TL;DR

It can only work when your cash flow, records, risk tolerance, and tax compliance are strong enough to handle volatility and tighter underwriting conditions.

What the Smith Manoeuvre is and why people consider it

At a high level, the strategy uses a readvanceable mortgage structure to re-borrow equity as principal is paid down, then deploy that borrowed capital into investments.

The attraction is potential long-term tax efficiency and portfolio growth. The tradeoff is leverage risk, record-keeping burden, and behavior risk during market drawdowns.

Leverage can magnify outcomes in both directions. Process quality matters more than theory.

Rules that matter before you start

  • CRA interest rules: line 22100 guidance notes most interest on borrowed money used to try to earn investment income may be deductible, while some uses are explicitly not deductible.
  • Use-of-funds clarity: you need clean tracing between borrowing and intended investment purpose.
  • HELOC risk controls: FCAC highlights HELOC flexibility and risk, including payment pressure if rates rise and risk of losing your home if debt is not serviced.
  • Underwriting constraints: OSFI guidance covers HELOC and debt-service controls for federally regulated lenders, including readvanceable-style structures under B-20 expectations.

Important

this guide is educational, not legal or tax advice. Strategy design and tax treatment should be confirmed with qualified professionals.

How a readvanceable structure works in practice

Component What happens Where people fail
Mortgage principal paydown Each payment increases available secured credit over time Assuming all lenders structure and monitor this the same way
HELOC re-borrowing New borrowing funds investment activity under a defined plan Mixing personal and investment-use cash flows
Interest and tax tracking Interest treatment depends on compliance-quality records Weak documentation and unclear tracing
Risk management Debt remains serviceable under rising rates and drawdowns No downside cash-flow scenario testing

Alternatives to the Smith Manoeuvre: 4 paths to compare first

Path Strength Limitation Best fit
Accelerated mortgage payoff Lower leverage and simpler execution Less portfolio exposure in early years Risk-sensitive households
Unlevered monthly investing High behavioral sustainability Slower capital deployment Consistency-focused investors
Hybrid approach Balances debt reduction and market exposure Requires disciplined allocation rules Moderate-risk planners
Smith Manoeuvre model Potential tax and compounding efficiency Highest complexity and drawdown stress Advanced investors with strong controls
Smith Manoeuvre strategy in Canada planning discussion for Canadian borrowers
The right answer is not universal. Strategy fit depends on behavior, liquidity, and downside tolerance.

Risk controls that separate durable plans from fragile ones

  1. Set a hard leverage ceiling before first draw.
  2. Predefine drawdown actions for market declines.
  3. Maintain a reserve runway for rate and income shocks.
  4. Separate investment-use and personal-use cash pathways.
  5. Run quarterly compliance and documentation reviews.
Smith Manoeuvre strategy in Canada documents and calculator in warm sunset light
If risk controls are unclear, leverage is premature.

Behavior traps that quietly damage outcomes

Mental model Common trap Pragmatic correction
Overconfidence bias Assuming strong past returns guarantee future debt safety Stress-test for prolonged weak markets
Anchoring bias Fixating on tax benefit estimates only Model after-tax, after-risk, after-fee outcomes
Status-quo bias Avoiding record-keeping upgrades after launch Use scheduled compliance reviews and audit logs

Best next step

If you are considering this strategy in the next 6 to 12 months, build your risk and documentation framework before taking the first leveraged draw.

Sources