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Originally Posted by Cake
The first thing that came into mind is "risk". I am not too sure what the Smith Manoeuvre is but it is risky to use your home equity as investment, especially on an investment that earns 7-8%. You would also have to keep in mind that interest income from investments are also taxed, some higher than others. (Capital gains vs. Interest Income).
For the average Canadian who do not have a background in Finance, this may not work. Even if you sit with a financial planner, they may not have the skills or time to fully plan the perfect investment strategy.
Is there any calculations that can show that the SMith Manoeuvre works? I would be very interested in taking a look at it.
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Smith's book explains the math in details. Borrow the book from the library and read it and you will see.
In most cases, capital gain get taxed the least (50% of capital gain is tax deductible). Dividend next because of dividend credit. Interest income ( ING direct or GICs or bonds) is taxed at full.
In executing Smith Manoeuvre as well as any other leveraging strategy, by default it is risky. However, if you are willing to invest in a long term horizon, say 20 years, the risk will be considerably reduced.
Smith manoeuvre also works better for wealthier people because the tax refund they get back each year will be higher because of their higher tax bracket.
I have read through the book and I find no logical and mathematical flaw in this strategy. Undoubtedly there is risk but always remember, risk and return is proportional.