Wouldn’t it be great if the federal government rewarded you for taking investment risks in private real estate? That’s essentially the idea behind the “Smith Maneuver.” Canadians who understand and use this strategy can gain significant tax advantages while building a portfolio of real estate assets.

Any Canadian who borrows money to invest, with a reasonable expectation of earning income, can deduct the interest they pay back to the lender. These deductions lower personal income taxes owed and, for those who’ve prepaid their taxes, may result in a refund from the Canada Revenue Agency (CRA). 

The main questions are: 

1. Where can you get a loan or line of credit at a reasonable rate? 
2. Once secured, can you invest that money in private real estate? 

Because of Canada’s concentrated banking system, the lowest rates usually come from secured loans backed by property. A readvanceable mortgage, or a segmented line of credit tied to a traditional mortgage, is a common way to access such financing. 

For REALTORS® who own a Personal Real Estate Corporation (PREC), another option is a shareholder loan. When a PREC refunds a shareholder loan, it’s considered tax-neutral, meaning the refund isn’t treated as taxable income. 

Once financing is in place, the Realtor can use the capital to acquire investment properties, such as condos, houses, or land. 

Paying interest to the lender creates a personal tax deduction, which may trigger a refund. That refund can then be applied to reduce the principal on the original loan, effectively allowing the tax system to help pay it down. Over time, what was once non-deductible debt can be replaced with deductible debt, increasing equity through investment growth. 

Realtors with a PREC can take the strategy further by combining it with a Personal Pension Plan (PPP). Using shareholder loan funds inside the PPP allows capital to grow in a tax-sheltered environment. 

Contributions to the PPP are tax deductible to the PREC, and any future growth is tax deferred. Because a PPP can invest in private real estate, this approach develops the same asset class in an even more tax-advantaged way. 

As an added benefit, taxes the PREC may have prepaid to the CRA can be refunded thanks to PPP contributions. Those refunds can then be used to repay the shareholder loan—without creating any personal tax liability for the Realtor.

Click here for previous articles about the pension plan.