Dave Debeau [00:00:09] Hey, can everyone Dave Debeau here with another episode of the Property Profit Real Estate podcast today, zooming in from sunny, chilly, snowy Calgary, Alberta UT. How are you doing today?
Keith Uthe [00:00:22] Keith, I'm fantastic. Thank you. It's a pleasure. You getting this opportunity to do this podcast with you?
Dave Debeau [00:00:29] Yeah, well, this is exciting because Keith is a real estate weirdo like the rest of us. He's an active real estate investor. He focuses on secondary suites, which is very cool. But here's the really extra cool thing that we're going to be really focusing on here with today with Keith is he's also a mortgage broker and he really knows a heck of a lot about this mysterious Smith maneuver, which some of us have heard about. Some of us have even learned at points in the past, but some of us don't remember all the details off the top of our head anymore. So, Keith, great to have you here. And why don't you why don't you just let's just dove into the whole guts of this. Give us the big picture. Thirty thousand foot perspective, what is the Smith maneuver? Why should we care? How does this affect us personally? How can we use this with our investor partners, all that kind of good stuff? So let's just jump right in.
Keith Uthe [00:01:36] Yeah. So the number one reason that the Smith maneuver was created kind of originally was because of the challenges that Canadians face. And so the idea was that giving people the chance to master their financial their mortgages for financial freedom. And so with these high taxes, high cost of living, high cost of mortgages and inadequate pensions. And so the idea went, Frazier Smith rest his soul, created this back. And he started back in 87 and his first book came out in 2002. You know, that was the objective behind this is how can you take a mortgage in Canada and turn it into a tax deductible, good debt rather than what it is for most people, which is a non tax deductible, bad debt. And that's the that's the thirty thousand foot view of what the intention is behind this.
Dave Debeau [00:02:35] All right. So it's all about how we can turn our normal personal mortgage for for a lot of people, how to turn that from just being, you know, like you say, bad debt into good debt, I guess, off the top of your head. Why is this kind of a uniquely Canadian thing? What do the Americans not have the same challenge or is it different for them?
Keith Uthe [00:03:01] And it's different. It is different for them. Yeah. So Merkins have their tax system is set up differently and they do have some. There's some you know, I'm not specific in it, but my understanding is they do have some write offs they can get for mortgage interest on a mortgage when they own a home in the US and Canada, which we can't. In Canada, you have to you pay your mortgage and what you pay is what you pay to pay it with after tax dollars. And what it costs is what it costs you. And for the majority of Canadians, they don't own their own home. There is no write off for that. That interest on that mortgage before. So it's just although it's paying down the mortgage, the interest is just bad debt. You can't do that.
Dave Debeau [00:03:46] All right. So the Smith maneuver allows us to change that in a legal fashion, which is always important because nobody wants to go to jail. And, Keith, before we we pressed record. You're mentioning this kind of kind of difficult to explain this in depth on a short interview on everybody's situation is going to be slightly different. But just to give people the gist of big, broad strokes,
Keith Uthe [00:04:14] how does it work? Well, the big broad stroke of how it works from a CIA perspective is any debt used to earn income. The interest on that debt is tax deductible. That's the that's the simplistic definition of what the CIA has. And that's what this falls was and were the importance of having a professional that knows and understands. This comes from being able to make sure that if you're going to use this net maneuver and put it in play, that you are not doing anything that is going to invalidate the contributions to your through the Smith maneuver, to your investing, that you're not doing anything to invalidate any of that interest by using it for personal expenses. Because that's the number one way that you can mess things up, is all of a sudden you're going to see different oversight happen. You've been doing it. And then all of a sudden you go, oh, I want to buy a 20 thousand dollar car for my kid, or I'll just use my home line of credit that I had set up and have been using for my Smith maneuver. You don't do that. That's a no no, because now you're blending you're giving the CIA an opportunity to say, oh, well, I don't value that muddied the waters and we're not going to allow you to deduct that debt.
Dave Debeau [00:05:43] So. All right. So sort of big picture. What we're looking at is let's say I'm I'm interested in doing this. I've got my primary residence. I've got a anormal mortgage on my residence. If I'm reading between the lines and if my very, very fuzzy memory serves me. Basically what we're doing is we're kind of going in and some way or another, we're perhaps we're refinancing the the property or perhaps we're setting up a home equity line of credit and we're using that. Line of credit instead of to go buy the kid a car. We're using that money to invest and because we're doing that, we're using that. However that works, whether it's through, I don't know if we're able to do that through self directed RRSP or or what we're what the rules and regulations are about what we're allowed to invest that money in. But we're using that to actively invest versus just spending it. And that's why the CIA is allowing us to deduct those interest payments because we're using that to try and make money.
Keith Uthe [00:06:54] Yeah, so so there's a couple of key things. One is to fully do this, you need to use a advanceable mortgage product. That's number one
Dave Debeau [00:07:04] is probably for most of us. If we want to do this, we're going to have to refinance remortgage and refinance our house, get out of whatever product we're in right now, get into something specific that allows us, you said, to advance. What what does that mean?
Keith Uthe [00:07:19] Yeah, so we advanceable mortgage is one whereby as you pay down the principal, you build up the availability through a line of credit. Well, as opposed to some a lot of there's not many not all institutions offer it, and because some institutions offer a fixed mortgage and a line of credit, but that line of credit has a fixed amount and it can't increase as you pay. It won't increase as you pay down your mortgage or you have to go and reapply to try and do that. And it makes it clunky and just doesn't work in the right way for doing this. So you need to have what's known as a responsible mortgage product to be able to get that, to get that process going to be able to fully take advantage of it. So that's number one. And number two, any of the phone number two, you have to have at least 20 percent equity in your home to be able to get that type of mortgage. That's number two.
Dave Debeau [00:08:17] So, for example, just to kind of simplify, let's say we got a four hundred thousand dollar house. We've got to have at least, let's say one hundred thousand or so eighty two hundred thousand of equity in that house.
Keith Uthe [00:08:29] Yeah, you'd have to have eighty thousand in equity to be able to get this set up with that that type of refinancing a mortgage. And then number three is when you do use funds, the funds that you would take from your pay down of your mortgage to invest have to be invested into non registered investments.
Dave Debeau [00:08:50] So what does that mean?
Keith Uthe [00:08:51] That means so you can't double dip with the credit. So you already get a tax advantage when you invest in RRSP. So you can't use this money to invest in NASSP because the tax advantage of the tax deduction you already get when you do that.
Dave Debeau [00:09:07] All right. So we're not allowed to put this money into our self directed RRSP into.
Keith Uthe [00:09:13] Yeah, you can put it into something. You can put into a registered fund where we already are getting a tax deduction or a tax advantage from the Sciarra for that same thing for TFSA, you already get a tax, it's registered and you get a tax advantage from it so that you get to declare so that you can't use that. So it works best for things such as mutual funds, stocks, private equities, investing in real estate lending money and as mortgages to to other investors genisis.
Dave Debeau [00:09:52] So we could you we can access money this money and use it for our own real estate deals if we so choose. Yes.
Keith Uthe [00:09:59] As long as the intent with that real is when you do that, that the intent is to earn income.
Dave Debeau [00:10:05] Right. We're investing in revenue property. So.
Keith Uthe [00:10:07] Yeah, yeah. So if the intent of if I was to give you money Dave for that, for an investment property and my only return was going to be on the capital of that property, the capital value increase of that property, that would not be an eligible because the eligible because that's a capital gain, not an income. So that's that's really important that if you're using it to invest in real estate with someone else, that there is an income component to what your return is from that investment.
Dave Debeau [00:10:44] OK, well, let's let's back out because it's a little Sarabia right now, Keith. So, you know, I think you've been helping people do this for a while. Give us an example. You know, just an easy example. Of one of your clients that's actually doing this, how they're benefiting from it?
Keith Uthe [00:11:02] You know what I'm going to give you myself. So I've I've been doing this all my life. And I started using this maneuver 15 years ago, and we fully converted about 13 years ago. And what I mean by fully converted is 100 percent of our primary residence mortgage was converted to being deductible, the interest being deductible through the Smith. And so for us, how that started was we had Refat, we had refinanced our home and had it as a advanceable product, and at that time we had three advanceable. We had put a line of credit as part of the advanceable because we were planning to invest, but we didn't know how exactly that was going to let. And and when we took the we took the funds that we got from our refinance, put them put it into our savings account or Smith Manouver Savings Account. And then we found a property to purchase, we took the money from our savings account and purchased the property, and that that was the real estate investment way that we did that large chunk of funds. And when we did that, and just by taking the funds, actually, when we took the funds from the from the refinance and put it in the high interest manoeuver account. That in and of itself was an intent to earn income, because that's what that paying that high interest account does
Dave Debeau [00:12:36] the whopping one percent or whatever we'd be making.
Keith Uthe [00:12:39] And it's and it's not about the rate of return necessarily. Some people say, well, why would you put it in as high as a savings account and earn less than you're paying on interest? Well, when you do a full calculation and calculator the advantage of converting your mortgage and being able to then deduct the interest on your mortgage against your income, that's where that's where the rubber hits the road and you start to see those big gains. So we did that. That was through twenty three thousand six in 2007 that we did that with on a few different properties. And suddenly, you know, by the end of 2007, we were fully we had fully converted our whole mortgage.
Dave Debeau [00:13:20] OK, go again, kind of cerebral. What does this actually mean in tax savings, like it sounds like a pain in the ass, to be perfectly honest with you. So it
Keith Uthe [00:13:32] is. Well, it it's it's what it does take diligence and it does take the responsibility. But the tax savings is huge. So we take up what
Dave Debeau [00:13:42] is what is what are the tax savings.
Keith Uthe [00:13:44] So if you take a three hundred and fifty thousand dollar mortgage, you're paying somewhere in the neighborhood of about fifteen thousand dollars a year in interest, OK? So if you are one hundred percent converted, that means you get to take that fifteen thousand dollars as a one hundred percent tax deduction on your income. So if you're paying if your income is eighty thousand dollars a year and you're paying tax on that eighty thousand dollars at your nominal tax rate, let's say it's 30 percent. You're you're paying twenty four thousand dollars a year in tax. Well, now you get fifteen thousand dollars and you lower your income to sixty five because of the deduction. But now that 30 percent, 30 percent of that 15 thousand, now you save three thousand dollars in in tax and you get a refund back from the government for that three thousand dollars, which you can turn around and pay it down on your mortgage if you like, pay it down on your mortgage, pull it out and invest whatever you choose. So it also can help to accelerate pay down on your mortgage as well, if that's your intent and you don't have to have extra money to make this work. Because you're paying down your mortgage anyways, you don't have to come up with extra money to make investments, you if you're not going to make some investments but say you're going to make small investments into Jicks or mutual funds or stocks or chip stocks or something, that's a little lower risk. That still is going to give you a reasonable rate of return of. It's it's just that and you can set up auto, you can set up stuff through, you know, depending on who you providers are for the different things you can set up so that you have automatic transfers of those funds so that it's not so on our side as well.
Dave Debeau [00:15:39] Yeah, it's just the initial set up can be a little bit of a pain, but
Keith Uthe [00:15:41] in the initial setup, can that take some guidance? But that's we're working with the Smith maneuver, certified professional as a mortgage broker as that, as an accountant, as a financial planner. Those are important things because you want everybody that understands what the objective is and all works together in the same sandbox to achieve the result for the client.
Dave Debeau [00:16:06] That was good, Keith. Well, I think we kind of got the the big picture and a quick summary, who does the Smith maneuver work best for?
Keith Uthe [00:16:16] It works. You know what? It can work for anyone that has 20 percent equity in their home, quite honestly. And they want and if they're if they're currently trying to do something to build a retirement fund for their future. This is a way for them to be able to help accelerate that.
Dave Debeau [00:16:34] All right, sounds good, Keith. Time flies when you're having fun, people find out more more about Keith Beauty and the Smith maneuver. What should they do?
Keith Uthe [00:16:43] They can contact me. I have my email. Is Keith that in which mortgage gutsier Aikin for me at four zero three six one four eight eight four three. And they can also you can also look for information for me on Facebook, Google and Instagram, LinkedIn, while they're all you know, I'm on all those platforms and my website is at demystifying mortgages dot com.
Dave Debeau [00:17:10] Awesome. Thanks a lot, Keith.
Keith Uthe [00:17:12] A pleasure being here today.
Dave Debeau [00:17:14] All right. All right. Take care. We'll see you on the next episode. Absolutely. Well, hey there. Thanks for tuning into the Property Profits podcast. If you like this episode, that's great. Please go ahead and subscribe on iTunes. Give us a good review. That would be awesome. I appreciate that. And if you're looking to attract investors and raise capital for your deals, that may invite you to get a complimentary copy of my newest book right back there. There it is, the money partner formula. You got a PDF version at Investor Attraction book, dot com again, investor attraction book, dot com ticker.