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MORTGAGE TAX PLANNING

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The topic of tax planning, insofar as it applies to mortgage planning in general, is quite broad and beyond the scope of this website. I suggest that you discuss the options in your particular situation with a qualified professional. I am more than happy to offer my assistance in a preliminary discussion and if you wish, refer you to a suitably qualified professional.

Among the most common tax planning tips are:

1. Buying a property for cash, and then taking a mortgage if you want to use the money for investment purposes.

The mortgage interest then becomes tax deductible. If however, you take out the mortgage to purchase the property first, you cannot deduct the interest for tax purposes.

Depending on the mortgage structure, e.g. a traditional mortgage versus a secured line of credit, there are a number of variations on this theme and competent, knowledgeable, financial advice is a must.

2. The “Smith Manoeuvre”

The work of Frazer Smith from Victoria, British Columbia. The process is explained in his book: “Is Your Mortgage Tax Deductible.” It’s a Canadian wealth strategy to structure your mortgage so that it becomes tax deductible.

In the United States mortgage interest is tax deductible (although there are tax implications upon selling depending on the circumstances). The Smith Manoeuvre is designed to provide Canadians with a similar advantage.

If you borrow money for investment purposes, such as equities or property, you can deduct the annual interest paid on the loan from your income tax.

Now the twist in the tale, so to speak, according to Frazer Smith’s approach, is that you borrow against the equity in your home as a traditional mortgage or line of credit. You then invest these funds in income producing vehicles, using the tax return from the deduction to further pay down your mortgage.

You continue doing this until your mortgage is completely paid off leaving you with a considerable investment portfolio and, of course, an investment loan. Your mortgage has now become an investment loan which is tax deductible and depending on a variety of conditions, beyond the scope of this introduction, your new portfolio is now larger than your loan.

This information is presented here for information purposes only and, as with any such information you should consult a financial advisor before implementing such a plan. There are numerous articles written about The Smith Manoeuvre, both pro and con, and these can be easily found on the internet.

Please note that I do not have any association with Frazer Smith, and present this brief introduction as it may be of interest to my clients.

CONTINUE TO PAGE TWO (Important Update: Jan. 2009)

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