Is Your Mortgage Tax Deductible? 8 Things You Need to Know Before Implementing the Smith Manoeuvre

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Marjory Bertha Morton
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1 Is Your Mortgage Tax Deductible? 8 Things You Need to Know Before Implementing the Smith Manoeuvre

In this ebook, you ll learn What is the Smith Manoeuvre The secret Debt Formula of Wealthy Canadians Tax Deductible Good Debt vs Non-Deductible Bad Debt Leverage - Your Most Important Financial Tool

2 In this ebook, you ll learn What is the Smith Manoeuvre The secret Debt Formula of Wealthy Canadians Tax Deductible Good Debt vs Non-Deductible Bad Debt Leverage - Your Most Important Financial Tool Why Traditional Investment Advice Doesn t Work How to Self Fund Your Retirement Savings Using Your Mortgage Payment Convert Your Mortgage Into a Tax Deductible Investment Loan How to use your FREE tax refunds to pay off your mortgage faster & accelerate your retirement savings

What is the Smith Manoeuvre The Smith Manoeuvre is a legal, financial technique developed by Fraser Smith that enables a home owner to convert the interest on their principal residence mortgage to a

The strategy allows you to generate free tax returns, build additional wealth for your future and pay off your mortgage years ahead of schedule, with no additional cash inputs beyond your regular

3 What is the Smith Manoeuvre The Smith Manoeuvre is a legal, financial technique developed by Fraser Smith that enables a home owner to convert the interest on their principal residence mortgage to a tax deductible investment loan. The strategy allows you to generate free tax returns, build additional wealth for your future and pay off your mortgage years ahead of schedule, with no additional cash inputs beyond your regular mortgage payment. The Secret Debt Formula of Wealthy Canadians Most Wealthy Canadians have been applying this strategy for years. They aren t debt free, they simply take a better approach to debt and leverage it to their advantage. They use their personal cash to buy their homes, vehicles and to pay for everyday purchases. And they use debt to create wealth by acquiring investments, real estate and businesses. When they do this, the debt is often tax deductible and they become entitled to significant tax incentives. Tax Deductible Good Debt vs Non-Deductible Bad Debt Wealthy Canadians NEVER use debt for personal expenses. They understand that debt can be more effectively used as a tool for wealth building and creating additional cash flow in the form of income from the investments and tax savings. This is often referred to as good debt. On the other hand, most non wealthy Canadians use debt as a means to fund their lifestyle and use cash to fund their savings and investments. Vehicle loans, home mortgages and consumer debt for personal expenses such as clothes, food and other items are generally not tax deductible and therefore considered bad debt and hold us back financially. These loans increase our cost of living in the form of additional interest expenses and since the debt is non deductible, we receive absolutely no financial benefit from having it in place. This includes the mortgage on your principal residence. The government of Canada does not view your primary residence as an investment and therefore does not allow you to deduct the interest. Debt (or leverage) can be a powerful tool or a heavy burden. The choice is up to you

Leverage - Your Most Important Financial Tool Canadians are generally comfortable with leverage. We use it every time we get a mortgage to buy a home.

4 Leverage - Your Most Important Financial Tool Canadians are generally comfortable with leverage. We use it every time we get a mortgage to buy a home. When someone puts 5% down and gets a 95% mortgage, they are leveraging 20 to 1 to buy a home. This homeownership strategy is commonly accepted and works for the following reasons. First we gradually reduce the debt by making mortgage payments, and second, the value of the home increases over time. In fact, homeownership would be practically impossible without this powerful tool called leverage. Think about how long it would take you to buy your first home if you had to save 100% of the value of the property! So why are most Canadians comfortable borrowing up to their eye balls to get into a home, yet when it comes to building wealth, we use our personal savings (if we have any) to fund our retirement plans? It s no wonder so many of us are coming up a little short heading into the golden years.

Why Traditional Investment Advice Doesn t Work Most of us would like to get rid of our mortgage as soon as possible and own lots of investments to ensure a financially successful retirement.

5 Why Traditional Investment Advice Doesn t Work Most of us would like to get rid of our mortgage as soon as possible and own lots of investments to ensure a financially successful retirement. The problem is that we tend to attack these two goals sequentially, and most financial planners encourage us to do so - pay off your mortgage and then start saving for retirement. The challenge with this approach is that it can take years to deal with the mortgage, which costs you years of lost compounding time in your investment portfolio. And with the increasing cost of living & home ownership, the little amount we do save has dropped precipitously over the last decade. In fact, Canadian savings rates have fallen to unprecedented levels and we are now considered to be a nation of spenders, not savers. Simply put, Canadians are spending more than ever at the expense of their savings. Roughly 50% of our disposable earnings goes toward taxes in one form or another, income tax, gas tax, goods and services tax, etc As much as 40% goes toward shelter cost, and the remaining 10% to pay for food, clothing and other consumer goods. With less than 10% of our disposable income available to pay for everyday life, it s no wonder Canadians are saving less and taking on increasing levels of personal debt. Now, what if there was a way to maintain your lifestyle AND start putting money away for retirement sooner and enjoy some extra tax refunds along the way? The Smith Manoeuvre has you getting rid of your old mortgage very quickly while simultaneously starting your lifelong investment program. Wealth creation takes time and the sooner you get to work putting money aside for the future, the sooner the power of compounding can work in your favour. In addition, because the strategy has you converting bad nondeductible debt to good tax-deductible debt, you begin generating free money from the taxman as you recover your hard earned tax dollars, which can be re-invested into your portfolio to give you even more fuel your retirement savings.

How to Self-Fund Your Retirement Savings with Your Mortgage Payment Too much month left over at the end of your cash? Don t want to sacrifice your triple macchiatos in favour of a comfortable future?

6 How to Self-Fund Your Retirement Savings with Your Mortgage Payment Too much month left over at the end of your cash? Don t want to sacrifice your triple macchiatos in favour of a comfortable future? What if you could maintain your lifestyle AND put money away each month, without affecting your cash flow? Now you re paying attention If you are reading this, there s a good chance you are carrying a pretty significant mortgage on your principal residence. Home prices have doubled and even tripled in some areas over the last decade and the only way to get into a home these days is to quite literally sign your life away. As a result, as much as 80% of your personal after-tax cash flow goes toward making your mortgage payments. The good news is that at today s low interest rates, nearly half of every payment you make goes to principal. If you do the math, that s as much as 40% of your personal after-tax cash flow that s being used to pay down your mortgage. What s not so great about this is that money will likely sit there as dead equity for the next years. And since your mortgage payment takes up most of your personal income, you really don t have enough money left over at the end of each month to invest. Here s the path most Canadian s follow Save for a down payment, get a mortgage, buy their first home, build some equity by making mortgage payments, maybe upgrade once or twice along the way (better lifestyle) and take on larger amounts of non-deductible debt, work hard through their higher income earning years to pay off that debt, then start saving aggressively for retirement. The problem with this approach is it doesn t give your money enough time to work for you. By waiting until your late thirties, forties (or early fifties) to seriously start putting money away, you waste valuable years where your investments can compound and grow before you need to start using it to pay for your retirement lifestyle. Wouldn t it be nice to get that money working for you, so you can start building wealth sooner instead of waiting until your mortgage is paid off to start saving for retirement? With the right mindset (and the right mortgage structure) you can pay off your debt and start building wealth for your retirement at the same time. By borrowing back and investing the principal portion of your payment each month, you can get a jump on your retirement savings and begin to convert your mortgage into a tax deductible investment loan.

7 Convert Your Mortgage Into a Tax Deductible Investment Loan The Smith Manoeuvre works by converting the bad non-deductible debt you already have, such as your home mortgage, into a tax deductible gooddebt investment loan. The first step is to setup a re-advanceable home equity line of credit (HELOC) structure on your home. This will allow you to draw your principal back out each month via the line of credit portion of the structure. We call this the investment line of credit. Some lenders will let you attach the line of credit component to your existing mortgage, but in most cases you will need to replace your existing mortgage with this new structure. It is vitally important that the new HELOC structure is setup so that you can draw the principal portion of your mortgage payment immediately after making the payment. Some lender products do not allow you to do this and you can waste valuable time, money and energy setting up the wrong structure if you are not careful. Always be sure to consult with a licensed mortgage professional that understands the Smith Manoeuvre and can properly guide you on the correct setup procedure. When you setup your new HELOC structure, you will partition the remaining balance of your non-deductible mortgage and keep this portion separate from the investment line of credit component. Once your structure is in place, you will continue to make your regular mortgage payment each month and begin drawing the principal portion from your payment to grow your investment portfolio. Over time, you will gradually convert your remaining mortgage debt into a tax deductible investment loan and claim the interest expense as a tax deduction for years to come. Important - You must NEVER use the investment line of credit for personal use. In order to be eligible to deduct the interest from this portion, you must be able to prove that 100% of the funds were used to acquire eligible investments. It is highly recommended that you seek professional investment advice from a licensed advisor in order to ensure you are selecting appropriate investments that both suit your personal risk profile and meet CRA guidelines for interest deductibility. Now that you are building your savings by re-investing the principal from your regular mortgage payment and generating FREE tax refunds every year, it s time to accelerate your debt conversion and grow your savings even faster.

How to use your FREE tax refunds to pay off your mortgage faster & accelerate your retirement savings One of the key benefits of the Smith Manoeuvre is that over time, you will gradually convert the

Along the way, you can claim the interest expense on your investment loan against your income and enjoy significant tax refunds, year after year. But what should you do with the refunds?

8 How to use your FREE tax refunds to pay off your mortgage faster & accelerate your retirement savings One of the key benefits of the Smith Manoeuvre is that over time, you will gradually convert the remaining balance of your non deductible bad-debt mortgage into a tax deductible good-debt investment loan. Along the way, you can claim the interest expense on your investment loan against your income and enjoy significant tax refunds, year after year. But what should you do with the refunds? Well, you have choices here. Because the refunds come to you as after-tax dollars, you can choose to spend this FREE money however you want. Fix up the house, buy some new toys or take that well deserved vacation. Doesn t matter, the money is yours. But if you want to be smart about it, you can take the tax refunds and make an extra payment on your mortgage and re-borrow that principal to further accelerate your savings and convert your mortgage even faster! By using your refunds to accelerate your debt conversion and increase your savings, you will dramatically improve the results of your program

The Home Equity Acceleration Plan (H.E.A.P. )

The Home Equity Acceleration Plan (H.E.A.P. ) By: Roccy DeFrancesco, JD, CWPP, CAPP, CMP Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection Society 1 Gathering new clients in the