eclectic12 

I've started reading some of the info in the links you provided (thank you by the way) and one roadblock I see is that I won't have dividends higher than the interest that I will be paying. My current investment strategy mostly uses the couch potato ETF plan with VUN, XEF, VCN, and ZAG


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## Eclectic12 (Oct 20, 2010)

feetfats said:


> ... There is currently no HELOC or anything like that.


That is going to make it tougher as having equity in the house makes for a cheaper interest rate. For example, my personal LoC was something over double what the Heloc rate was.




feetfats said:


> ... I would think this could make pulling equity out of the house pretty difficult because the economy did chew up all of it. It just depends on how in tune that big bank is with this little town I'm in, they might still consider the value to be what I paid.


No idea as in my neck of the woods, prices have been going up. I'd have to check but I am pretty sure they haven't been increasing the borrowing amount as the prices in the hood rise.




feetfats said:


> ... CG isn't a problem because I still have CG losses available from other years.
> All numbers are FMV yes, I don't consider the values to be what I paid, they are what they are today.


My concern about FMV in a non-registered account was that it might be spent on the mortgage early in the year then potentially months later, when the tax return is worked on - a large bill shows up, causing a scramble.
Fortunately, from what you say, there are enough CL to make this a non-factor.





feetfats said:


> ... So if I peel all the money out of the TFSA's and then pay down the mortgage etc. then pull it back out of the new loan will I will have to invest in Non-Reg and can't use the TFSA's?
> Putting that money into a taxed account could definitely chew away at some of the benefits of doing this.


To deduct the interest, the investments have to be held in a non-registered account (NR).

Not sure why one would think of a lost benefit when it's been decades that to get the interest deduction, the investments have to be non-registered. I can see where if it was allowed, it would be all that better but AFAICT, it has always been the NR requirement.




feetfats said:


> ... one roadblock I see is that I won't have dividends higher than the interest that I will be paying. My current investment strategy mostly uses the couch potato ETF plan with VUN, XEF, VCN, and ZAG


Maybe ... point 1.69 says that "assuming all of the other tests are met, *interest will neither be denied in full nor restricted* to the amount of income from the investment *where the income does not exceed the interest expense.*". 

I'll have to find it but I seem to recall an article saying the Finance dept. requires the income to equal or exceed the interest but that CRA ignores this requirement (maybe based on Luco case?).


Between what looks like a high interest rate you'd be charged, a strategy that pays low income and that the stock markets are at or near all time highs - I personally wouldn't want to have the interest to much larger than the income.


Cheers


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