After reading so many posts on how the Smith Manoeuvre works, maybe it’s time to show what happens when Smith Manoeuvre doesn’t work as planned. Are there any bad sides to the Smith Manoeuvre? Hell yeah! This complex technique is definitely not for everyone.
The first problem you might encounter setting up the Smith Manoeuvre would be the lack of knowledge. In the first post about this strategy, I outlined the basic requirement to start the whole plan. You need an accountant, a banker and a financial planner. If only one of them is not familiar with this kind of leveraging technique, you can be in the red for a while.
Imagine that your accountant doesn’t understand how to report the taxable deduction related to the interest. He could think that your whole mortgage is tax deductible (only the part related to the amount invested in Canada) and give you some real trouble with the government. This is not being the only part your accountant can misunderstand. He might not be comfortable with the different gains from the investment and how they should be reported. By investing, you will receive interest and dividend payment along with capital gains. Each of them is taxed differently. In other words, don’t give your paper to your brother-in-law. Deal with a real professional that is specialized in this kind of technique.
The credit part of the Smith Manoeuvre is one of the basics of the strategy. If your credit product i.e. your HELOC is not setup properly, you will not be able to benefit from the strategy. You need to be able to create two sub-accounts with variable limits that will fluctuate over time. If your banker misunderstands your need, you might end up paying HELOC setup fees for nothing as the product will need corrections.
As you can see, the Smith Manoeuvre is a highly complex financial strategy; everything needs to be put in place by professionals. But the most important part of all is the investment strategy linked to it. Therefore, your financial planner needs to be the main man in the operations. As the financial planner’s knowledge and competency represent the biggest risk, we will describe his role in the next post.
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