Success! 🎉 CRA has received my response, and proceed to finally issue my revised 2022 tax refund.🙏🏻 After several months of gathering documentation and corresponding with the CRA, they accepted my explanation regarding the investment interest deduction related to my Smith Manoeuvre strategy. This experience reinforced a few important lessons that I think every Canadian investor should know. What did I do wrong? When I refinanced my mortgage, I borrowed $70,000 based on the existing equity in my home, but after financing costs and fees, only around $68,00p actually made it into my investment account. Under the CRA's tracing rules, you can only deduct interest on the amount of borrowed money that is actually used to earn investment income. That meant I could have claimed interest on the approximately 97.7% of the interest (the percentage of the borrowed funds that were actually invested), which I totally had not claimed (oops! 😬). Fortunately, I had kept detailed records showing: ✅ The mortgage advance ✅ The transfer of funds to my bank account ✅ Every transfer into my brokerage account ✅ The investment purchases ✅ That the funds remained invested in a non-registered account Having this paper trail made responding to the CRA much easier after I was asked to provide documentation whe I had refiled my taxes for the previous years. My biggest takeaway If you're implementing the Smith Manoeuvre or borrowing to invest: * Keep meticulous records from day one. * Trace every dollar from the loan to the investment. * Understand that financing costs can affect the deductible portion of your interest. * If you're unsure, don't hesitate to call the CRA or speak with a qualified tax professional. 📹 I had made a YouTube video walking through this entire experience, including the mistake I made, the CRA review process, and what I'd do differently: https://youtu.be/cSz5dkI4o6A On another note, my readvanceable mortgage (currently with Scotiabank) is coming up for renewal in December. ➡️ I'd love to hear from anyone else who has a re-advanceable mortgage: Which bank/financial institution are you What are some of the pris and cons of it? For me, overall I like the Sccotia STEP readvanceable mortgage. The only con I can think of is that the mortgage principle that isnpaid down every month or any prepayments usually take up to 2 banking cylces (typically 2 months) before they auyomatically getbadded to my HELOC as an additional available balance for borrowing. I wished it was a bit more instant but that is frankly the only main con that comes to my mind.
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26 Comments
Will W@williamwang23 · 10d
Good thing you mainly invest in one fund...can you imagine if you had like 20 different stocks and maybe sold some and bought some...that'll make the paper trail so much harder to follow...
Kyle Garrett@kgcottawa · 10d
ScotiaSTEP is the best product on so many levels. The delay from prepayment / regular payment of principle on the mortgage to the unlocking of that credit on the HELOC is definitely frustrating. I’ve only deployed about 45% of my HELOC, so no material impact on me yet.
forester @foresters · 10dEdited
Congrats on getting that refiling sorted out. Curious about why exactly Scotia takes two months to readvance? Have you tried speaking with an advisor there to see if there’s any way to minimize that advancing turnaround?
Ade O@kingadey · 10d
Record-keeping does make things easier when situations go sideways. Thank you for keeping it real, Moe!
Tyson @timeagent · 10dEdited
What does the tracking and paper trail that you send to CRA look like? Is it just the transaction statements or do you income a written state explaining how to look at the documents? On X statement, XXX date, transaction for XX, then on other document, Y statement, transfer for the same amount. Or just dump all the raw PDFs to the CRA? Also, I have a Screencap from an Ed Rempel video. I figure it's ok if I just get one of these mortgage product. Although I'm in a situation where I'll need a mortgage brokerage, might as well find a SMCP mortgage broker.
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