Client Presentation of The Smith Manoeuvre: Best Practices

Is Your Mortgage Tax-Deductible?

Client Presentation of The Smith Manoeuvre: Best Practices

Introduction of The Smith Manoeuvre to your Client

I would highly recommend that you suggest they read the book, Master Your Mortgage for Financial Freedom, prior to your first in-depth conversation with the homeowner. This will significantly reduce the amount of time you need to spend explaining certain concepts such as deductible versus nondeductible debt. Also, if the person you are speaking with is married or in a dedicated relationship, you will want to request the spouse or partner read the book too. It does little good to have one on board with the strategy but not the other.

Information Gathering You will want to collect as much basic information from the potential client as early on in the process as possible. This information is important because if you go deep into the education process and spend significant time with the homeowner only to find they have nowhere near the required amount of equity in their home, have been unemployed for a period of time and therefore will not be able to qualify for a readvanceable mortgage, etc., then you have spent time with someone who can't implement the strategy when you could have been spending time with someone who can.

More information is better but at the very least you will want to have the following information prior to serious engagement with the client:

? General Personal Information o Name, location (city/town, province), marital status employment status and household income

? House and Mortgage Information o House market value; mortgage balance, rate, payment, remaining amortization

The above is the minimum required information in order to get results from The Smithman Calculator and at this point you may want to reach back out to the client with preliminary results indicated by The Smithman Calculator. If you have only collected minimal information to this point, the initial projected net benefit results will likely be able to be significantly improved but you can expect that the client will be sufficiently interested in continuing the discussion. Should they indicate so, this may be an opportunity to request more fulsome information prior to a meeting so at that point you will be able to show further improvement in projected net benefit. The additional information you request from the client will be dictated by your profession ? what you require in order to do your job.

Additionally, while requesting such information, you may want to request the client sign a consent form allowing you to share this information with other SMCPs that the client may need to work with and to whom you may introduce them. This will reduce the `information request fatigue' that the client may otherwise encounter if every professional is requesting the same or similar information directly from the client.

The First Deep Dive Meeting

When you do meet for your first deep dive, it is suggested you go through a certain sequence of discussion.

Accuracy of Information Firstly, you'll want to confirm any information that the client has supplied prior to the meeting to make sure it is accurate and that the client didn't have any misunderstandings when filling it out. It



Is Your Mortgage Tax-Deductible?

is quite common for clients to not fully understand what is exactly being asked of them or they may not disclose certain pertinent information as they felt it was not important.

Challenges Canadians Face Secondly, through many years of experience we have learned that priming your client with information and enlightenment of the difficulties Canadians face will ensure your client has a rounded understanding that they need to do something; that they need to make a change in order to improve their future financial security. Your client may need motivation to make a change and understanding the depth of the challenges will give them that motivation.

I would start off discussing the challenges that we Canadians face, just as I do in my book, Master Your Mortgage for Financial Freedom. High taxes, the cost of living including the true cost of their mortgage, pension insecurity, the fact that we Canadians are many times forced to forego investing for our futures because we are too busy paying the mortgage (along with everything else in our lives) ? the sequential approach to our financial affairs. I expect you won't find many arguments here ? this is why they are sitting in front of you.

These issues have been discussed in-depth previously in this manual and the book. Be clear and concise on your messaging of these challenges to your client so motivation to take action is generated.

Discussion about Debt Once they acknowledge what they already know, that the cards are stacked against them; once the full weight of the true financial burden that confronts them daily is felt, you could dive into the discussion about debt ? the explanation of good debt versus bad debt, using examples like I do in the book and in the course manual. This is a critical part of the complete discussion and one that should be handled with a great deal of attention. You could focus on the wealth pyramid ? that 10% or so of the Canadian population owns more than half of Canada's wealth and the other 90% of the population had to share the other half of the wealth. You could explain why they wealthy are in the top ten percent, and that (if they didn't inherit their wealth) it is because they understand debt and how to make it work for them, not against them. If the client is not able to be made to understand the difference between the two types of debt; if they aren't able to comprehend that the wealthy view debt differently than they do, use debt differently than they do, and in fact, actually appreciate debt, then they won't be able to fully grasp how the strategy can help them and they may withdraw. Don't move on until you are sure they get it.

Explanation of The Smith Manoeuvre At this point you could go into detail about how The Smith Manoeuvre works ? just the Plain Jane version ? no accelerators. It is extremely important that you are able to concisely and clearly state the process.

The Readvanceable Mortgage You could begin with an explanation of the readvanceable mortgage and how it operates ? that being that the equity generated by the regular mortgage payment is able to be reborrowed; that they can access any equity paid down on one side of the mortgage by withdrawing newly available equity from the other side. Now they understand the readvanceable mortgage. They understand that they can reborrow each month, but the next part of the discussion should focus on the fact that what they do with that reborrowing is the difference between wealth destruction and wealth creation. Again, bring back the differences of non-deductible versus deductible debt and the fact that if they borrow with the reasonable expectation of generating income, they can deduct the interest expense.

Increasing efficiency of the regular mortgage payment You will want to explain how the monthly borrowing that occurs on a monthly basis leads to the strategy servicing its own increasing interest expense. That each month, due to the increasing



Is Your Mortgage Tax-Deductible?

efficiency of the regular mortgage payment, a little bit more is paid down on the amortizing nondeductible mortgage balance, meaning the limit on the LOC ? the newly available credit for borrowing ? also increases a little bit month over month. Therefore, by investing a constant amount each month ? that being the amount that was reborrowed the very first month of the process prior to any line of credit interest being owed ? there is a little left over to service the previous month's line of credit interest payment. Month after month the amount available to borrow from the LOC increases and therefore there is more and more available to service the monthly increasing LOC interest as long as you continue to invest only the constant original amount. When you extrapolate many, many months of investing that constant amount at an assumed growth rate you end up with a very large number representing their forecasted portfolio value at the end of their amortization period.

Have a discussion on compound growth to ensure they understand the benefits of investing now versus investing later.

Now the client should understand how, without any additional cash flow required from them, they now have funds to invest each month whereas before they did not (or that now they have more to invest than they did before). The mortgage payment that they are already making anyways is what is providing the investable funds.

Once they see how they can invest new money on a monthly basis and the benefits of doing so you can explain that due to the deductibility of interest that accrues month over month, they can take their annual tax savings (tax refund or amount of tax calculated to have been saved) and apply it as a prepayment at tax time. Doing this every year will significantly reduce the amount of time it takes to eliminate that expensive non-deductible mortgage debt. The annual tax savings increases year on year due to the increasing tax deductions year on year.

At this point, before moving on, you'll want to ensure they have a solid understanding so far of the basic Plain Jane Smith Manoeuvre. Round back and ask them testing questions, ask if they have any questions. Once you know they are clear, you can move on to the accelerators.

Accelerators Take your time with the five accelerators as this is what is going to subsequently provide most of the persuasive power when you demonstrate The Smithman Calculator with their actual values.

Here are some tips for when explaining the various accelerators (I mention below some tips when using The Smithman Calculator with the client, but generally, the actual calculator demonstration would come after the verbal education on the Plain Jane Smith Manoeuvre and the accelerators, risks, etc.)

? The Debt Swap o Existing investments ? Stick to the principle of potentially using only non-registered investments for the debt swap. Any discussion about taxation and the superficial loss rule should be had with their SMCP investment advisor. If you are not an SMCP investment advisor or accountant, you will want to stay away from discussing using registered investments for the debt swap as there are certain complications with this. o Future Lumpsums ? The homeowner may consider using future lumpsums to be received for the Debt Swap from a number of potential sources, but the discussion on what to use for this would centre around if the homeowner already had plans to use any future amount of cash either for a) mortgage paydown or b) for investing. With this accelerator you can show them how it can be used for both. But if the future lumpsum expected were allocated by the homeowner for something



Is Your Mortgage Tax-Deductible?

other than mortgage prepayment or investing (such as a vacation) then you'd likely leave this amount out considering it would no longer be available for its originally intended use as it would be first prepaying the mortgage and then getting invested for long-term growth.

? The Cash Flow Diversion o Current Savings/Investment Program field ? when you use The Smithman Calculator with the client, only enter amounts that the homeowner has been directly investing each month. If they have been investing on a less consistent basis, average out the total annual amount on a monthly basis. Exclude any registered contributions from the calculation considering The Smithman Calculator does not account for an accurate comparison of investment programs for these preferentially taxed accounts. o Squeezed Cash field ? the homeowner may already be prepaying their mortgage each month or by relatively small amounts when they have it ? maybe they have doubledup their mortgage payment or are instructing extra prepayments every so often. When using The Smithman Calculator, be sure to include any extra payments they are already making in the `Squeezed Cash' section. This is because to date, the homeowner had not been getting any of these prepayment amounts invested and if you enter these amounts in the section intended for `current savings/investment program', then it will assume the amount entered was getting invested previously and erroneously note so in the green results panel ? Net Value of The Smith Manoeuvre.

? The Cash Flow Dam o The Cash Flow Dam accelerator is applicable to proprietorships only, not incorporated business. If they indicate they own a business, be sure to confirm with the client that the rental property or home-based business is not held in a corporation. o Be sure to confirm that any amounts entered in The Smithman Calculator for the Cash Flow Dam accelerator are available to go toward reborrowing to service the proprietorship expenses. If the homeowner requires any of this cash flow for living expenses, enter that amount in the field in the appropriate box of the Income section of the first sheet ? Personal Information. o Clearly explain to the client that the calculator will account for any excess monthly revenues by assuming the excess is invested in securities at the entered assumed growth rate. Should the client want to have a cash buffer for the proprietorship then reduce the amount entered in the revenue field. In other words, if monthly rental revenues are $3,300, monthly expenses are $3,000, but the client wants to use the $300 excess to build up cash reserves available to the proprietorship (rental property repairs, emergency expenses, etc), then only enter $36,000 ($3,000*12) for annual proprietorship revenues and the same for annual expenses. The Smithman Calculator will then leave the monthly $300 out of the calculations assuming it stayed back in the proprietorship account and did not get run through the mortgage and subsequently invested in securities for growth.

? The DRiP o The explanation for the DRiP accelerator is a relatively simple one. Instead of having any dividends automatically reinvested, take them in cash and apply as a prepayment and then get the amount invested into the same security that sent the dividend in the first place or a different investment. The taxation of dividends is the same whether automatically invested or received in cash. o The calculation for the effect of the DRiP accelerator is a tricky one for The Smithman Calculator. When the total mortgage loan entered into the calculator is greater than 65% loan-to-value, there may actually sometimes be a negative effect on the results for any given annual distributions yield entered (2%, 3%, 4%, etc.) when this accelerator is applied. In addition, the effect on future net worth may be slightly positive when one percentage is applied yet slightly negative for a slightly higher or lower



Is Your Mortgage Tax-Deductible?

distribution yield. When the total loan is less than 65% you can expect increasing positive results when applying increasing yields. ? Prime the Pump o Remember to explain that any amount used for the Prime the Pump accelerator will be directly invested; it will not first go toward prepaying the non-deductible mortgage balance, then reborrowed to invest. The reason is that this initial borrowing will then have gone to a non-deductible use, which is prepaying the non-deductible mortgage debt and we do not want any non-deductible debt on the portion of the readvanceable mortgage that is, and shall always remain, fully non-deductible. o Any amount entered will be invested into a non-registered account, not registered (RRSP, TFSA, etc.). o The Smithman Calculator calculates the related interest of the amount entered and automatically assumes this will be added by the homeowner from personal cash flow as a monthly prepayment against the mortgage. Therefore, when the LOC limit increases dollar for dollar by the total principal reduction for the month, it is available to service the incremental interest without reducing the amount of investable funds. If the client is unwilling or unable to add this related interest amount from personal cash flow as a monthly prepayment against the mortgage, then perhaps the homeowner should not be borrowing it out in the first place. o The Prime the Pump accelerator is true leverage ? it is increasing the homeowner's debt whereas there is no increase in total debt if this accelerator is not implemented. Always be sure to emphasize that this accelerator increases their total debt and therefore their total risk.

Pause here to ensure your client fully understands the accelerators.

Risks After the education of the strategy in its basic form and of the accelerators but before showing the client the results on The Smithman Calculator, you will want to discuss the risks involved and have a general discussion. Risks have been explained in the book and in the course manual.

After you address the risks involved you may want to open it up for a general discussion and Q&A for subject matter discussed to this point.

Demonstration of The Smithman Calculator This step is very powerful whether you are on a video call and sharing your screen or if you are physically with the client.

First, run through their actual Plain Jane Smith Manoeuvre (PJSM) numbers on The Smithman Calculator so the client can see how the strategy could help them using their numbers with regards to the speed at which they could convert their mortgage and accrue investment assets as a base case scenario.

Consolidation and preservation: once the PJSM scenario has been run, add in any consolidation and/or preservation of debt and select any salvaged payments be applied and the results will improve over the PJSM.

Then introduce any accelerators they may have available to them. Do this one accelerator at a time so that they can see the incremental improvements as you stack the applicable accelerators on top of each other ? give an explanation of how each of the accelerators applies to their current financial situation if the client has them available for use. For example, if they had some paid-up, non-registered investments, input the values for the Debt Swap and the results over the PJSM will improve; do they have and discretionary money or an existing monthly savings program which could go first to prepay the mortgage? Input that into the Cash Flow Diversion section and numbers would improve further.



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