Smith Manoeuvre Calculator: how it works in 2026, with a worked example

Questions people ask

What is the Smith Manoeuvre?

A way to turn a non-deductible mortgage into deductible investment debt. With a readvanceable mortgage, each principal payment frees room on a linked line of credit; you re-borrow that room and invest it in income-producing assets. Interest on the line of credit is deductible under paragraph 20(1)(c) of the Income Tax Act because the borrowed money earns income, and the refund can prepay the mortgage, which frees more room. The strategy, the tracing rules and the court cases are covered in our guide, <a href="/guides/smith-manoeuvre">The Smith Manoeuvre: how mortgage interest becomes tax-deductible</a>.

Is mortgage interest ever deductible in Canada?

Not on your own home. Interest is deductible only when the borrowed money is used to earn income from a business or property (ITA 20(1)(c)). The Smith Manoeuvre does not make the original mortgage deductible; it replaces it, dollar by dollar, with a separate loan whose use is investing.

How much tax does the deduction save?

The interest reduces taxable income, so the saving is roughly your marginal rate times the interest: at $120,000 in Ontario, $12,000 of line-of-credit interest saves about $4,345 in 2026. The calculator runs the deduction through the federal and provincial brackets rather than a flat rate, which matters when the deduction crosses a bracket edge.

What return do I need for it to work?

More than the after-tax cost of the line of credit, adjusted for the tax you will eventually pay on the investments. At a 5% line rate and a 40% marginal rate the borrowing costs about 3% after tax, and only half of a capital gain is taxable, so the break-even return is usually between 3% and 4.5%. The calculator reports the exact figure for your inputs.

Can I invest the borrowed money in my TFSA or RRSP?

You can, but the interest is not deductible: section 18(11) denies interest on money borrowed to contribute to an RRSP, and TFSA and FHSA income is exempt, so borrowing to earn it fails the income-earning test. The manoeuvre only works in a non-registered account.

What is direct-use tracing and why does it matter?

The CRA looks at what each borrowed dollar was actually used for, not what the loan is called. Draw on the investment line for a car or a vacation and that part of the interest stops being deductible; in a mixed account every principal repayment reduces the eligible and ineligible parts pro rata. Keep the investment line separate and use it for nothing else.

Did the courts approve the Smith Manoeuvre?

The Supreme Court respected a plain re-borrowing in Singleton (2001), where refinancing so that the new debt was traced to an investment use was upheld. In Lipson (2009) it applied the general anti-avoidance rule to a version that also used the spousal attribution rules to shift the deduction to the higher-income spouse. The simple manoeuvre is accepted; layering other rules on top is where the risk lies.

What are the main risks?

Leverage: the investments can fall while the debt stays. Rates: the line of credit floats with prime, and every extra point on a $300,000 line is $3,000 a year. Cash flow: the interest is paid from your pocket every month. Tax: a fund that pays no income, a personal draw on the line, or a spent return-of-capital distribution can all reduce deductibility. Quebec also limits investment-expense deductions to investment income in the year.