June 20, 2008, 6:00 am

What is the Tax Deductible Mortgage Plan (TDMP)?

by: The Financial Blogger    Category: Leveraging Strategies
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An interesting coincidence brought me to write this post about a company called TDMP. About 2 weeks ago, I received two emails from two different readers asking my opinion on the Tax Deductible Mortgage Plan. Since I never heard of this company before (they do not seem to be active in my province), I was really curious about their plan. This is basically a firm offering to setup The Smith Manoeuvre for your financial pleasure.


I am not going to do a review of their service (since I didn’t get paid for it 😉 ) but I will use the example of Chris, one of the two readers, to illustrate which kind of question you should ask a financial advisor when they approach you with such leverage strategy.

What is the strategy?

Chris and his partner make 150K and have a free mortgage property worth 400K. They have been approached by TDMP in order to leverage over their property. This sounds a lot like a Smith Manoeuvre strategy but it is called that tax deductible mortgage plan. The projection was based on a “income fund” providing 8% return per year. So if you have bad debts (i.e. non tax deductible debt); you pay them with your investment returns and you re-borrow the money to invest again. Therefore, you are switching bad debts into good debts.

Hum… let’s say you pay 4.75% (prime rate) on a loan where the interest are tax deductible (therefore a net charge of 3%) and you make 8% per year with your portfolio. This sound very interesting isn’t? Well I don’t think that things can be that easy!

What are the fees and why should I pay them?

According to both readers, TDMP charges $39 a month for the administration fee of the whole setup. While this sounds to me like another hidden / other fee that company charges to improve their profit margin, they may do extra stuff for their client too. Even thought $40 a month seems a lot (since you are still paying interest on the loan and MER’s for your investment), I told Chris to ask them what were they doing for so much a month. An added value would be to keep track of the client’s investment record and interests charged along the year in order to facilitate the completion of their tax report.

In which kind of investment portfolio the leveraged money will go into?

I think this part is a big must as it will determine if you will end-up as the king of the leveraging or another poor victim from “evil” advisor bringing their clients blindly into the abyss of madness.

In Chris’ case, the broker didn’t give much information the first time besides the fact that it will (will? Never use this word as a financial advisor) give a 8% return according to past performance. I must admit that this is kind of odd. The first thing would be to determine the client’s investment profile instead of offering a one fits all fund. Anyway, there is no such thing… regardless the past performance of the fund. Based on that premise, we should all sell Sprott Canadian Equity Fund that has an astonishing record. However, the fund also went down badly a few times since its inception as well!

I guess the main point I am trying to make with this post is do not sign leverage proposal on the first meeting and come back with a lot of questions for the second meeting. My conversation with Chris was obviously lengthier but in the end, it will lead to a second or maybe a third meeting where fundamental questions must be answered. Good luck to you my friend!

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Comments

It is so very simple to just go out and get a mortgage yourself that I don’t think we need a provider to tack on fees. I do recommend that people don’t waste hundreds of thousands of dollars in their home, but it doesn’t take much to do it yourself.

It’s amazing, I just got back from my second meeting with TDMP representatives here in Calgary and now I find your blog entry about that exact company.
I have not been able to find any relevant info about them so far, but I must admit they do know what they’re talking about IMHO.
First of all TDMP is a long term strategy and that greatly reduces risks associated with investments as most of us know.
I was told that they have about 100 clients in Calgary and most of their clients are in Trornto area.
Take a look at couple of printouts using real numbers
http://i032.radikal.ru/0805/89/03636eb7702e.jpg
http://i001.radikal.ru/0805/bd/41020ce8e480.jpg

It would be cool to start a discussion here about TDMP.

by: The Financial Blogger | June 22nd, 2008 (7:55 am)

Iakov,

Chris (one of the 2 readers that contacted me about TDMP) showed me exactly the same pictures.

The strategy itself is good (I am already a big Smith Manoeuvre and other leveraging strategies fan)

However, I am a bit skeptical about the fees charged and also the way they present the leverage technique (do they show the potential risk?%). Have you seen what could happen if your investment drop 15% and you pay 6% interest rate? How many years or what kind of returns would you need in order to get your money back?

I’ll surely add more info on TDMP as I find it in the future 🙂

Please feel free to add you comments on this post 🙂 This would be valuable to everybody!

FB: I’m trying to get a spreadsheet they’re using to calculate things, but very skeptical that I get one as it is probably proprietary software.
I did ask a question about what happens if interest rates go up, hoping to get an answer after weekend.
To answer your question. Well if investment looses 15 % then 8% distribution will surely be alot less then original amount ($1540 in my example) and if it stays down for several years then income fund will be empty very quick.
This is a biggest risk in this strategy as I see it. What kind of investment is purchased is very important.
Second biggest risk is interest rate going up.
Its a high risk high reward type strategy, perhaps other SM strategies are less risky, I would love to hear about them.
P.S. I also agree about high fees and I have yet to discuss it with them, but I doubt that they will decrease them in any way. It’s the only thing that pays M-Link (well besides mortgage and MER fees of course, which I think should be enough)

I was told that there are about 1600 people in Canada that signed up with TDMP and I would love to meet just one to pick his brain 🙂

by: The Financial Blogger | June 27th, 2008 (1:19 pm)

Iakov,
number doesn’t mean anything. I can bet you that million of Canadians are losing money on the market. It doesn’t mean that it is not a good place to invest your money in 😉

I would like to have a TDMP advisor comment on this post actually 😀

I would like that comment too.

Hey FB,

I am “the expert”. I have done some seminars with these guys in the past, plus I know another advisor who Fraser Smith wrote about in his book . I can tell you some of the risks.

Risk # 1. Fees !! (when I started no fees were charged)
Risk #2 – #10. …Call me and we can chat further if you wish.

Regards,

Brian

Brian!
I could call you right now if you don’t mind. What is the number?
If you prefer please e-mail the number to iakovs@gmail.com

Hi lakov,

Go to my website and leave me your #. I will call you on Monday. I am in Ontario so keep in mid the time zone.

http://www.mortgageplans.ca

regards,

Brian

Hi FB,

This strategy is not the Smith Manoeuvre. It is the Smith/Snyder Manoeuvre. There is a big tax issue with it. The fund pays out a fixed monthly distribution. It is not income – it is your own principal being given back to you. This is why they can promise it – it will give you back 8% of your own money each year even if the fund is losing money.

This leads to the tax problem. If you borrow to invest and then cash in the investment, you cannot still deduct the loan interest. Since you are taking 8% of your principal out as a ROC (return of capital = your principal), then the interest on that amount of the loan is no longer deductible.

For example, if you borrow $100K to invest and it pays out $8K, then at the end of the year only the interest on $92K is tax deductible. After 12 years, NONE of the investment loan interest is tax deductible.

The strategy looks cool, since it looks like you are paying your mortgage off very quickly, but you are converting it into a NON-deductible investment loan. There is actually no benefit at all from taking the ROC distribution, paying it onto your mortgage, reborrowing that amount to invest again, and then doing the year-end “Snyder Tax Calculation” with your tax return to figure out how much of your investment loan interest you can claim. We call these the “4 meaningless transactions”.

There are many variations of the Smith Manoeuvre and other leverage strategies in which all of your loan interest remains tax deductible. We have done all kinds of projections on various Smith Manoeuvre strategies and have found that the strategies that keep all of your interest tax deductible are more effective for growing your nest egg and getting tax refunds than strategies with ROC distributions.

We would recommend to avoid strategies with ROC distributions.

The $40/month fee and the $1,500 setup fee charged is because TDMP is a mortgage broker firm. There are a couple of monthly transaction involved (especially with the ROC strategy). If you have a financial planner setup the Smith Manoeuvre, they can automate the process or manage it simply. However, for a mortgage broker to do it, they need some compensation.

Ed

FB,

Let look at the markets today (December 6th). The TSX is down about 42% from January. This means the ROC (return of capital funds) will have their distributions cut in 2009.

Example $100,000 loan is worth $80,000 (assuming it only went down 20%). The old distribution would be about $666 the new distribution in 2009 wlll be $533 or $133 less!

Since the monthly fee is $40 per month, any thing less than a 50% return on your investment and you are underwater every month. Yes, you need to look long term (five plus years) but who needs to pay fees in a bear market!

This is not for everybody, you should be in a high tax bracket, have your disability, life insurance covered and be willing to take some hits in your statements. There is little talk of risks only the upside.

Risk management, I believe is rarely discussed, most of the time is spent on the investments. How about getting disabled and finding out your group policy only pays for six months in this bear market? What about an emergency money that you can get tax-free, or does the RRSPs have to be raided?

There is lots more I could talk about but doing your own research is a good start.

regards,

Brian

Brian,

I agree that leveraging is definitely not for everybody. Most people probably realize that with the current market 😉

It should also not be the first investment strategy to be used (RRSP, insurance are less risky and offer great benefits).

Cheers,

FB.

Hi FB,

The reason one would review their “Risk management” first (insurance) disability, life insurance, critical illness etc. Is most people do not have this covered off in the first place. They think their group coverage is enough. Then with a loan on top of all this (current debt) even in a good market the worst thing to happen is a health problem…

This step (Risk management) is one I think is missed almost all of the time. I talked to a stock broker who is a branch manager for 80 brokers. He said only about 10% talk about risk management and he sells about half of all the insurance for all the brokers! The average size is over $250,000 per client. So in a bear market this may be depleted in short order.

regards,

Brian

Brian!

Every time you post, you end up talking about insurance.
I understand that it’s easier to sell insurance than TDMP or similar strategy because you actually have to explain things to people instead of making them scared for their life.
Come on already, enough of insurance talk eh? This is TDMP thread!

Hi Lakov,

Let me set the record straight. I have no links with TDMP. If you read any of the above comments that would be clear. I understand you may not understand “risk management” . As far as the TDMP I think I made my point about fees. As far as the strategy read comment # 11.

Brian

Brian!

If you have no links with TDMP why are you posting about insurance in this thread.
Check the title.
Oh and as a side note. I usually start spelling my name with capital letter, that being an “I”.

Iakov,

The best idea would be to call them and find out for yourself. It’s like asking BMO if you can get an ING mortgage!

Brian!

If you read my post #2 I explicitly say there that I have been in contact with TDMP. I’m not sure what you’re trying to accomplish by posting here, but it sure is not helping with topic.

Iakov,

Read my comment # 12 and read FB, comment # 13. FB said “It should also not be the first investment strategy to be used”

Hope this helps.

by: Antoine, Investment Advisor, LLQP, | December 17th, 2008 (3:15 am)

Brian, i appreciate the hard work you do.

I think people here should not consider TDMP. To date they have 3000 clients. The advisors under the program are only restricted to selling their funds, so right there it is not a independent solution for canadians.

Canadians should consider the Manulife One product or a similiar product like National bank’s all in one. It applies the same rules of SM but SANS THE FEES !!!!. WHO SAYS YOU HAVE TO LEVERAGE ALL OF THE EQUITY IN YOUR HOME. Ratio should be a 1 to 10 or 1 to 5 basis. ANYTHING MORE IS TROUBLE.

Bear and Bull markets over the last 40 years have been 1 year bear ( down ) and 4 bull years up. Things will rebound, stay calm and focus on what you can control.

People should also consider using a HELOC to get a IRP insurance retirement program. Where the gains ( 8 % ) even NOW IN 2008. since its a capped fund inside the insurance policy.. ITS TAX FREE AND TAX SHELTERED…..

Anyone has any comments i want to know. TELL ME. Cheers,

DON’T GET MAD GET EVEN, Jim Cramer

Antoine,
TDMP advisers are NOT restricted to selling specific funds, that’s a fact, I asked.
Manulife One has a monthly fee, $14 I believe.
What’s so hard about Brian’s work?

Iakov,

You are right the advisors can choose any fund they wish. Here is the problem with the ROC (return of capital funds) right now, as you know the market is down about 40% come January these funds will have the distributions cut! After this distribution cut comes another problem, since these funds are distributing about 8% the performance is hurt even more.

On a $100,000 loan assuming the fund is only down 30% this cut will be about $200 per month. So the original distribution was about $666 to $466. Even though the market value is now $70,000 you still have to support this loan for $100,000 with prime (bank at about 4.25%) this will cost about $354 per month this leaves you with about $100 to invest!

If this market does not recover soon and fast I see more cuts to the distribtions going forward.

I think TDMP charges $40 for this service every month. Which seems high in in this market. Even without the fees you have to be careful.

My suggestions is to make sure clients have some risk management (insurance) before entering any leverage. If you go to any bank and borrow for your business they will usually get you to buy, or have insurance signed over to them before you get the money. This is to protect the bank! Why not protect yourself instead! This is usually a topic that is not raised at all even though by leveraging you are taking on more risk.

Brian

Brian. you made me smile, thanks!

Everyone has an agenda but you have to ask yourself what makes the most sense. So far the CFP route including insurance/investments and the Manu/National bank make the most sense to me.

The TDMP so far seems easy b/c people don’t have to manually adjust their accounts every month! Maybe the $40 mth might be worth it as opposed to the trouble of manually doing it?

I spoke with some their VP of marketing today to get some info because this does seem annoying to my clients that I am suggesting this to. I did not get the info but was told there may be a seminar in my city in a couple months or so.

Update:

I had a person see me who had a TDMP mortgage who lives in the Burlington, Ontario area. He had borrowed about $170,000 in 2007 (June/July) the value in December 2008 was $97,000 (aprox.)

The distribution was $1,133 per month (paid from the fund to help pay down the mortgage faster)…now the distribution was cut to $650 per month! Remember the cost to support the $170,000 was almost $600 per month (based on prime). This means he has about $50 per month to pay down the mortgage!

After the $40 fee the “EXTRA PAYMENT” of $50 is down to $10.
If this market does not recover soon and make a BIG recovery, he will be underwater. More distribtuion cuts will happen unless this market recovers.

The Five key questions to ask:
Will distribtuions be cut?
How does a monthly fee effect the plan?
What if I lose my job?
What if the market does not recover anytime soon?
Can I do something more conservative and protect my family?

The TDMP plan may work for some people, just get all the facts first and ask lots of questions.

Just because a plan looks good a paper, does not mean it will work out in real life.

thx for the feedback Brian,

in my opinion, the investment should not be used to pay off the mortgage… especially if you are taking money from the capital invested. You will affect your tax deductions along with seriously handicap your investment for long term returns…. this sounds just stupid!

Hi FT,

An update, person with a TDMP (see comments above) he is about $63,000+ under water even after the market gains in 2009.

Problems:

Distributions cut. (2008) mortgage paydown now much slower!!
Little follow-up now from advisor…markets down
Broker pushing to lock in rates, the longer the better!

Good news:

Finally stop paying the $40 per month.

Bad News:

Wife not happy with financial situation.

Another update tax returns two people cost $300 for the TDMP through a CA firm which is recommended by TDMP.

The tax returns should be no more than $200. The key is the mutual funds (which distribute a return of capital)… are they prorated down every year? If not an audit by CRA could be painful.

Since most CA firms know little about how these funds work, I will keep you posted to see if in fact the taxes are done properly.

FB,

Since it is tax time agian …here is some more problems with some “tax deductible Mortgage plans” TDMP.

T5’s and T3’s produced by the funds bought! This reduces the effective tax refunds big time!

I have a person who has been doing this for about four years (underwater by about $30,000 net tax benefit …about $400 refund for 2010! I reviewed her tax return! We are working on steps to reduce her risk avoiding or lowering her T3’s and T5’s.

Hey FB,

The TSX is down about -12% year to date my guess is the TDMP clients may not be pleased at what is happened to their holdings.

The fees and poor returns may mean getting this idea to zero will be hard to do, even after the mortgage is paid off. The investment loan will take many years to pay off.

If their is any TDMP clients out there please share your story.

Cheers,

Brian