Banks readvance but dont capitalize, and credit unions capitalize but do not readvance.

I went into my local credit union, just as Fraser Smith did years ago , with the hope i could pave the way for Winnipegers to to have a full blown turn key SM solution. Just like the TDMP people but with out the high fees.

The CU folks simply thought I was nuts, and I thought they were going to have security escort me out of the building.
I rank the SM up there with the Buffet concept of “buying a dollar for 50 cents”.

Buffet says of the 50 cent dollar that people either get it or they don’t.
Same thing goes for the SM.

Ed, I look forward to meeting you this Sunday when you are in Winnipeg.

There is no problem with capitalizing the interest or the Smith Manoeuvre in general from a tax perspective, if you keep good records and don’t take money out of the investments.

You are not the only ones lookin at it. We have hundreds of client families doing it and we do their tax returns to make sure they have no issues (since I am also an accountant).

Normally, you can’t trust what CRA tells you, since most of their phone people are not very knowledgeable. CRA’s policy is that they are not bound by anything their people say on the phone. However, you seem to have found a knowledgeable person.

There is a lot of useful info on the internet, especially on the www. milliondollarjourney.com site, if you want more info.

Ed

He brought up a couple of points. it533 para 16 talks about cash damning. Not cash damning ala Fraser Smith but cash damning in terms of keeping everything seperate.
The main HELO should be segregated for investing only (duh), but he also said that i could “compound” my own loan provided that it be done via a seperate bank account used for investing/HELOC servicing only. Do not use your everyday checking account to deposit and pay your HELOC. He also said that if the bank charges you a monthly fee for the account, it could also be deducted.
So basically you can deduct compound interest auto or manual, so long as everything is kept separate and can be traced easily in the event of an audit.
He also recommended for piece of mind to get an opinion from CRA (wasn’t that the whole point of him phoning me back?) by looking up the advanced information circular IC 70-6R5.
I will send an email outlining what I am going to do. It will be interesting to see what this dept has to say. I suspect they have already heard of the SM.

I will post back when I hear from them.

I also think you’re right that the employee was trying to help you with something that was over his head. I wouldn’t try to make sense of what he told you (wait for the senior person to contact you, and read the bulletin while you wait). I don’t think cash vs accrual is relevant for you.

Cash method: http://www.cra-arc.gc.ca/tx/bsnss/glssry/c-gn-eng.html#method
Accrual method: http://www.cra-arc.gc.ca/tx/bsnss/glssry/a-gen-eng.html#accrual

When I ran my business before, I used the accrual method, since I was starting small (and hoping to grow), so I wanted to capture all the income I could ASAP (hoping that the following year would be a breakout year and I’d make far more income).

I *BELIEVE* if you withdrew money to pay a deductible debt, interest would still be deductible.

For example: I have a HELOC used for investment property expenses and a margin debt, used to invest in blue chip socks. Both debts are deductible. If I get sick of having to watch the margin debt (say I’m worried about a margin call while I’m out of town), I can use the HELOC to pay off some or all of the margin debt. The HELOC remains entirely deductible (since the debt was “moved” from the margin loan to the HELOC).

As another example: Say I have a deductible HELOC (as above). I’m going on a trip to Hawaii and I borrow $1000 from it. Upon my return, 3 weeks later, I repay the $1000. This part of the HELOC is NOT DEDUCTIBLE (it wasn’t used for investment purposes), and if I’m ever audited, it will make the deductibility of the HELOC questionable from that point on. This is what the guy at CRA thought you were asking.

With the CRA you want a VERY CLEAR paper trail of everything you do, and why you’ve done it. I *believe* if you withdrew and re-deposited to a LOC on the same day (or within a day or two), you could make a very clear case that you were manually compounding (and the withdrawl and redeposit was simply done to meet the “minimum monthly payment” required by the bank).

Remember that people are human, and not everyone who answers the phones at the CRA will understand exactly what you’re talking about. I think you have the right idea (and he misunderstood what you are describing).

I got my answer by reading the tax law (which I posted a link to), and reading through a number of discussions on Canadian Business Online (where they addressed the law, and gave examples).

I’m sure when the right person returns your call they’ll verify this (and please post a comment when / if they do, it’s always great to get more verification that what we’re doing is legit).

Just curious how you went about this?
I just got off the phone with CRA and I was told the original loan interest is deductible, but if you withdraw and redeposit it is NOT deductible because the amount you withdrew was not used to invest, it was used to pay interest.
Weird because I then asked about IT533, and deducting compound interest. The CRA guy put me on hold and then read me the actual tax act. He talked about compound interest being deductible as long as the compounded interest was used to service a loan that was originally used for investing. (exactly what we do in the SM).
But he then said this would not apply to situation because I was taking money out of my line of credit to pay interest, NOT invest, therefore the “interest payment withdrawal ” would not be deductible.
I then told him THAT’S what compounding is. Except that i am manually compounding.
He then took my name/number down and someone from rulings is gonna call me back with an answer.
WTF??
I don’t get it. Compound interest either is, or isn’t deductible. Should be cut and dry.
I think maybe the CRA guy didn’t understand manual compounding at all. He kept putting me on hold to “get an answer”. I asked to speak with whoever he talked to while I was on hold. Said he couldn’t do that. Lol.
Hopefully CRA auditors are just as stupid.
Just curious if you got the same clueless run around, and how did you finally get your answer.