028: Smith Manoeuvre Case Study and Q&A | Robinson Smith

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Ryan 0:39
Welcome everybody to Explore FI Canada podcast, the future of personal finance in Canada. Hi, everybody. Welcome to Explore FI Canada podcast.

You’re listening to a personal finance podcast by Canadians where we feature stories that regular Canadians are starting achieving or living in the financial independence journey.

My name is Ryan Myricks. I’m from Kitchener, Ontario, and only one of the three co-hosts on this little podcast. Joining me from Vancouver, BC is my co-host and blogger at EatSleepBreatheFI.com Chrissy Kay. Hey, Chrissy.

Chrissy 1:10
Hey Ryan, how are you doing?

Ryan 1:12
I am fantastic. How about you?

Chrissy 1:14
I’m great. And we’re joined today by a special guest.

Ryan 1:19
We do have a special guest, would you like to introduce him? The one the only…

Chrissy 1:24
The one the only Robinson Smith. We’re so excited to to have you on. Welcome to the show.

Robinson 1:29
Well, I’m very excited to be here. Thank you, folks.

Ryan 1:32
Awesome. Now we do have a third co-host, the Money Mechanic, but he’s already interviewed Robinson for interview number eight on the FI Garage podcast. So we highly recommend you go over and check that out.

Ryan 1:44
We didn’t want him sitting down here because it would just be too much of a you know, duplicate scenario. So we gave him the boot. I hope you guys are okay with that.

Chrissy 1:53
I’m sure he’ll forgive us.

Ryan 1:55
But I will seriously recommend everybody that you can go and check out that interview. Perhaps before you listen to this one because we’re not going to get into the super basics of the Smith Manoeuvre, you can either head to SmithMan.net for all that information or check out the Money Mechanic’s interview with Robinson Smith on that one.

Chrissy 2:12
As Ryan said, we are not diving into the basics, we are instead going to be running through a case study using Ryan as our subject.

Chrissy 2:21
And we will be using his real numbers and assessing how the Smith Manoeuvre would have helped him in his situation. And we at the end, we’ll finish off with some questions that were submitted by you, our listeners.

Ryan 2:35
Mm hmm. That is honestly sounds like such a fun format for this type of interview. Because when you hear Robinson on all the other podcasts that I’ve listened to, he really knows his stuff. And then we’re going to be able to run through with the calculator with the man himself to figure out what would have happened in my hypothetical scenario from 2016 to 2020.

Ryan 2:55
So this year of me paying off my mortgage now, all our listeners know I’ve griped about this on probably half the episodes that I did not use the Smith Manoeuvre, even though I wanted to because I couldn’t convince my wife, because she hates any type of debt, whether it’s good or bad.

Ryan 3:10
But we’re gonna go through the hypothetical. Hopefully by the end, I’ll feel really bad. And then I, you know, I’m significantly poorer than what I could have been hoping Robinson will deliver to us. And with that, I think we should just let you take it away.

Ryan 3:27
Robinson, I know you have a lot of my numbers. So should we should we go over them? With everybody and just see where the calculator takes us?

Robinson 3:36
Yeah, sure. First, I guess Ryan, you just mentioned your wife and her aversion to debt, any kind of debt? That is probably one of the biggest things we face when we’re talking about the Smith Manoeuvre with Canadian homeowners.

Robinson 3:50
You know, we’ve we’ve been growing up all our lives surrounded by people who are seemingly older and wiser than us telling us that debt is bad all debt is. And it’s ingrained in us. And we decide that for the rest of our lives, we’re going to try to avoid debt of any kind.

Robinson 4:09
And we do so to our detriment because we don’t you know, unless we’re taught in business school, we don’t, we aren’t taught the fact that there are two types of debt there’s deductible debt and non deductible debt. And non deductible debt is where we borrow to buy cars and vacations and, and toys.

Robinson 4:25
And this type of debt destroys wealth, and it’s terribly expensive and deductible debt is when we borrow with the expectation of generating income. And this type of debt is beneficial to us because it allows us to acquire assets, which are going to increase in value plus we get a tax break.

Robinson 4:42
So, deductible debt creates wealth, non deductible debt, destroys wealth. So that’s a big differentiator in when talking about the Smith Manoeuvre, which is, which is involved which involves re-borrowing the equity created in your home with your monthly mortgage payment in order to invest.

Robinson 5:00
So that’s, you know, I might go into it a bit more later on in the podcast, the conversation flows that way. But basically what your listeners are going to be hearing is, is I’ve got two options, I can either take every penny I have and apply it against my mortgage and be clear of that as soon as possible.

Robinson 5:18
Or I can do that as well take every penny I have and try to pay down my mortgage as quickly as possible, but rebar, all the equity I create with every mortgage payment and prepayment and get that invested.

Robinson 5:30
Because otherwise, if I’m just concentrating on paying down my mortgage, I’m taking my dollars and it’s going to the bank and mortgage is reducing, I’m not getting those dollars invested. So I’m foregoing the magic of compound growth.

Robinson 5:42
And as we all know, that gets terribly expensive. So the Smith Manoeuvre is a mortgage conversion strategy. We convert our non-deductible mortgage debt to tax-deductible debt.

Robinson 5:52
We’re getting invested right away, because it’s deductible debt, we’re receiving tax refunds, and we’re able to apply this money which otherwise we wouldn’t have receive against our mortgage each year and then get that out and invested as well.

Robinson 6:05
So, three things, we’re reducing your tax bill, we’re eliminating our non-deductible mortgage extremely quickly and we’re getting invested for our future, whereas otherwise we wouldn’t be.

Ryan 6:14
I like the sounds of door number two.

Robinson 6:18
All right. Well, just looking at your numbers here, Ryan, I’m sorry to see that since 2016, all the way to 2020. You’ve made $14,000 a year. That’s, that’s got to be tough, Ryan.

Ryan 6:32
What’s that, sorry?

Robinson 6:33
But no, I have what I’ve done, Ryan, is the calculator is not really built to go back in time to see what would have happened because in your case, you know, every every year you’ve you’ve prepaid your mortgage by varying amounts, your income has gone up and down a little bit.

Robinson 6:53
So I’ve done the best I can to go back in time and apply pre payments approximately when you did when inputting in the calculator here, but as for income, I’ve just averaged it because there’s only one spot available to to one shot in time to input income.

Robinson 7:10
So I’ve averaged it out to 95 over the over the period of 2016 to 2020. So that’s the, that’s the income value I used for this scenario here. In the calculator. You can input employment income, investment income, pension income, rental income from a rental property and the related expenses, other self employed income.

Robinson 7:33
And, as regards assets, I didn’t put any assets in here because I think, Ryan, when you mentioned in 2016, an RSP, withdrawal, and TFSA I think that went to the downpayment of the property.

Ryan 7:51
It did, yeah, I drained all my registered accounts and for putting money into the property and I think that’s actually quite a very familiar millennial thing to do so I’m hoping that this is actually fairly common.

Robinson 8:04
Well, I would expect it would be, you know, the homebuyers plan with with housing doing nothing but going up across Canada generally, there’s not a lot of other options for people in order to get into a home.

Robinson 8:17
So so that comes out to that income that I’ve inputted a marginal tax rate of 38.29. That’s based in BC, that tax rate applied to that income. So it might be a bit different where you are but it’s gonna be close on for the mortgage side of things you said the value of the house $315,500.

Robinson 8:41
And with your down payment, you required a mortgage of $252,400 which is 80% of the value of the home, which is you need at least 20% down in order to be able to get a readvancable mortgage which is what is required for the Smith Manoeuvre. Now you weren’t doing the Smith Manoeuvre so you didn’t require a readvanceable, but…

Ryan 9:01
Yeah, but I got it anyways. That was all part of my sneaky plan to convince my wife… would be good enough

Robinson 9:10
Cross the finish line and then try to push it over, eh?

Ryan 9:13
Yeah, exactly. I got the readvancable mortgage, I got that giant HELOC on my online website, you know, just growing incrementally every single payment period.

Robinson 9:23
Yeah, and just briefly for your listeners, that’s exactly what happens is if if I’ve got, say, a $300,000 mortgage, a typical mortgage, you make a payment against that the balance is going to go down from $300 to $299,000 with a payment, but on a readvancable.

Robinson 9:38
There’s a secured line of credit which is attached to that. And while the limit on that line of credit may start out at zero, as soon as you make $1,000 payment against that principle down to $299. The limit on that line of credit increases by $1,000.

Robinson 9:51
So dollar for dollar, you can borrow that back, which means you’re going to owe the bank the same amount over the course of time. But you’re going to be doing wise things which with it, which is borrow to invest in something nice and stable.

Robinson 10:06
You don’t want to go to Vegas with this money and buy your cousin’s internet startup or something like that. But the difference is you’re going to convert that non-deductible debt, that expensive non-deductible debt deductible debt over time, and you’re gonna have a growing investment portfolio which will which will offset that nicely.

Robinson 10:22
So back to you, Ryan, your mortgage balance $250 to $400 was at a rate of 2.29. And you had it amortised over 30 years. Now, if you well, you do have readvancable. Currently, the rates are prime plus a half generally on a readvancable.

Robinson 10:40
So that line of credit works out to 4.45. On the reborrowing side. Now we get into actually implementing the Smith Manoeuvre, you’d ask for a 7% forecasted portfolio growth rate. So we’ve got 7% inputted for that growth rate.

Robinson 10:59
What the mortgage balance, your rate, your amortisation, as determined, the calculator has determined, is that there’s about $490 to invest right off the bat on a monthly basis, were you to borrow the principal reduction each and every month and get that invested.

Robinson 11:15
So we’re going to go ahead and say we want to invest that full $490 a month that you have access to. And we’re going to apply the tax refunds that this borrowing to invest generates to as a prepayment against this mortgage on an annual basis.

Robinson 11:35
And on the Debt Swap for the Debt Swap accelerator. This is where I had to do a little bit of tinkering but basically for the years 216, 2016, up to 2020, I’ve taken the the total amount that you prepaid your you’d indicated you would prepaid your mortgage in those years, and you’ve done so at various times, maybe twice during the year. Whatever.

Robinson 12:00
I’ve inputted one value for each year, which is the sum total and applied it as a prepayment, hypothetically, in the middle of each year. So it’s not going to be completely apples to apples. But the numbers effectively work out the same.

Robinson 12:14
So I’ve got July of each year of value, which I’ve summed up as your pre-payments that you indicated to me, the calculator is going to take these values in these periods of time various periods of time and apply them as a prepayment to the mortgage, have that money accessible again via the increasing limit on the line of credit and get that money invested for you.

Robinson 12:34
We don’t have any values for the Cash Flow Dam accelerator. Basically the Cash Flow Dam is if I’ve got a rental property, what what most people do is they take the $2,000 they receive from the renter and they turn around and pay the mortgage on that rental property and the expenses say 2000 bucks a month.

Robinson 12:50
So cashflow neutral in this example here. But what they should be doing is take that $2,000 and apply it as mortgage prepayment on their own home and then access it again on that line of credit. Reborrow that money to service the expenses on the rental property.

Robinson 13:07
Because they’re borrowing to invest in their business, they can generate the tax deductions on on that monthly borrowing so that reborrowing is not going into securities for growth, it’s going to service the the expenses on your on your business, which is your rental property.

Robinson 13:22
But that greatly accelerates the paydown of your non-deductible mortgage on your principal residence.

Chrissy 13:27
Can I just cut in? I read your book and it’s excellent, by the way, and I finally understand the accelerators. I found it a bit hard to understand when I when your dad’s book came out. That was it was a little more buried in the math and the way you explained it is is really clear.

Chrissy 13:43
And the way I see it, the accelerators are finding money that you have access to. And instead of just using it for expenses, you’re using it as prepayments to your mortgage which ends up giving you more income from the line of credit to invest with. Is that sort of the gist of the accelerators?

Robinson 14:03
That’s that’s exactly the Debt Swap Accelerator. Let’s say I’ve got $30,000 invested. And now I have my readvancable mortgage, I want to implement the Smith Manoeuvre. Well, I can either leave that $30,000 I have invested to keep growing or I can redeem those investments for cash.

Robinson 14:23
And we’re going to want to look at the tax implications of that are you in a capital gain position or a loss position, but you redeem for cash, you prepay your mortgage by that $30,000 let’s say and then the next day that money becomes available in the line of credit.

Robinson 14:37
You pull that $30,000 out and you buy the same security if you want, right so within a week, you’re still invested $30,000 but you’ve paid down $30,000 of non-deductible debt and replaced it with $30,000 of deductible debt which says great things to your your tax bill.

Robinson 14:52
And on the cash flow diversion side of things, if I’m investing $300 straight from my bank account off my you know, when my pay comes in. If I’m investing 300 bucks a month, well, instead of going directly to the investment company, I make a prepayment against my mortgage of 3000 bucks above and beyond my regular mortgage payment.

Robinson 15:09
And that becomes available to invest as well. So I’m still getting that money invested, there’s no new cash coming from my pockets, I was already investing 300 bucks a month, but I’m making it work more than once.

Robinson 15:19
So, yes, you can take new money you have available to you, you can take money that you already have somewhere doing something and just divert it against your mortgage and and really accelerate the paydown and that non-deductible debt.

Ryan 15:31
Mm hmm, and if I can just interject here just because I want to bring these accelerators back to the focus on my own personal story is that I’m just a regular guy making a T4 income. So if anybody’s listening here saying like, can I actually do this because I don’t have rentals or I don’t have these like magical accelerators and money just coming at me from all different angles.

Ryan 15:49
That’s not it’s not exactly what we’re talking about. There are certain things that come in for income that you could probably either just use because you’re going to have a substantially high savings rate. Anyways, being part of the FIRE movement so when that RRSP refund comes back in, deploy it for the Smith Manoeuvre, right?

Ryan 16:05
Maybe the Child Canada Benefit comes in and you don’t actually need to spend that money on diapers, deploy it towards the Smith Manoeuvre, like there’s all these different levers that just come in you know, it’s whether or not you turn on the Uber app is completely up to you.

Ryan 16:18
But I just wanted to say for my own personal situation that while we talk about all these rental properties and other investment incomes and whatnot that you can apply to this calculator for me, it’s just a T4 and I think you average it, Robinson, at $95,000 over the four years.

Ryan 16:34
So I get that that’s probably pretty high for some people and I’m obviously over the average income of a regular Canadian but, um, yeah, I just that’s what my income is. So we’re just going to see if it’s gonna work with the Smith Manoeuvre, and I think just earning a regular T4 and getting 95 grand a year is definitely going to work. Wouldn’t you say Robinson?

Robinson 16:54
Well, yeah. And, you know, once we’re done going through your example Ryan, we can also drop that 95,000 income to 50 and see what the result is. Yeah, that’s the lovely thing about this calculator is you can plug in any different scenario with income, you can increase forecasted growth rates.

Robinson 17:11
Decrease, you can increase or decrease mortgage rates depending on when you think you’re going to be getting a mortgage or mortgage rates are going to be doing when you refi to get into the readvanacable mortgage.

Robinson 17:20
So lots of different scenarios you can run on this calculator. And yes, you’re right, you know, just if there’s someone who’s just got a T4 you know, maybe some of these accelerators aren’t available to them, but even 50 bucks a month, if you can scrape that together to make as a prepayment against your mortgage is going to improve your situation.

Robinson 17:38
So everything helps. And one thing that will be available even if someone is executing simply the Plain Jane Smith Manoeuvre which is using your regular mortgage payment and nothing else, no extra cash, no Debt Swap, you’re going to see an improvement but because you’re investing each and every month.

Robinson 17:55
You’re going to start to accrue assets, which otherwise you wouldn’t have because of this money would have your mortgage payment wouldn’t have been, you wouldn’t be borrowing to invest, you’re able to apply the DRIP, the Dividend Reinvestment Plan accelerator.

Robinson 18:08
The DRIP accelerator is basically is if I’m receiving dividends from my investments, I can take those dividends instead of having to have them reinvest automatically each month I can take them in cash, use them as a prepayment whenever they come in quarterly by annually, whatever it is.

Robinson 18:22
And then reborrow and then buy that stock back again. So you can apply this DRIP accelerator or you can choose your annual distribution, yield 3% 2% 4%, whatever it is. And then lastly, on the accelerator side, I didn’t use that for your scenario. But you know what I’m going to. Boom, I hit the toggle, Chrissy!

Robinson 18:25
Now, the Prime the Pump accelerator is it’s the last one here. Basically, if I go to refinance my house because I need to get out of a mortgage that doesn’t work into a mortgage that does maybe the value of my house has increased over time.

Robinson 18:59
Over the years, I’ve paid some of my mortgage down over the years. And so they’re going to say, Okay, well, we’ll, we’ll lend you this $300,000. So you can pay out the mortgage from your other lender, but because of the value of your house, we’re also going to give you on that line of credit side, available credit immediately of 50,000, let’s say.

Robinson 19:17
So this Priming the Pump accelerator says, Well, I’m able to take that $50,000 or 40, or 25, or none, there’s a slider. And you can choose how much if any you want to use, and basically you’re getting that that amount invested day one, as soon as you get that mortgage.

Robinson 19:31
So you’ve got the longest period of time for this, this lump sum investment to grow over time. And in your case, I did not use this, Ryan, because you were at the full 80% in any event. So now we’re ready to look at the results.

Ryan 19:45
Drum roll, please.

Robinson 19:46
Yeah.

Robinson 19:48
How much have you have you paid out your mortgage already? Or is there still a small balance on it or?

Ryan 19:54
There’s still a small balance on it, so it should be done by June of 2020. So I have $13,000 I believe or $12,000 depending on which, no, I think it’s $13,000 right now be $12,000 after next pay that I still have remaining on it. And that’s going to take me until June to get off.

Robinson 20:11
Okay, all right, good. So at that point, you’re gonna have a clear title house and what will the value of the house be?

Ryan 20:19
So the market value of the house should be around $500,000, maybe higher, but I’m just gonna stick with $500,000 that’s a nice easy number.

Robinson 20:27
Okay, so $500,000 will be the value of your house. And you’ll have $500,000 not necessarily $500,000 that available to you to do something with because nowadays lines of credit you secure line of credit only go up to 65% of the value of your house if you get it through big banks, but now you’ve got all this, this equity, which feels real good to see that in the house, but it’s earning zero percent for you right now with a sixth

Ryan 21:02
You’re actually killing me Robinson.

Robinson 21:03
Yeah. Yeah. Maybe. Yeah, maybe it feels good for your wife to see the equity.

Ryan 21:11
Yes, yes, exactly. She’s the one with the smug smile. I’m the one with Yeah. The gritted teeth.

Robinson 21:16
Yeah, well, there’s you know, it’s 65% loan to value there’s $325,000 that you could pull out and do anything with you can go you can pull that out, get a Ferrari, you can go around the world. You can test it, right? It’s available.

Robinson 21:29
You could throw it in the fireplace if you want the the lender doesn’t care. Your HELOC is secured by the house so they don’t care what you do with the money, right. But what I’m saying is that there’s $325,000 that is earning zero percent, actually less than zero percent due to inflation.

Robinson 21:43
And a lot of people are in this position. You know, a lot of older people we see in this position, they concentrated on paying their mortgage off their clear title and an $800,000 $900,000 house some parts of Canada and living off of fixed income, right? But I digress.

Robinson 21:58
Your results you would be clear title by June with zero dollars of investment assets, because you’ve related to what we’re talking about here this month, because you haven’t been pulling that out and investing.

Robinson 22:13
Now, what what I did is I took the amounts of the principal reduction from the regular mortgage payment from your prepayments, and over four years I got these amounts invested. So one invested for four years one lump sum for three years one for two, one for one, right?

Robinson 22:34
And the effect of if you had employed the Smith Manoeuvre today, you’d have a portfolio value of at 7% growth $472,721. Now, that does not include the tax benefit. So it would it would be a bit higher than that in effect, but let’s just call it $470,000 offset by your initial mortgage balance.

Robinson 23:00
Which would now be an investment loan of two… what did we say? $252,000?

Ryan 23:06
Yep, that’s right.

Robinson 23:07
So if we take $470,000 we subtract what you would have in deductible debt generating tax deductions for you. 252 you’d have a net improvement in wealth of $218,000 today.

Chrissy 23:20
Wow.

Ryan 23:22
I’m trying not to cry.

Robinson 23:24
You go right ahead. Nobody can see.

Ryan 23:28
Oh, Chrissy.

Chrissy 23:30
Is this is this over the four years from 2016?

Robinson 23:34
Yes. Yeah.

Chrissy 23:35
That is astounding.

Robinson 23:36
Yes, we go back we go back and this is this is imagining that today is is 2016. And he’s just starting his his mortgage pay down now. So in four years is when he would be four years from now clear title with zero invested versus the same with $218,000 improvement net worth if he had access the equity that he’s created via his record.

Robinson 24:00
Regualr mortgage payments and those prepayments and gotten that money invested based on our assumptions here. So that’s how much how much further ahead he would have been today. Yes.

Chrissy 24:10
Oh my.

Robinson 24:11
So, so that the calculations I did there’s is as I said that the calculator the Smithman calculator’s not really built to compare what would have happened. It’s for people saying okay, here’s where I am today. What happens if I start today, right where can I end up?

Robinson 24:26
Now we know so again, Ryan, if you started your program today, you you know that based on your prepayments if you could if you knew what they would be in the future you knew in four and a half years you’d be clear title to the house with zero dollars in investment using the calculator.

Robinson 24:43
If what the calculator has done when I’ve inputted your values is it says okay, based on the amortisation that you input so in 30 years in your case, what is the result of me starting this program based on Ryan’s numbers In 30 years, so it doesn’t tell me what your results going to be in 4.5 years.

Robinson 25:04
It tells me what the result results are going to be in 30 years based on the app that I input. So with your numbers with these estimated prepayments going forward each year, four years into the future, and then stopping the results that the Smithman calculator comes up with says, Okay, well over the course of 30 years, you will see total tax deductions of $306,000, which means tax refunds money back from the government of $117,380.

Robinson 25:35
And because you’re able to take these tax refunds, because we’re going to take these annual prepayments for years into the future, and then they’re going to stop because they can tell you why right now, but what happens in that case is your regular mortgage payment your annual prepayments takes 25.5 years off of your amortisation.

Robinson 26:00
So it’s shortened to four and a half years, which is your actual case. Right? So the Smith Manoeuvre and your actual case, both have you eliminating all of that $252,000 of non-deductible debt about the same time when you’re not aggressively pre paying your mortgage as you have over the over the past four years.

Robinson 26:23
Even if it’s less-aggressive prepayment, the improvement from the Smith Manoeuvre versus your scenario would increase. But when we compress something, when we compress a mortgage for 30 years down to 4.5 years, it gets harder and harder to compress.

Robinson 26:38
So with these massive prepayments that you’ve made over the past four years, making them with the Smith Manoeuvre scenario, we get about the same amortisation period reduction to 4.5 years.

Robinson 26:49
The net worth improvement, however, again, based on your numbers and investing what you can when you can in 30 years, you would have a portfolio value of $2.1 million, which would be offset by that deductible now deductible investment loan of $252,000 for a net improvement in your family net worth of $1.84 million.

Ryan 27:17
Sorry, that’s over 30 years? You’re saying?

Robinson 27:19
Over thirty years.

Ryan 27:20
Okay.

Robinson 27:21
Now, one thing I didn’t do is, you know, I calculated that your current net worth improvement would be $218,000. If you had invested over the past four years via the Smith Manoeuvre, what we could do is throw in that $218 your investment, your hypothetical investment portfolio value, and apply that.

Robinson 27:45
It’s it’s tough to do apples to apples here because you’re, you’ve prepaid your mortgage for four years and then you stopped because or you’re going to stop very shortly because there’s no need to prepay it anymore.

Robinson 27:56
The question is, what are you going to do going forward with all that money that you used to be prepaying, are you going to now invest it?

Ryan 28:06
Essentially, yes.

Ryan 28:07
Because, yeah, because I don’t have any money working for me. My home is not an investment, right? It’s providing me really cheap rent, but otherwise, I need to put my money into the stock market because I’m gunning for FIRE. So right, I need to take all that exact same amount and start deploying it into the broad based stock market.

Robinson 28:07
Right.

Robinson 28:24
Right. And so, so essentially, what you’ve done, I mean, you’re a young guy, you’ve got lots of time left. You haven’t shot yourself in the foot here by any stretch of the imagination, but you have lost four and a half years of compound growth.

Robinson 28:38
Because you haven’t been pulling that money back out and investing it and, and, and I want to stress here that, that it’s important that, you know, if there’s two people in a relationship, they’re both on board. You know, if you’re not both on board, it’s probably not worth doing it.

Robinson 28:56
Yes, you’re going to lose out financially but you’re going to gain them over. Because the two biggest reasons of relationship breakdown or money problems and and sex, and, am I right? I mean, it’s a fact and the top one is money problems.

Robinson 29:11
So if someone isn’t comfortable with an investment program or whatever the case may be, you know, you can’t, you can’t, you can’t push it, you got to do what you can to make the other person understand and maybe they understand, but they’re still not comfortable.

Robinson 29:24
But again, you you haven’t shot yourself in the foot here because you got a lot of time to get into the market and do really well for yourself. My point is simply that by losing four and a half years of compound growth, you’re going to do okay, but you’re not going to do as well as if you had got that money invested via the Smith Manoeuvre.

Ryan 29:40
Mm hmm. I think sometimes when people hear about this on the surface, they like to think like, okay, so you’re just, you’re borrowing to make dividends kind of thing. Like, is that what you’re doing? And it’s like, No, you have to think about it like this.

Ryan 29:52
If you’re buying ETFs that was worth $17 this year, and then $18 this year, and then $17, the next year, and then two dollars the next year after that, like you’re getting in and all these ones and because we all make the assumption that the stock market just goes up and up and up.

Ryan 30:06
And in this case, we use 7%, which I think is a very fair, very fair estimation, you’re buying it like it’s the capital appreciation, that’s what you want. The dividends are, are serving you as a form of just paying down that mortgage faster.

Ryan 30:21
Because then it’s the accelerators that we just talked about, it’s going to go to the principal, and then you’re going to pull that money back out, and it’s going to go right back into buying that super low cost ETF, right, and you’re going to keep buying it lower and lower.

Ryan 30:32
So while I am about to begin investing in the stock market, as of June of this year, when my mortgage is done, I have that four and a half years of not doing so. And because I’m earning a high amount of income, I had a very easy tax strategy to leverage at my disposal.

Ryan 30:51
And like you said, I didn’t and that’s because I I prefer my marriage over my wealth, but I’m super like, you know, it’s just one of those things where it’s like If people can wrap their head around that, and they can get it all, like, I want the capital appreciation. Yeah, you do.

Robinson 31:06
Yeah.

Ryan 31:07
Because look at all that magic I missed out on and actually, Chrissy, I kind of want you to weigh in on this question that I have and then we’ll let Robinson answer it as well. But was this just like a perfect storm kind of scenario?

Ryan 31:18
Like, because I have a fairly high income not super high, but it’s a high income. I had all the taxes in the world that I was paying that I could have deducted with this strategy. I had a super high savings rate, right. Like, was was just just because of the perfect storm scenario, or could this have gone like a lot worse? If it wasn’t me if say if it was somebody else?

Chrissy 31:42
You mean, as far as Smith Manoeuvre gains?

Ryan 31:46
Yeah, I think so. You know, like, what if we’re in a whatever in a environment where the interest rates much higher and the stock returns are much lower? You know, and that kind of thing, right? I’m not I’m not going to go as far as to say like, I could have lost my job.

Ryan 32:00
But you know, like, was there was there… were the conditions just perfect for me to miss out on this amount of money because of who I am? And I think there’s a lot of listeners who are very, very much like me, or they’re high income and high savings rate.

Chrissy 32:15
Possibly, I mean, every everyone is saying that the FIRE movement exists because of the market conditions we’ve had. So, interest rate, the low interest rate environment, all of that it could be the perfect storm that has resulted in this scenario.

Chrissy 32:32
But as Robinson writes in his book, and that I’ve read, even in a higher interest rate environment, even in a lower earning environment, you still can get ahead with the Smith Manoeuvre.

Robinson 32:45
Yeah, I mean, we have to we have to remember that. My father Fraser came up with the strategy, you know, in the early to mid 80s, when interest rates were in the double digits. So mortgage rates, borrowing rates and it worked.

Robinson 33:00
He put his private clients into this for 20 years before writing the book, you know, proving out, proving out quite successfully the model. So, you know, people say, Well, what if interest rates rise? Well, there’s, there’s, you know, when are they going to rise realistically, right?

Robinson 33:16
Probably not for a while, but in any event, if interest rates rise, your mortgage rates are rising and and if I’ve got high interest rates, fine paying 7% on my debt, do I want to pay 7% on non deductible debt or do I want to pay 7% on deductible debt? I’ve got the debt anyways.

Ryan 33:34
Alright guys, I think we need to take a quick break, and we’ll be right back right after this.

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Ryan 34:39
Okay, guys, welcome back. Robinson, you also have a similar scenario where you reduce the amount of taxable income that you have. So could you walk us through a bit of those numbers?

Robinson 34:51
Yeah. Basically, we did your scenario based on your average of $95,000, $90,000 of income now led to a 38.29% marginal tax rate which the calculator used. And that gave you a net worth improvement $1,844,436.

Robinson 35:14
If we drop your annual income to $50,000, then that drops the marginal tax rate to 28.2. And your net worth improvement reduces from 1.84 million to 1.76 million. So that’s the that’s the effect of the your tax refunds reducing a little bit not bad 1.84 down to 1.75.

Robinson 35:40
So yeah, it certainly, it benefits higher earners. But you know, if I drop the marginal tax rate to 20% for someone who’s making $30,000 a year, now your net worth improvement is $1.69 million.

Chrissy 35:58
Wow, still a lot.

Robinson 36:00
Yeah, over the over the amortisation. So, so tax rate does affect it. But even for people who are shooting for a lower tax rate, as long as you’ve got a non-deductible mortgage, and your assumptions are reasonable, you’re you’re going to be in the money.

Ryan 36:18
So I have a question then, Robinson. So in our movement, we’re trying to make as little amount of money as possible when it comes to drawdown mode when we’ve saved enough money. We’ve we’ve been working our (bleeps) off for so much money, and now we will kind of want to peel it back.

Ryan 36:36
We want to take back our time. Some of us will quit our job, some of us will just switch or reduce our hours greatly. And that means that we could effectively plummet our taxable income. At this point, would you recommend that we keep the loan or should we be removing the loan?

Ryan 36:51
Have you experienced something like this? I guess it’s it’s almost just like dealing with anybody going into retirement, right? I mean, what do you do with a tax-deductible loan if you don’t have a high income?

Robinson 37:02
Well, I guess a consideration. Firstly, you’re going to want to talk to your Smith Manoeuvre Certified Professional accountant on this. That’s an accreditation program I’m putting into place across Canada, which maybe we’ll talk about later.

Robinson 37:17
But you can find out information on the website Smithman.net. But, but effectively, there’s there’s, I would say there’s two components to this there is okay, my marginal tax rate is so low, I’m generating less benefit on this investment loan, which is deductible.

Robinson 37:33
Does it make sense to keep this deductible investment loan? Well, if I’ve got a loan of $252,000, and an investment portfolio of $1.9 million. Sorry, in your case it was increased $2.1 million. What are my options there?

Robinson 37:53
I can take my after tax cash flow and I can start chipping away that that deductible investment loan and get that down. Or I can say say, you know what, I want to get rid of it all tomorrow, I’m going to redeem $250,000 of my assets and my $2.1 million worth of assets to pay out that deductible loan.

Robinson 38:12
What What have you done there? You’ve just removed from a 7% growth rate 250, a quarter of a million dollars in order to pay down debt, which is effectively costing you maybe, maybe 3.6%, right? So, you’re, you’re, you’re telling yourself in the world that I want to forego growth on a quarter of a million dollars at 7% so I don’t have to pay interest of 3.6% on that money.

Robinson 38:43
So again, we just on emotion, right? The psychology of money here and maybe it helps you sleep at night, not having that $252,000 of debt on the books even though it’s tax-deductible, even though it’s reducing the tax you pay, regardless of how much you earn how much or little, you still want that gone so that you can sleep better your wife can sleep better, whatever the case may be.

Robinson 39:10
And And if that’s the situation, then go ahead and do it, you got $2.1 million. You want to sell a quarter of a million to pay out that loan, go ahead and do it. If it’s gonna help you sleep at night, if it’s gonna make you a happier, less grumpy person.

Robinson 39:23
Go ahead and do it. You’re still way ahead of the game with a person of the wealthy mindset who understands the value of deductible debt, the value of compound growth, would they do that? Most certainly not. But you’re not dumb and they’re not you.

Ryan 39:39
Chrissy, I want your two cents here for sure.

Chrissy 39:42
Well, my argument is if you educate yourself, you read Robinson’s book, you read about leveraged investing. I think you couldn’t sleep at night that you’re not using leveraged to invest. That’s me. If I know that all this equity is sitting in my house, and I’m not using it to my best benefit, that would keep me up at night.

Chrissy 40:03
I would be the opposite and and I feel like education is what would help here, you know, just learning about the Smith Manoeuvre, learning about how the stock market works, that will take away so many of your fears and you will actually understand what you’re doing and why you’re doing it. That’s my two cents.

Robinson 40:21
And so, you know, you Ryan, if you’re, if you’re sitting on $325,000 of equity that you could pull out to invest tomorrow, or within a week after you get a HELOC against whatever the case may be, no one’s saying that you have to pull out that full $325 and get it invested.

Robinson 40:43
Maybe you start off with 20 grand, maybe you start off with 50 grand. You dip your toe and and see what happens. I was just interviewed. I think it was last week for Ben Felix and Cameron Passmore for their podcast.

Ryan 40:58
Awesome.

Robinson 40:59
Yeah. So that’ll be coming out March sometime. But, you know, Ben talks about the studies out there, they’re saying, if you’re young and not borrowing to invest, you are missing out huge. So it’s a big psychological barrier for so many people that, that they choose to not even look at it.

Robinson 41:23
I, this isn’t something I’m interested in, I don’t want to be interested, I don’t want to spend the time learning about it. And again, if that’s who you are, that’s who you are. But if you’re truly of the mindset that I want to be able to create wealth for myself, so that I can achieve my goals and do what I want, when I want whatever that is, then borrowing to invest can be a part of that.

Robinson 41:47
And when you’re young, you’ve got so much time to weather, any storms, to make changes to do whatever you want, whatever is best for you. But it’s something that if you’re really interested in being a as secure as possible to the extent that you want to be financially secure, it is something that you have to look into and consider, either accept it or reject it, but do so with knowledge.

Ryan 42:10
I think these are wise words. And if anybody has been doubting what you’ve said for the last two minutes, they can go ahead and rewind 20 minutes and hear that staggering number that I’ve missed out on. If they need to, again.

Ryan 42:23
I have a feeling though, that this is gonna be an episode that people are going to play two or three times right just to wrap their head around it because it is such a phenomenal strategy. And I wish I had convinced my wife I really do. But you know what?

Ryan 42:38
I don’t I don’t want to come at her with all these behavioural biases that she has that Robinson is brilliantly pointing out. Maybe she’ll listen. She hasn’t listened to a podcast episode yet because she’s a hater, but I feel like maybe she’ll listen to this one, right because it is my real numbers like none of this has been made up.

Ryan 42:55
It’s just it’s just the theoretical parallel universe that could have happened, right? But otherwise, these are all my legit 100% numbers that Robinson asked for.

Chrissy 43:06
Can I make a suggestion? I think she should read Robinson’s book, Master Your Mortgage. It, it outlines that so clearly you can see how your emotions affect this so greatly and so negatively. No it It explains the benefits and how all these all of us have been blindly following the cultural stereotype to pay down your mortgage, get rid of all debt. And when you see the fallacy in that and how it really sets us back, you can’t unsee that once you learn that. You can’t go back.

Ryan 43:43
It’s on Amazon, right? I’m just gonna add it to like the shopping cart or whatever. Even if she removed it. I’ll just add it back. For you, by the way, the next time you hit order, it’s coming.

Robinson 43:57
That’s clever. Well, now you better hope she doesn’t listen to this episode. So she’ll…

Chrissy 44:03
Know all your secrets.

Ryan 44:05
No kidding. No kidding. Okay, well, I think now is probably a good time to… Oh, you know what, before we switch I just want to say one last thing. You’ve been doing all this via the Smithman.net calculator that people can subscribe to on your site, correct?

Robinson 44:22
Yes, Smithman.net. You can order the book. There’s a Homeowner’s Course there’s also the calculator or combos, you can, you can…

Ryan 44:30
Well there’s just an incredible amount of information that you can easily buy from your site. And I feel as though I just have to say for everybody because I think a lot of us sometimes we’re more a little too frugal, a little too cheapskate about things.

Ryan 44:46
But the amount of money that is at stake here, if you slip or do something wrong, you’re not going to have those type of risks. If you read and understand the information that Robinson is presenting to you. And the available resources that he recommends on his site. So I actually think it’s something that our listeners should greatly understand and probably appreciate the value of what they’re buying via this calculator.

Robinson 45:11
Well said Ryan.

Ryan 45:14
Right on. Okay, I think it’s time for some listener questions. Chrissy, why don’t you lead us off? Because we did, you, I believe it was you, Chrissy, that posted to our Facebook page asking for some some questions from our listeners.

Chrissy 45:26
Mm hmm. Yeah, because this is a hot topic. It seems like people are hungry for this info. So we asked our listeners and we got a few questions and I had to stop asking for questions because I was afraid we’d get a flood.

Chrissy 45:39
So we have a few here that we received and I’ll start with one from Abid. He says I’m moving into a place where I’ll be renting out my basement come March and wanted to have all my ducks in a row. So his first question is, is there a way to cleanly figure out what amount of the tax return is related to the Smith Manoeuvre and what amount is related to other items such as RRSPs, etc.

Robinson 46:03
Considering his first statement moving into a place and renting out the basement, I kind of took that to be how do you figure out how much I can deduct from my mortgage, considering part of my house is being rented?

Robinson 46:21
So for the first part here, basically, if you’re renting out 20% of your floor space, you can deduct 20% of your your mortgage expense. So, that’s, that’s a relatively easy way to figure that out. But as regards, you know, at tax time, if I’m trying to figure out, I’ve got this is how the second way I interpreted this question is…

Robinson 46:42
If I’ve made contributions to my RRSP, I’ve got deductions here, there and everywhere. Plus, I’ve got deductions due to the Smith Manoeuvre, how do I figure out what came explicitly from the Smith Manoeuvre, and it’s, it’s very simple.

Robinson 46:55
You’ve got a mortgage statement from your mortgage lender, and it’ll tell you how much you paid in interest for the for the year on the annual statement? And then you just apply your marginal tax rate to that.

Chrissy 47:07
It’s very simple.

Robinson 47:08
Yep.

Chrissy 47:09
Perfect. Okay, his second question is in relation to the Cash Dam accelerator, you mentioned that you need to have a sole proprietorship or partnership to use the expenses towards the non-deductible mortgage. Why can’t we do this with a corporation or just as an individual?

Robinson 47:25
Firstly, when he says why can’t we do this just as an individual you effectively are if it’s a proprietorship, that’s that’s exactly what it is. The income that your your business quote unquote, here, unincorporated businesses generating is his income that you generate classified and considered treated the same way as income you get from your employment.

Robinson 47:48
So you are as a proprietorship, effectively doing this as an individual for the Cash Flow Dam. Now, as regards to why you don’t want to do it with a with a a business that you own which is incorporated. It boils down to the fact that as I mentioned, a sole proprietorship, your business is considered as you.

Robinson 48:10
Whereas an incorporated business is as real a person as you are in the eyes of the CRA, so it’s a completely separate legal entity. So when we’re taking money from the incorporated business, when we’re lending money to the incorporated business, the business has to be careful that it doesn’t run afoul of the CRA.

Robinson 48:34
You know, we we run into accounting issues. So the complexity comes on the monthly reborrowing that you would do to service corporate expenses, where you’re, whereas otherwise you would be investing in securities instead, you’re servicing the expenses of the corporation.

Robinson 48:49
When you do this repeatedly. The CRA might not look kindly on the on the corporation. It’s not necessarily… now bear in mind, I’m not an accountant, but it’s not necessary that you as the homeowner is at risk, it’s it’s on the corporate side.

Robinson 49:03
So you really want to get advice from a professional from a tax tax accountant. When you when you have an incorporated business and you’re considering using aspects of the Cash Flow Dam with that business.

Robinson 49:17
So a bit of a confusing response, but effectively it boils down to the fact that a proprietorship if it’s unincorporated, the revenue and expenses are considered yours as an individual. When it’s incorporated, it’s a completely different set of books.

Chrissy 49:34
And I agree it can the Smith Manoeuvre can get very messy very quickly if you don’t know what you’re doing. And that’s why I value the advice of an expert especially someone who’s qualified and knows about the Smith Manoeuvre it it can get very confusing as an individual to do it on your own.

Robinson 49:53
Absolutely. Like I said, I’m putting together the Smith Manoeuvre Certified Professional Accreditation Program. I’m going to be accepting financial professional various types across Canada, they’re going to be trained in the Smith Manoeuvre, they’re going to be certified, pass an exam.

Robinson 50:05
And then I can send people who are inquiring of, you know, I’m in Burlington, I’m looking for a mortgage broker, I can send them to a certified mortgage broker or account or investment advisor in their area. So that’ll be coming next month.

Ryan 50:19
That’s fantastic. All right Ryan, do you want to cover the next questions?

Ryan 50:23
Yeah, by the way, and when Robinson says next month, we’re recording this in February. So this will probably be released next month. So take a look right now. Right. Okay. No, I really like I really like your answers because it speaks to the next question, which is from Mark Seed, My Own Advisor.

Ryan 50:43
That’s his Twitter handle. He’s basically asking why not focus on killing the debt versus taking on more risk, let alone more monitoring of the work?

Robinson 50:52
So I guess in what he’s saying is like once you have paid off your mortgage and you have this giant investment loan, why not throw all the additional money at killing that loan? Like why would you refinance and just start taking out more? I think we’ve already answered this question a little bit, but I’ll just have you quickly speak to it if you don’t mind.

Robinson 51:11
I’m sure I read the question as, you know, let’s, let’s do what you did, Ryan. Let’s focus on retiring that mortgage rather than implementing the Smith Manoeuvre, which has some monitoring work to do a couple of transactions on a monthly basis.

Robinson 51:27
And I guess it so I guess what it boils down to is how committed are you to giving you yourself and your family the best shot at improving your wealth? And how much potential wealth are you willing to forego if let’s first look at killing the debt?

Robinson 51:41
So in other words, taking every cent you can to eliminate the mortgage as fast as you can. If I’m if I’m 40 years old, when I get a mortgage, I aim to retire when I’m 65. No 25 years from now, it is my goal to achieve clear title as soon as possible.

Robinson 51:55
So let’s say I make an extra thousand dollar payment against my mortgage each and every month. We’re looking at a $500,000 mortgage at 3.5% amortised over 25 years because I prepaid this mortgage by thousand dollars each month over and above my regular mortgage payment.

Robinson 52:10
Instead of 25 years mortgage payments I’m clear title in 16 years. Okay that’s pretty good but this is not the Smith Manoeuvre scenario. This is just me prepaying the mortgage. But after 16 years where what have I got no more mortgage payments and hundreds and hundreds of thousands of dollars in equity in my home which may make me feel good, it may not.

Robinson 52:27
But and so now let’s further assume that for the next nine years, so that’s 16, I’m clear title for another nine years would be 25 years. I’m 65 and starting to retire, let’s say I take my former mortgage payment plus that extra thousand that I was applying as a prepayment and I invest that at 7% growth.

Robinson 52:43
So I’m investing $3,366 bucks each month from age 56 to 65. Okay until the point I’d be clear title if I hadn’t prepaid my mortgage at all. By the time I retired my 65th birthday I’m clear title and I have an investment portfolio with $504,425.09.

Robinson 53:02
My question to you is, will $504,000 be enough personal savings to see me through another 20 to 25 years? Right? Does that generate enough income for me as I get older and potentially less healthy require part time care, full time living, care, assisted living, whatever it is, right?

Robinson 53:18
Because we often forget that when the older we get, typically the less healthy we get, the more help we need. All right. So at this point, what do I have if this is not enough for me? I can continue to live in my house on a very small fixed income, or I can sell the house and move in my kids’ basement.

Robinson 53:34
I can work in my retirement. In fact, next time you’re at Walmart, or Costco, or McDonald’s, have a look around and you’re going to see a lot of senior citizens working there. Right? They’re there because they have to be there, because they concentrated on paying down their mortgage not investing for their future.

Robinson 53:48
Or I want options. I can sign up for a reverse mortgage right and start selling the house back to the bank. And so none of those are particularly appealing to me. But what if at age 40, when I got the house, what if I implemented the Smith Manoeuvre right off the bat.

Robinson 54:04
And it made that home equity work for me, as soon as I generated each month, right taking advantage of compound growth and tax deductions for the next 25 years, all while not having to come out of pocket any more each month than in the previous scenario, right?

Robinson 54:17
I’m making that thousand dollar prepayment against the mortgage on on top of the regular mortgage payment but no change there. So with this manoeuvre instead of 16 years in the previous scenario, I’m eliminated my non deductible mortgage debt in 14 years.

Robinson 54:32
Plus, at the end of 25 years, instead of having a portfolio value of $504,000 improves by $792,000 to just under $1.3 million. So $404,000 that’s a 65 versus 1.3 million. And don’t forget this is net, right?

Robinson 54:53
So the actual portfolio value is $1.8 million, but I subtract the $500,000 deductible investment I have and I get 1.3 million in a clear title house. So that’s why, you know that taking on the monitoring, taking on some complexity.

Robinson 55:11
You know, that’s, that’s why for me it is it is worth it. In fact, if if I wanted to if I was doing the Smith Manoeuvre, I could even keep $900 of that $1,000 monthly prepayment in my pockets and only prepaid by $100.

Robinson 55:25
And I still come out ahead versus if I don’t do the Smith Manoeuvre at all. So now if we look at this, this increase in net worth is additionally hundred thousand dollars that the Smith Manoeuvre generated for me.

Robinson 55:38
If If I take 20 hours working on my Smith Manoeuvre on a monthly basis over this 25 years, that works out to $40,000 an hour that I’m getting paid in order to monitor my Smith Manoeuvre. So yeah, I’m willing to put that time in.

Chrissy 55:56
Yeah, and I would also go back again, to a hiring a professional. A Smith Manoeuvre qualified professional. Because if this is too much for you, and I find as, as much as I understand it, and I get the concepts I, I am afraid I’m going to make a mistake.

Chrissy 56:12
And I have peace of mind by hiring an expert, and working with someone who knows what to do. And that takes away all the complication, all of the hassles like he does everything for me. So I would argue if this is something you want to pursue, and that’s what’s holding you back then consider hiring a professional because even if you have to pay them fees, you’re still ahead because you would not have done the Smith Manoeuvre without them. Right?

Ryan 56:36
Right. Hmm. I’m assuming Ed Rempel is not going to charge you $2 million over the years. Right. So it speaks actually so much to this movement, because a lot of people are decluttering their life and finances is a huge, huge part of it that people just want the simple path to wealth like they really do.

Ryan 56:58
That’s why that book by JL Collins resonates so much with Canadians and it’s not even anything to do with Canadian tax systems, right? But we’ve all read it knowing that we love and that we just want the simplicity.

Ryan 57:07
And if you do want the simplicity yeah, just find a financial planner. Preferably one that’s certified although I think Ed Rempel’s probably like the Grandmaster sensei of the Smith Manoeuvre at this point.

Robinson 57:17
He’s been doing it for many, many years indeed.

Ryan 57:20
Right? Yeah, I remember reading his comments on Million Dollar Journey. Like, I think I read on like 2012 or 2013 or something like back when I first learned about all this and I was just like, Whoa, my head was exploding then.

Ryan 57:32
Right, you know? Yeah, it’s just you can make this simple. Yeah, you’re gonna have to pay for it. But it’s do Do you want the wealth or not do want? Yeah, it’s gonna be a little bit more complex, because now you have to go with an advisor.

Ryan 57:45
And yes, you’re gonna have to pay them and whatnot, but at the same time, you’re going to be building your wealth. And you’re going to be making it simpler on the way back because now that person that financial planner, that certified financial planner is going to be taking care of it for you that wonderful place to be Chrissy, you’re gonna stick with Ed the rest of your life.

Chrissy 58:04
Yeah.

Robinson 58:05
Many years ago, I someone got in touch with me out there in Alberta. So I went and met with them and, and sat for two hours or more and went through the whole process. And they ended up not coming on board as a client.

Robinson 58:18
But they did get a mortgage to the mortgage broker that I use so that they could implement the Smith Manoeuvre. And he was I got the impression he was Do It Yourself type of guy. So he wanted to learn how to do it.

Robinson 58:29
And so I spent the time and educated him and he didn’t come on as a client. But about two years later, he came back. He had he’d blown himself up. He tried the the investing component on his own. He didn’t have professional guidance.

Robinson 58:43
He took risky moves, and, and it didn’t work out for him. And he says, You know, I should have just, I just should have just signed you up. And yeah, so again, that’s why I’m certifying these financial professionals across Canada because they’re gonna be know what they’re doing.

Robinson 59:00
They’re going to be able to talk investors off the ledge, they’re going to be able to reason. You know, they’re psychiatrists as much as they are advisors, you know.

Chrissy 59:10
Yeah. And I think also the huge benefit is also the taxation of all this, that is what scared me the most that I would mess something up and CRA would come after me and I would have no defence because I made a mistake, and I’d be on the hook for who knows what kind of penalties. So that, for me is a huge value in hiring a professional.

Robinson 59:31
Well, exactly. And, you know, there’s there’s a lot of people out there who try to do everything on their own so that they save money in doing so.

Chrissy 59:39
And that’s me. I’m that person but with this, it’s not worth it.

Robinson 59:43
But if you if you are, are paying a financial professional accountant $400, $500 to do your taxes, while being assured that they’re going to be done correctly, and so that there’s no threat and you aren’t going to be able to enjoy $500, $708,000 dollars improvement in net worth.

Robinson 1:00:02
It is worth it, it is absolutely worth it to spend that $500 to have this person enable you to make an additional $600,000 improvement network.

Chrissy 1:00:12
Yeah. And also something we should mention is their fees are typically deductible as well correct?

Robinson 1:00:18
Yes

Chrissy 1:00:19
Yeah.

Ryan 1:00:20
Right, because it’s a taxable account. So when it’s not, when it’s a tax-sheltered account, there’s no way you can ever waive the MERs of your ETFs or the financial planner’s fees right. But in a taxable account, those are typically write offs and they can probably show you how to write those off.

Robinson 1:00:36
Now there’s, there’s a difference in like for an account, you can write off the accounting fees for the investment advisor, if they are working on a commission basis, then you cannot deduct the fees that go to the advisor, but if they’re fee for service you can, so that’s something to be aware of as well.

Ryan 1:00:52
That is a very important line to have on this podcast.

Chrissy 1:00:56
That actually further reduces the expense of hiring someone.

Robinson 1:01:01
Yes.

Chrissy 1:01:01
To the point where it basically is more than a wash because of the value they bring to you.

Robinson 1:01:06
Yes. You know, we’re dealing with we’re dealing with the CRA here. And we don’t want to take any chances. We don’t want to guess. We don’t want to submit our return and say I’m I’m 92% sure I got that all right.

Chrissy 1:01:20
No, no, thank you. No. Not for me. All right. So our next question is from a listener who, by the name of Geoffrey, and he says, we used our line of credit to put a down payment on a rental condo that rent pays for the mortgage insurance taxes, condo fees and the interest for the line of credit.

Chrissy 1:01:39
So he wants to know is it possible to pay down the principal on the line of credit without having to pay out of pocket. And he asked this because he says if I don’t pay down the principal using my own cash flow, then I can never use the HELOC again unless I sell the condo.

Robinson 1:01:53
Okay, sounds like he’s got a HELOC and not a readvancable mortgage. If I get a HELOC, if the bank says okay, based on the value of your house, your income, your credit score, your current mortgage balance will give you a HELOC for 50,000 bucks.

Robinson 1:02:09
Great, I pull that $50,000 out, I put it as a down payment on a rental property. But if I’m making interest-only payments, I can never borrow from that again. Right? There’s there’s a hard limit on that.

Robinson 1:02:20
And even if I make regular mortgage payments and pre payments against my mortgage, the limit on that HELOC does not increase. It’s a completely separate lending facility. It’s not integrated like a readvancable mortgage.

Robinson 1:02:31
So if he had a readvancable mortgage, and he pulled out $50,000 or so for a down payment on the rental condo, if he implemented the Smith Manoeuvre, then the balance the limit on that line of credit would increase on a monthly basis based on how much he’s paying down on his non-deductible mortgage side.

Robinson 1:02:48
And he could borrow that out and get it invested. So now we start with a balance of $40,000. Then we go to $41,000 $42,000 $43,000. But if he’s looking at if he’s looking and so he can continue to use that it’s all dependent on on what type of loans you have secured by the house. Readvancable? Or is it a traditional typical mortgage plus a HELOC with a hard stop on its limit from some other lender, maybe even the same lender.

Robinson 1:03:20
So now he can by implementing the Smith Manoeuvre, you can generate these tax deductions which lead to a tax refund, with which he can start reducing that initial 40,000 money that he borrowed. And that’s not new money out of his pocket. It’s simply money coming back from the government. It’s not like he has to take that from a salary or anything. So.

Chrissy 1:03:42
Okay, excellent answer.

Ryan 1:03:44
It just doesn’t sound like a Smith Manoeuvre problem. This sounds like a cash flow. A cash flow problem.

Robinson 1:03:48
Yeah.

Ryan 1:03:50
You need to charge more for rent buddy.

Robinson 1:03:52
Yeah. Correct. It’s not necessarily a Smith Manoeuvre question. And in any in any event, I mean, unless this guy has has overborrowed. Meaning he couldn’t afford to pull that 40 or 50,000 from his line of credit the first place why would he want to pay that down? Right?

Robinson 1:04:09
We’ve invested it 4.5% he’s paying on it if he’s at 30% marginal tax rate it only cost him 2.7%. So, but really you know, because this is to sit down with this is someone who needs to sit down with a professional say, Okay, here’s my situation, really disclose what they’re going through right now.

Ryan 1:04:29
Right on. All right, hope that helps, Geoffrey. Our next question is from Mr. Prairie FIRE. Fred, as we like to call him. What episode was he on Chrissy? Was it 12?

Chrissy 1:04:40
I don’t know, but we’ll put it we’ll put it in the show notes.

Ryan 1:04:44
I know. Isn’t that sad though, right. We have we’re getting to that point where we have so many episodes. It’s like uhhh… I remember you! Anyways. So he has the following question: I’ve been interested in the topic of the cash damming strategy.

Ryan 1:04:58
For some reason I can’t wrap my head around it, and how the cash flow works, the steps to make it work and the benefits of a rental property. I think he has two, and wanted to see what advantage if any, there is in using this strategy.

Robinson 1:05:13
Okay, so so I touched on the Cash Flow Dam earlier on the show. Let’s, let’s say I’ve got a house that I live in, I’ve got a mortgage, it’s non-deductible, I’ve got a readvancable mortgage, I’m implementing the Smith Manoeuvre.

Robinson 1:05:26
For every mortgage payment I make some of that reduces the principal on my mortgage, I can borrow that out, let’s call it $1,000 a month, and I can invest it. So each month I’m pulling out what I pay down and I’m getting invested.

Robinson 1:05:37
If I also own a rental property, which again is unincorporated, so it’s owned under my name. If my renters in there are paying me $2,000 a month, what I probably have been doing is taking that $2,000 and directly turning around and making the mortgage payment on that rental property.

Robinson 1:05:57
Plus, servicing, utilities, paying utilities and other maintenance. Whatever expenses I have for my business, which is that rental property. So instead of taking $2,000 in rental receipts and paying the rental expenses, in the same motion, I take that 2000 in rental revenues, I prepay my mortgage in the house that I live in.

Robinson 1:06:20
So on top of the thousand dollars that is reduced by my regular mortgage payment, I’m reducing another $2,000 of non deductible debt. Therefore, instead of $1,000, to reborrow, I have $3,000 to reborrow. $2,000 goes into my rental property bank account from where I then make the mortgage payment on that rental property and service the expenses on that business.

Robinson 1:06:42
The other thousand I can invest in securities. So this in this scenario, we’re cashflow neutral on the rental property two grand in two grand out. It doesn’t directly increase my investment portfolio because the $2,000 of that is going into the business to service the mortgage, etc.

Robinson 1:07:01
It does indirectly increase my investment portfolio because this in this increased pace of reborrowing leads to higher deductions which leads to higher tax refunds, which leads to more that I’m able to prepay against my mortgage each and every year, which means there’s more than I can invest that once a year in a lump sum in securities because I’m taking my refund, reborrowing what I paid down the mortgage to get it invested.

Robinson 1:07:26
So it doesn’t indirectly increase your investment portfolio. But if we’re in a cash flow positive position, which I hope everyone is, then if I’m getting $2,000 a month in rental revenues, and I only have $1,500 that I need to service the rental expenses then I pre pay my mortgage by $2,000.

Robinson 1:07:43
I reborrow that $2,000, $1,500 goes to service my rental expenses and $500 is available to invest in securities on top of that thousand dollars from my regular mortgage payments, so $1,500 dollars a month into securities. $1,500 dollars goes into servicing my rental property.

Robinson 1:08:00
Because I am borrowing to invest with a reasonable expectation of generating income, which is my rental revenue, I can deduct the interest on that borrowing. So it is extremely efficient in eliminating that non-deductible mortgage debt very quickly. And if you’re cashflow positive, especially, you’re able to incrementally get invested for growth for the future.

Chrissy 1:08:25
It’s beautiful. It’s really so simple. You just have to get your head wrapped around it, go through it a few times and you’ll get it. Basically you’re taking any income that you have and instead of directly investing it, filter it through the mortgage first so that it can become tax deductible.

Chrissy 1:08:45
So that you’re getting more of that tax-deductible borrowed money that you can use, like you said it there’s so many benefits from just slightly restructuring how you pay things. It just makes so much more sense.

Robinson 1:08:58
You know with this program you you’re simply restructuring your finances. You’re taking advantage, in most cases of what you already have. You already have increasing equity in your home. And you’re just putting it to work.

Robinson 1:09:11
You already have investments somewhere. You can sell and debt swap it. You already have rental revenues, you already have self-employed income, which you can also use for Cash Flow Dam if you got a home-based business. So in most cases, there’s things that you can do with what you already have to greatly improve your wealth over time.

Chrissy 1:09:33
That’s wonderful. So we have one last question from Money Mechanic. He wanted us to make sure we ask this because this is a common question that comes up a lot. Basically, what investments should we use?

Chrissy 1:09:45
For example, is using an asset allocation ETF okay? So a lot of people think you have to invest in something that earns dividends or greater income than the interest that you’re paying.

Robinson 1:09:56
Right. I I will never make specific Investment recommendations like invest in this stock or that ETF. I’m no longer an investment advisor. I’m not licenced in that capacity. So I always say, go speak to a Smith Manoeuvre Certified Professional Investment Advisor. Do it right the first time.

Robinson 1:10:16
But what I will say to this is it goes back to the Tax Act. And the fact that Revenue Canada says if we borrow to invest with the reasonable expectation of generating income, we can deduct the interest on that borrowing.

Robinson 1:10:30
So I can invest in something that historically hasn’t paid income dividends or interest income or something, but has the possibility that it can because even an equity mutual fund, which doesn’t pay dividends, has an allowance built into it that if we have a really good year, yeah, we might send out an extraordinary dividend.

Robinson 1:10:53
So there is an expectation that it can produce income. So I don’t have to buy investments that are do earn dividends, I don’t have to invest in something that sends me interest income, I don’t have to invest in, in something that that actually does generate income, it only has to have a reasonable expectation, a possibility that it could.

Robinson 1:11:16
Now that being said, if I’m a gold bug, I borrow each month and I buy gold bullion? Well, CRA is going to say I don’t think so. Because if I got a chunk of gold on my desk, I’m hoping 100% for capital appreciation, how is that going to generate income for me? Right.

Ryan 1:11:32
So you’ll need a chisel.

Robinson 1:11:37
To show off at parties, I don’t know. But but there’s no reasonable expectation for earning income. And the same goes for raw land. You know, that’s a bit more flexible there. But if I buy raw land, I hope to flip it one day is to a developer. I’m not expecting income from that in the meantime.

Robinson 1:11:53
So that’s why you need to talk to a professional and ask them does this ETF, does this stock, does this mutual fund, does this REIT, does does this qualify? Will I be able to deduct the income? And they’re gonna say yes or no. But there’s a surprising range of things you can invest in and still deduct the income, the source of the interest.

Chrissy 1:12:12
Perfect. Yeah, that’s what everyone needs to hear. And remember that there is there are so many things that you can invest in and, and it does help to have a professional so that you know, for sure that you’re not making mistake.

Robinson 1:12:24
Mm hmm. Yeah, absolutely.

Ryan 1:12:26
And I think this is a great segue then to cap off the show, because while we are members of the FIRE movement, and the vast majority of us DIY, our investment portfolios, and it’s never ever been easier than 2020 to do so.

Ryan 1:12:40
The Smith Manoeuvre does remain a strategy, a very lucrative, but it’s it’s simple on the surface, but complex under the hood, and there’s no shame in having to buy the financial planners, such as Chrissy did with Ed Rempel, right. There’s no shame in having to do that.

Ryan 1:12:56
And just as Robinson said, just a few moments ago do it right the first time. Don’t be the guy that shows up to two years later and says, Yeah, whoops. Yeah, you know, I burned 30 grand because I thought I knew I was doing but I cracked under the pressure and my wife was yelling at me and blah blah blah blah blah, right?

Ryan 1:13:14
I mean, there’s a whole story that can go to any of these situations though. Yeah, I want to thank you so much Robinson for coming on the podcast and for describing the case study and seeing my numbers right you know, I’m still sobbing on the inside.

Ryan 1:13:30
You know, I’ve I think I was more chipper at the beginning. But But I had I knew this was coming. I knew I didn’t know the exact number but I knew this was coming. I knew it was going to be a fantastic strategy for for the past for the present and probably for the foreseeable future unless something changes with the CRA. I’d highly recommend that if you can stomach the risk, do so. Chrissy?

Chrissy 1:13:57
Well, Robinson, if someone would like to pursue the Smith Manoeuvre and is interested in finding a professional, what are the best steps that they can take to do that?

Robinson 1:14:07
Well firstly read the book whether whether they buy it from Smithman.net, whether they go to the library to check it out whether they bought it from a friend, read the book, start to get educated. And if you’re interested in running your own scenarios, go ahead and get the Smithman Calculator.

Robinson 1:14:23
Or if you get in touch with us at info at Smithman.net we can put you in touch with a professional who has been doing putting clients into the strategy for years whether they be a mortgage broker, investment advisor account, etc.

Robinson 1:14:35
And so that’s very important. Get in touch with us if you’re looking for a professional don’t just ask on the street. And there’s also the Smith Manoeuvre Homeowner Course that I’m putting together. It’s not complete yet, but it goes into more depth than than the book does.

Robinson 1:14:51
So a number of different resources, but really just educate yourself. Get comfortable with it. Understand the difference. In between deductible and non-deductible debt. The wealthy do. They know it very clearly and that’s why they’re wealthy. So, so education is key. And yeah, read the book, however you get your hands on it.

Chrissy 1:15:12
Okay, that was excellent, great info. Thank you so much Robinson. We’re so happy that you could come on and speak to us today.

Robinson 1:15:19
You’re very welcome. My pleasure.

Transcribed by Otter.ai

Outro
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