Interest Capitalization
Hey guys, I just wanted to clarify something regarding the Smith Manoeuvre and interest capitalization, since I’m currently implementing it and want to make sure I’m doing it correctly and in a CRA-compliant way.
Here’s my setup:
- I have a HELOC that is being used only for investing purposes.
- I maintain a separate Smith Manoeuvre checking account.
- There are no personal expenses mixed into this HELOC — only investment borrowing.
From what I’ve read, the investment loan interest can be capitalized (i.e., borrowed again so that the interest itself compounds instead of being paid from employment income/cash flow).
So here’s the exact scenario:
Let’s say my HELOC balance is currently $35,000.
At the end of the month, the HELOC interest charge is $118.
The bank does not allow the interest to be charged directly back onto the HELOC itself. Instead, the interest payment has to come out of my checking account.
So what I’m currently doing is:
- The $118 interest gets debited from my Smith Manoeuvre checking account.
- I then transfer/re-borrow $118 from the HELOC back into that same checking account.
As a result, my HELOC balance increases from $35,000 to $35,118.
My understanding is that this is effectively capitalizing the interest, since the borrowed funds are being used to pay deductible investment loan interest. However, I just wanted to confirm whether this arrangement is generally considered acceptable and CRA-compliant.
Has anyone here structured it this way?
Any issues from a tracing/documentation perspective?
Anything specific I should be careful about?
Would really appreciate any guidance from people who have implemented this successfully or discussed it with accountants/tax professionals.
Thanks!