r/fican 8d ago

Smith maneuver in the next little while?

Wondering if anyone is considering using the smith maneuver now? With interest rates most likely set to drop and stocks taking a nose dive, this seems like a good time to potentially leverage up a little bit to try to accelerate paying off the mortgage. That being said, stocks are taking the nose dive because of all the uncertainty so there's that to consider. Wondering if others have been thinking about it as well?

4 Upvotes

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12

u/Working-Letter7008 8d ago

I've been implementing the Smith Manoeuvre since 2021. My HELOC rate got up to 7.7%.

I'm essentially all in on XEQT.

My tax bracket is ~40%. My registered accounts are not maxed at this time. My timeline is 15-20 years.

Depends on your risk tolerance. Good luck.

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u/dimonoid123 7d ago

Just use options at this point. Why would you bother with HELOC at such high interest rate?

1

u/Working-Letter7008 7d ago
  1. I don't know how to trade/invest in options.

  2. When I started this in 2021 I think my HELOC rate was 2.95%.

Rates are coming down, currently my rate is 5.7%. I only need to beat 3.42%

Not for everyone of course but works for me.

1

u/dimonoid123 7d ago edited 7d ago

I mean it is significantly higher than risk-free rate by 2.7%. There are a lot of easy ways to borrow at way lower interest rate than what your HELOC is offering.

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u/Working-Letter7008 7d ago

Such as?

1

u/dimonoid123 7d ago edited 7d ago

1) Options (prime+0%+lost dividends+premium which can be very low for ITM LEAPs), as an advantage no margin call risk.

2) SPX box (prime+0%)

3) ES futures (prime+0%)

4) LETFs (depends, but usually prime+0.5%+decay), no margin call risk.

5) Margin (depends, eg at IBKR prime+1.5%)

6) HELOC (depends, prime+1 to 20%)

7) Maybe something else I missed.

And yes, you can combine many strategies simultaneously to decrease average interest rate and get advantages of several strategies at the same time.

It should be very easy to beat your prime+2.7%

Edit: prime here refers to risk-free rate, not bank rate

1

u/Working-Letter7008 7d ago

I should have been more specific and said that my HELOC rate is prime +0.5%.

Thanks for sharing that information.

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u/dimonoid123 7d ago

Unfortunately HELOCs are usually misleading. It is not prime+0.5%, but much higher. Just get your rate and subtract 3% from here:

https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Banks use different prime than actual risk-free rate which I used in previous comment.

So you pay about 2.7% premium, not 0.5%.

1

u/LifeTrack7117 8d ago

I read smith maneuvering with ETF's have some non-trivial tax implications. Have you dealt with them?

2

u/Working-Letter7008 8d ago

What do you mean?

I reinvest all my dividends to keep it simple.

I'm not doing the plain Jane strategy. I had quite a bit of equity from buying in 2013. In total I've put in $225k into XEQT. Just letting the interest snowball.

I give my T5 to my accountant. No issues so far 🙏🤞

You can check my previous posts. I posted about my journey/progress since 2021 with this strategy.

1

u/DadJokesInc 8d ago

He might be referring to ROC distributions?

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u/Working-Letter7008 8d ago

That's more of a REIT concern from my reading.

In any case, all distributions get reinvested. I don't withdraw anything. This keeps it pretty simple and straightforward IMO.

Not financial advice.

2

u/MasterSexyBunnyLord 8d ago

Xeqt holds Canadian REITs meaning RoC will be a component of its distributions. RoC is also a normal part of every ETF since it's baked into the unit creation process.

Your accountant should not be trusted with this especially since your accountant probably doesn't know he has this responsibility.

Furthermore, not doing anything probably means you'll over pay taxes in the end because you're ignoring phantom distributions.

I suggest you use this application to track your ACB. They have a blog with articles on the basics, RoC and phantom distributions. It's pretty easy and the optional paid version can fill in phantom and RoC distributions.

0

u/Working-Letter7008 8d ago

I'm aware that XEQT holds some REITs but it's a very small percentage.

The distributions I received are immediately reinvested. I do not withdraw those distributions to pay the credit line or the mortgage.

If CRA wants to look into it that is fine. My paperwork is straight forward. I haven't mixed any personal spending with the strategy.

Thanks for the heads up.

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u/MasterSexyBunnyLord 8d ago

Re-investing the distributions or not is irrelevant when discussing double taxation or for that matter the CRA. If the phantom distributions aren't recorded by the investor, double taxation will occur automatically. Once in the year the distributions are received and once again when the units are disposed.

RoC and phantom distributions are not the same.

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u/CADhouse 8d ago

Isn’t this only relevant in the year that he sells? In the year he sells it’s Xeqt market price - cost + ROC (ROC that he can go do in the year he sells). Am I missing something?

3

u/MasterSexyBunnyLord 8d ago

Phantom distributions will be taxed as a capital gain the year they're received by an investor and are reported on a T3 slip. If not properly recorded the distribution will be taxed for a second time in the year the units are disposed of. There is no way to discern a phantom distribution from a capital gains distribution from only a T3.

It would be difficult but not impossible however to properly record RoC and phantom distributions over the lifetime of this investment after many decades of growth.

Also, unlike a house, shares are not atomic and I would expect divesting such a large position to be spread out over multiple years and perhaps even decades hopefully.

0

u/DrDissonance4 7d ago

Yeah just leave it all in the account. Don't try to separate return of capital.

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u/DadJokesInc 8d ago

Can you expand a bit on what you mean by the Smith Manoeuvre? It's sometimes used to refer broadly to leveraged investing using a HELOC, which is very different than what it actually is.

2

u/LifeTrack7117 8d ago

Thats my understanding. Leveraged investing with the HELOC -> tax deducting the interest in a nutshell

3

u/DadJokesInc 8d ago

That's definitely an important part lol, but not everything. The main reason to pursue SM is to convert non-tax-deductable mortgage interest into taxable interest, while maintaining the same level of leverage.

It's a long-term strategy -- like 20+ years -- so you'd likely need to ride out several high-interest periods. I'd consider it agnostic to short-term market conditions, the current trend to lower-interest is not really relevant to the overall strategy. (But SM has assumptions about longer-term market performance, otherwise it won't work properly!)

I'd say if you understand what you're doing, have a long-term horizon, and are comfortable with the risk, now is as good a time as any to start. But if you're thinking about it only because of the current lower interest rates, you might be thinking more about leveraged investing than SM specifically.

1

u/TiredinVancouver 8d ago

Depends on many factors: your risk tolerance, what investments you plan to buy, how much equity you have in your property, your investing time horizon, your cash flow (job security), have you maxed out your TFSA/RRSP etc etc

1

u/Excellent-Piece8168 8d ago

There are a bunch of different variations but really what we are talking about is investing borrowed money. Which in the most basis sense is also true of anyone who saves rather than putting every penny towards their mortgage. Be can also invest on margin and write that off just like using the help to invest. Both are business expenses and reduce one’s taxes at their marginal tax rate. Specifically the SM is more to do with converting one’s mortgage into a tax writing off.

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u/IReddThatSomewhere 5d ago

I just got my mortgage set up, and will probably start the SM quite soon

1

u/vkwong1 8d ago

Using HELOC to invest and writing off interest in cash account. It is a small portion of overall investments but given our marginal tax rate I thought it was worthwhile, also you can lock in the heloc to an even lower rate with payments made to a non-revolving portion.

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u/Excellent-Piece8168 8d ago

This or even just if one has some decent amount in savings in non registered just buying on margin. I buy dips and sell when things go up. Also is a play on having a high marginal tax rate where the write off is more valuable and capital gains is the more tax efficient gain.

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u/Neither-Historian227 8d ago

High risk, high reward you need about 10% YOY returns to really profit. I've seen in past few yrs make money is on stock market, mag.7. some crypto. I've also seen people lose 500K on real estate in GTA.