For several years, the Smith Manoeuvre has been used to convert non-deductible mortgage debt to deductible investment debt. Lots of twists on this strategy have evolved and one of the more successful ones comes from a company called TDMP.com.
We spoke with Sandy Aitken, President of TDMP, about how TDMP works and what drives his success in this market.
Here is that interview:
I’ve reviewed the TDMP product before and as you mentioned in the interview, most of the funds that they implement contain a large portion of ROC. I don’t understand the advantage of this as all you end up with is a non tax deductible investment loan after paying off your mortgage. Basically back to square one.
I would say TDMP is perfect for growing our business as it basically takes care of the client from Start to Finish, I would assume that $39/mth would be a write off.
I do like the strategy and I’m all for convenience but a $2700 startup fee?? Yikes! I’d rather take that money and pay down my mortgage with it.
After the stock market crumbled 50% last year, I wonder if the Smith Manoeuvre is as popular as it once was. The only thing worse than losing 1/2 your money in the stock market is owing that lost money to your bank.
Some of us provide this service to our clients for free. I could never understand how TDMP and Sandy gets away with these fees, but I know the kind of volumes his company is doing and it seems there are a great many individuals who find value in paying to set this up.
Rob, when you refer clients to TDMP do you receive a finder fee back?
Hi John: As noted in the interview, CMT is not affiliated with TDMP. I’m not sure how they operate with respect to referrals. Sorry.
Hi FT (MDJ): Funny enough, I asked TDMP about ROC funds because of your review. They seem to feel they have a way around the deductibility erosion problem but I’m not privy to their methods.
Cheers,
Rob
TDMP – not as easy/advantageous as it sounds. Lots of work/discipline required from client, basically its an “all or nothing” type of structure…I wouldn’t recommend it.
Rob, do you endorse people using this program? If not, why do a story on it, I realize you may want to show options, but to highlight something that is controversial at best might not be worth it.
Hi Hugh,
CMT is a news site first and foremost. The topics discussed here are chosen based on general interest. As stated in the interview, we don’t endorse TDMP. In fact, we don’t endorse many of the companies we write about.
For the record, I haven’t heard of any “controversy” surrounding them, apart from the cost perhaps. They’re a fast growing company, they’ve been getting widespread exposure, and they have a unique business model. That makes them newsworthy and that was the reason for the story.
Cheers,
Rob
I don’t think Rob/CMN is endorsing TDMP or the strategy; rather, just highlighting a viable mortgage strategy that many, many Canadians are embracing.
Regarding the erosion of deductability, once the paid down principle has been readvanced to repurchase the investment, the client has effectively created a very small investment loan. In the end there is no erosion, as the mutual funds withdrawn under ROC are continuously being repurchased using borrowed $$$.
Hi Rob,
The big problem is the ROC (return of capital) funds. If one calls any of the big fund companies like Dynamic or Fidelity they will tell you the distributions have been cut for many of these funds!
This means a fund that one borrowed $100,000 ROC which distributed say $670 in 2008 is now distributing at least $200 less. You don’t have to take my word for it just call the fund companies.
We all know 2008 was a blood bath in the stock market and things got worse in March of 2009. The market is up so far this year but the distributions will not recover for those who were in the market before 2008. Since many ideas are based on a 8% distribution this problem is only get worse over time.
There is a lot more I can add here but the key is this is the ROC I think has more risk than is needed.
Only people who can handle the downside of the markets, have a good job and have lots of insurance if they get sick or disabled should consider this.
Brian
Hi Brian,
Thanks for the note and the added info on ROC funds. We usually try to steer away from commenting on the investment side of things because that’s not our playground. People interested in leveraged investing are best served by consulting financial advisors on this stuff. I’d recommend choosing someone who’s licensed, has many years of experience, has no unresolved regulatory or BBB complaints, and knows a lot about the Smith Manoeuvre (regardless of whether they recommend it or not). That said, your points about ROCs are quite interesting nonetheless!
Thanks/Cheers,
Rob
Rob, good job explaining the complex, Smith Manoeuvre and variations thereof. I come from the conservative banker side of the business and my advice always to all consumers is never, ever invest in a product you don’t understand and especially one that risks your families home or a CRA audit/assessment.
Ivory Tower,
The part about risk makes sense, but the CRA audit/assessement? I’d go to CRA’s web site and go to IT533 section 33, or talk to your CA. CRA can do an audit anytime they want, if you work within the tax act you will be ok.
Brian
Brian is absolutely right. There are no tax problems with borrowing to invest as long as you follow CRA guidelines.
I don’t dispute what Brain is saying. “At this time”, there are no tax issues with Smith Manoeuvre or variations thereof and it is perfectly legal. However, it is still regularly challenged by the CRA all the way up to the Supreme Court.
My point is simple. The Govt revenue arm won’t like it when too many Canadian’s take up this tax strategy and it starts to impact their revenue. Think, Income Trusts and how the government pulled the rug out from under it by simply amending the tax laws.
As well, the more complex your tax circumstances, the more you invite scrutiny from the CRA. However legal your circumstances, its still a hassle most can do without!
Ivory Tower,
The reason borrowing to invest will remain a tax deduction for a long time is tax act would have to change. For example rentals would no longer be tax-deductible, when do think that is going to change?
CRA audits thousands of people every year. Go to CRA’s web site
http://www.cra-arc.gc.ca/reviews/
CRA can at anytime review your tax returns. It’s like the police checking seat belts etc. Yes it may be a hassle but short of earning no income (which you should still file to CRA) I don’t what else to tell you.
Hi Brian,
I’ve been following this site for quite some time now and have read many of your posts – you clearly have a great financial background and express yourself well.
Borrowing to invest can and should remain a tax deduction – I can’t imagine the CRA will ever take issue with that. To me, the risk is specific to leveraging a principle residence which already has the tax benefit of a capital gains exemption. It seems that a reasonable case can be made than an individual should not be able to benefit from both the Smith Manoeuvre as well as the capital gains exemption.
For a similiar reason to not being able to contribute to a TFSA through the the Smith Manouevre, I would think a case could be that either:
a) interest paid is not tax deductible
b) capital gains are incurred on the principle residence.
I understand that this is not currently the case, but seems a reasonable direction for the CRA to go. I’d be interested to hear Brian’s and others thoughts on this.
Jason
Hi Jason,
I am not too sure I follow you about the TFSA and the SM.
The TFSA (which I think is great) is the same as an RRSP with out the tax deduction today, only to pay it later. Which by the way is similar to a ROTH IRA (in the US)so the idea is not really new just to some who write for papers sold daily.
For the taxation of a principal residence in a nutshell there is no capital gains taxes. Go to CRA’s web site and look up IT-120R6.
Which way will CRA go? It’s the government of the day which likes tax credits, which many people do not take advantage of but looks great.
An example is the Disability Tax Credit (DTC) which as many are missing. Walking, dressing, feeding, learning diabilities,hearing, etc. The fact you can redo your taxes up to ten years is a great example.
Don’t pay income tax? No problem.
In cases where someone with a disability pays little or no income tax it is often still possible that important financial benefits (including refunds) can be transferred to a family member who pays income tax – even if you do not live with them. How many people know that?
A bit long I know.
Brian
Ivory Tower,
I was wondering if you have taken any tax courses or know any CA’s that you can talk to about interest tax deductiblity. Since your comments back in 2009.
Here is link for you. http://www.jamiegolombek.com/printfriendly.php?article_id=802
Cash distributions
In a technical interpretation (2007-0230431E5) dated August 23, 2007, the CRA was specifically asked whether interest on money borrowed to invest in mutual fund trust units continue to be deductible following an income distribution paid to the investor in cash.
The CRA responded, not surprisingly, that since the current use of the borrowed money remains unchanged as none of the units originally acquired with the borrowed funds was disposed of, interest on the borrowed money would continue to be tax deductible.