I was happy to see the latest edition of Canadian Business in my mailbox this week.  Every year, the magazine issues the Investor 500 edition, a comprehensive look at Canada’s 500 largest publicly traded companies.  In this edition of CB, I also found an article listing the top 15 Canadian companies by profit and total revenue:

Although these stocks offer a range of yields, these stocks would likely be a good starting point for your dividend stock portfolio.  Some of these Canadian companies have been paying dividends for over 100 years and others, regular and increasing dividends for decades.

Let’s a have quick look at some of the data:

• Royal Bank (RY) – paid dividends since 1870.
• TD (TD) – paid dividends since 1857.
• Bank of Nova Scotia (BNS) – paid dividends since 1832.
• Bank of Montreal (BMO) – paid dividends since 1829.
• Imperial Oil (IMO) – paid dividends for over 100 years and has increased annual dividend for 18 consecutive years.
• CIBC (CM) – paid dividends since 1868.
• Canadian Natural Resources (CNQ) – paid regular quarterly dividend since 2001.
• Canadian National Railway (CNR) – paid regular quarterly dividends since 1996.
• Bell Canada (BCE) – paid regular quarterly dividends since 1983.
• Great-West Lifeco (GWO) – paid regular quarterly dividends since 1990.
• Husky Energy (HSE) – paid regular quarterly dividends since 2001.
• Power Financial (POW) – paid regular quarterly dividends since 1990.

Can you imagine the income you might have received from such companies if you had bought and stay invested in such companies over the years – instead of jumping in and out of the market?

Can you imagine the capital appreciation you would have gained as well?

Investors, if you’re struggling over what Canadian dividend paying stocks to purchase for your portfolio, while pouring over company metrics still makes sense and buyer must always beware, consider owning the Canadian companies that make a bunch of money and have been doing so for a very, very long time.  Just ask do-it-yourself investors like Susan Brunner and Robert Gibb.

What do you think of these companies?  Do you think past performance could be any forecast of future results for these dividend paying stocks?

Last year, my front lawn and parts of my back lawn were decimated by grubs.  It was a hot and very dry summer in Ottawa last year and the lack of rain over a period of many weeks coupled with some extreme heat beat my lawn into submission.  That hot, dry weather also encouraged significant grub growth.  Actually, the grubs didn’t do all the damage last year.  The damage went over the top thanks to some huge crows and a few night critters like racoons that dug up my lawn recklessly to find and eat the grubs as appetizers.  The damage started in July and continued right through to October.  Here is a picture of my front lawn today:

As you can see, there is a recovery process in motion – there are small signs of life.  For today’s post, I thought I’d take a departure from the personal finance and investing stuff and tell you what my recipe is for a healthy lush lawn this year, on a modest budget of course.

1.      Bye Bye Thatch

Thatch is dead and/or dying matted grass that accumulates on top of the soil.  Thatch prevents air, water, and fertilizer from reaching the soil.  This is not good folks.  So, I removed the thatch this spring with a metal rake.  It took me a few hours last weekend and this past weekend, but I raked our 0.5-acre lawn from stem to stern.  After the snow melted this winter, our lawn was brown in colour and very thin.  Every year actually, Ottawa’s harsh winter weather wreaks havoc with our lawns. To promote the recovery process, thatching was a must.  Getting rid of the thatch didn’t cost me a penny, just my time.  At least the weather was good when I did it.

2.      Hello Seed

I’ve read that overseeding is a great way to recover your lawn from winter; it will green up the lawn, thicken the turf and introduce new varieties of grass to existing turf.  Overseeding will also help crowd out weeds and withstand more bugs.  I typically use a hand-held spreader to overseed our lawn, going just above the seed manufacturer’s recommended spreading rates.  Unlike thatching overseeding will cost me money.  I decided to purchase a few bags C-I-L Golfgreen Grass Seed this year.  No, this is not a sponsored post.  I read this particular grass seed contains endophytes which should help my lawn and ward off grubs.  You see, endophytes are fungi that live inside grasses or plants in a symbiotic way.  Endophytes are natural and quite desirable (I’ve learned) in turf grasses.  While living off the host the endophytes will produce alkaloids that are not appealing to many insects; these alkaloids are essentially toxic to armyworms, chinch bugs, cutworms, green aphids and webworms.  Endophytes are basically a biological insecticide.  To date, I’ve purchased three bags of C-I-L seed at about $13 per bag ($39 total).  I’ll probably need a few more bags in a couple of weeks as I continue the overseeding process.

I’ll also need to buy some more good soil to mix the seed with.  To date, I’ve spend about $20 on soil and will likely need to spend at about $20 every month going forward mixing the seed with good organic soil.

3.      Welcome White Clover

With my degree in Biology, I probably should have remembered the benefits of clover in a lawn.  Clover not only greens a lawn, even during dry spells but it’s a natural fertilizer for your lawn by fixing nitrogen.  Using white clover on your lawn, you don’t have to buy any more lawn fertilizer – ever.  While nectar from the flowers clover produces might attract some bees now and then, you can rid yourself of this issue by mowing your lawn at a modest height, cutting the flowers during the blooming season.  The best part about white clover, apparently it is toxic to grubs.  A 500-g bag of white clover costs about $10 at my local hardware store down the road.  That small bag should cover a few hundred square feet.  I’ll probably need many bags this year (maybe another 5 bags ($50)) to encourage clover growth in areas where my lawn is well-established and where I’ve needed to start the lawn almost from stratch.

4.      Just Add Water

Based on seeding instructions, I’ll need to water my lawn liberally for about 7-10 days in a row to promote seed germination.  After that, I should be able to cut back to 2 days per week, eventually 3 days per week in another month.  Seeds cannot germinate unless there is good seed-soil contact, sunlight and lots of water for nourishment.  I’ve read you need to water your lawn enough to get the soil wet to about 4”-6” down or the equivalent of 1″ of rain per week.  It is not frequent watering you need for your lawn (once established) but deep, prolonged watering that will produce and maintain a healthy root system.  We have a well, so we don’t pay city water or sewer fees but I’m very water conscious so I don’t want to water the lawn recklessly.

Over the spring and summer, I’ll repeat the cycle of overseeding, adding clover and thorough watering.  When I need to mow the lawn I’ll keep the clippings on the grass and avoid cutting the grass too short.  I’ve read 3″ is a good height to maintain deep grass roots.

Hopefully…that should do it.

When I add it all up, the supplies to recover my lawn this year will cost me a few hundred bucks.  Not a killer expense but certainly enough money to be spent.  Last year was a disaster for our lawn.  Hopefully this approach on a modest budget will bring it back into top shape.

Got any tips for my lawn this year?

That’s right, I wrote it.  My Ottawa Senators will beat the Pittsburgh Penguins in seven games.  Although they lost game 1 of the series (4-1), I’ve got a great feeling they can rebound in game 2 on Friday night and come home with the split.  Who’s with me?

The “lawn weekend” will be filled with yard work and studying for an HR course I need to write an exam for soon but some relaxation is also in store as well.   Until my next post, enjoy these articles.  Have a great long weekend!

Mr. Money Mustache had a cool post about a lawyer calling it quits and a despondent millionaire.  The lawyer has more money than he can spend and now, realizing this, is quitting his job and selling his McMansion.  The despondent millionaire has been somehow programmed to think he has been financially unsuccessful by his family despite owning two homes and holding a bunch of investments.

Prairie EcoThrifter had some tips to simplify your life.

Garry Marr said too many eggs might be in the housing basket.

Modest Money offered what you might want to know to improve your credit score.

Avoid these mistakes, when starting your investing journey courtesy of Boomer & Echo.

Financial Highway wondered when do you like to splurge?  I don’t splurge very often, but when I do, I splurge on travel, and Dos Equis.  For the most part, stay frugal my friends.

Dan Bortolotti wondered if some potatoes can be socially responsible index investors.

Big Cajun Man scoffed at some bloggers seeking to retire by age 35.  I missed my chance.  The Financial Blogger on the other hand, is wondering if he can still make it.

My University Money offered a few ways your campus bar can become a rockstar.

Rick Ferri said on his blog this week:  “Wise investors do not try to time markets. They create an asset allocation to stocks based on their needs, invest in the asset allocation using index funds, and rebalance occasionally. A low-cost buy, hold and rebalance strategy has the highest probability for meeting future financial goals.”

The Passive Income Earner shared some mortgage strategies.  9 more years to kill mine, so the math says, can’t wait.

Dividend Growth Investor shared the world’s best dividend portfolio.

Dan Mac had a great post about reinvesting dividends.

My friend Steve has a way to shop at Costco sans membership – read more here.

Susan Brunner reviewed Power Financial.

A successful company has a few options when they earn real money.  Companies can:

• Reinvest its earnings back into the business,
• Buyback some of its common stock, or
• Pay a dividend.

I prefer the latter for all companies I own directly and from the perspective of a shareholder in Coca-Cola, I’m glad I do.

Coco-Cola (KO:US) started paying a dividend in 1893 and has been paying a quarterly dividend since 1920.  At the time of this post, the dividend payment is $0.28 USD.  Here are some interesting KO metrics courtesy of TMX and DividendInvestor.com:

*Recall P/E tells us a ratio about market value per share / earnings per share (EPS).  Generally, a higher P/E means investors are expecting higher earnings growth ahead.

With 50 years of consecutive dividend increases behind them and a generous P/E on the books, I can see KO churning out profits and dividends for investors for decades to come.  Let’s look at some interesting calculations:

• An investor who owned KO 23 years ago today (just picked the year 1990 at random) would have returned over 1000% on this investment.  The total value of a $10,000 investment in KO 23 years ago would be worth about $117,000 today.  You can play with stock calculators from this page or other sites and see for yourself.

With international growth on the rise, up near 20% in Thailand in particular and near 10% in other countries year-over-year, the future looks promising for Coca-Cola.

Since I’ve owned Coca-Cola, I’ve seen the quarterly dividend rise from $0.41 USD per share, to $0.44, to $0.47, to $0.51 before the 2-for-1 stock split last year.  As a top-20 holding, blue-chip stud in Vanguard’s Total Stock Market Fund (VTI:US), I see no reason to sell this company for the foreseeable future.  If the stock price moves up, I will continue to hold it.  If the stock price moves down, I will consider buying more if I have the money to do so since killing my mortgage competes heavily with my investing objectives.

As an investor, reliability is important to me.  I also recognize there are other ways businesses can deploy their earnings and for many companies, dividends are not guaranteed.  However in the case of Coca-Cola, it seems like dividends and capital appreciation are pretty much sure things.

Do you own Coca-Cola stock directly?  Do you own it indirectly via Exchange Traded Funds (ETFs) like VTI or others?

Image courtesy of http://www.photographyblogger.net/16-exceptional-coca-cola-pictures/

Warren Buffett is recognized as one of the greatest long-term investors of all time.  Buffett has said many things about buying and holding stocks for the long run, but this is one of my favourite quotes from him:  our favorite holding period is forever.

How long should you and I hold a stock?

Buffett answered this question by saying if you don’t feel comfortable owning a stock for 10 years you probably shouldn’t own it for 10 minutes.  Sage advice.  ’m trying to follow that advice as much as I can.  For most part, unless my companies change direction dramatically and as long as they pay dividends, I’m holding them.  In some cases, I’m buying more of them automatically via dividend reinvestment plans (DRIPs).

How has this strategy worked out for me over the last few years?  Not bad actually.  My 28 Canadian companies are on target to pay out just over $6,850 in dividend income this year (an increase of $80 over last month) but I suspect the income might be more since I reinvest dividends often and I will likely make more contributions to our TFSA before December while other monies go towards lump sum mortgage payments.

Our dividend income is a critical component of our retirement plan so we can’t spend the dividends today.  Instead, it must be reinvested or at very least saved so we can buy new companies if equity markets decide to retreat a bit.  I can’t predict when markets might slide (I really have no clue if and when they will do) but I’m cheering for falling  markets since this investor likes to buy stock(s) at cheaper prices than today.  I don’t always get my way but once in a while my wish comes true.  Thinking about this wish reminded me of an article by Andrew Hallam, author of Millionaire Teacher who wrote this in the Globe and Mail about falling markets:

The notion that bad markets are good opportunities is a tough thing for inexperienced investors to get their heads around. They are often happy when markets rise. But as Warren Buffett likes to point out, this makes as much sense as celebrating the rising costs of groceries.

Hopefully many years into the future Andrew I’ll be celebrating the fruits of my labour after doing a few things very well:  holding blue-chip companies that pay dividends as close to forever as I can.

Friends of My Own Advisor, can this strategy work out for me in the long run?  What should I be mindful of with my dividend income strategy?

Last week, all the chatter by the cool kids on Twitter was about an Eric Gryba hit (from my Ottawa Senators) on Lars Eller (Montreal Canadiens) in game # 1 of this series.  Gryba served his suspension and thankfully Eller was OK and is recovering. This week, I’m proud to say my Sens crushed the Habs in game # 5 and promptly disposed of those speedy Habs, winning their round # 1 series 4-1.  Goaltender Craig Anderson was a beast in every game and I can only hope he continues his stellar play in round # 2.  At the time of this post our next opponent is to be determined but regardless who it is, round # 2 should exciting.  #GoSens #peskySens

The hot weather in Ottawa is gone but the temperature continues to be mild.  Our lawn took a beating last year with the drought and lawn grubs almost killing it so I’ll be working on restoring our lawn this weekend; raking it, overseeding it and watering it.  I suspect I’ll be rinsing and repeating this cycle for weeks.  I’ve read white clover is very good for your lawn as well and it helps get rid of lawn grubs.  Can anyone out there confirm that for me?  Do you use clover on your lawn?

Before you get working on your house, lawn or garden this weekend, make some time to check out some of these great blogs.  I’ll be back next week with a dividend income update for April and maybe a few other posts.  Take care!

Here’s a refresher about the elements of investing courtesy of the CFA Institute, covering five key principles:  asset allocation, a long-term horizon, diversification, low costs and tax management.

Fans of Modest Money voted for Canada’s Top Finance Blogs 2013.  Congratulations to all finalists and vote here for your favourites!

The Dividend Guy wondered if sell in May and go away was good investment advice.  Not for me.

Million Dollar Journey offered some smart ways to spend your tax refund.  I will be writing a post about how we spent our tax refund soon.

Dividend Monk took a look at Colgate-Palmolive.

Boomer & Echo wondered how much of your income you save.  Robb is apparently saving a bundle of his, great work!

The Passive Income Earner shared some TFSA strategies.  I use the TFSA as a retirement account, a great one at that.

Dividend Ninja offered some stock selections in the telco, real estate and energy sectors.

Freedom Thirty Five was happy to connect with a few bloggers recently.

Canadian Mortgage Trends wondered if mortgage brokers can avoid a potential conflict or maybe just avoid Garth Turner specifically, including Garth’s criticisms of the mortgage industry.

Mr. Money Mustache shared some tips to prosper in an economic boom.  His advice is clear and timeless how to behave in a boom:  “Everyone is speculating vigorously on stocks, and the index is at a high valuation. You’ll want to continue your regular investing program, but your asset allocation rules will automatically make you buy fewer stocks and more bonds. And especially look into alternatives like paying off your mortgage early – this is the time to get out of debt, because the getting is easy.”

My friend the Blunt Bean Counter shared some travel travails.  He said he needed another week to rest his brain post tax season.  I can’t blame him.

Canadian Couch Potato couldn’t believe investors can be this clueless.

Canadian Capitalist reminded us RBC and BMO are offering cheaper business banking options.

A Millionaire Teacher I know added $20,000 to his portfolio recently.  I only wish I could have that kind of cash flow every few months.  Someday Andrew…

Big Cajun Man reminded us the answer is always no, unless you ask; then you have a shot at discounts.

Mr. CBB is young and almost financially free.  Great work!

Michael James on Money wondered if 15% returns are too high or low.  I just wish 15% returns were normal.

Thanks for including me in the following Carnivals:

Carnival of Investing

We’ve all heard the refrain before – death and taxes – these are two certainties we must all face as part of life.  Believe it or not, you can also be taxed after death.

After your death, even if you are a Canadian citizen your estate may be subject to U.S estate taxes.

What is U.S. Estate Tax?

This is the tax imposed on the estate of a deceased person, such as property transferred under a will and certain other property that flows on death.  This tax can apply to U.S. business assets, U.S. real estate property, U.S. stocks and other assets above a certain market value.  I’ll provide more details on that in a bit.

U.S. estate tax is applied on a scale.  These rates apply whether the individual is a U.S. citizen, a U.S. resident, or a non-resident ― the difference is that for non-residents who are not U.S. citizens only the value of property with a U.S. location or connection is included in calculations.  Canadians investing in the U.S. should be concerned about this and read on to see if this tax might apply to their estate.

But I’m a Canadian citizen!?

Regardless if you’re a Canadian resident, even if you don’t live in the U.S. or you’re not married to a U.S. citizen, upon death your estate may be subject up to 40% U.S. estate tax after January 2013.  (Recall Canada doesn’t have any estate tax.)  As a Canadian citizen, when you die, our tax laws say you dispose of all your capital property and assets at fair market value, unless the assets are transferred to certain people.  You may have some capital gains but you may also be able to take advantage of some tax deferrals.  Let’s quickly use RRSPs as an example.

When Canadians die, RRSPs are deemed “disposed” and depending upon who is the beneficiary, the tax consequences from your RRSP can be deferred to your spouse or other financially dependent individual.  Read an excellent article here for more information on that.

Back to U.S. estate taxes…

When Canadians die, they will be forced to pay U.S. estate taxes depending primarily upon:

1. their worldwide assets, and
2. how much of those worldwide assets are U.S. “situs” assets.

U.S. situs assets is a fancy term that includes the following stuff:

• Real estate property (e.g., condo in Florida) and other tangible property situated in the U.S.,
• U.S. securities, including those held in a discount brokerage account in Canada or outside Canada like:
  • U.S. mutual funds including money market funds,
  • U.S. securities including ETFs and stocks in an RRSP, RRIF, RESP or TFSA,
• Any business-related assets owned by a sole proprietor and used in a U.S. business activity,
• Some U.S. debt obligations.

Fortunately, the Canada-U.S. tax treaty provides Canadians with some exceptions from U.S. estate tax.  Generally speaking, this treaty allows Canadians to avoid U.S. estate tax if after January 2013:

• The worldwide assets of the deceased are less than $5.25 million USD (only in certain circumstances involving spouses can this amount be doubled).

OR

• U.S. situs assets of the deceased are less than $60,000 USD at the time of death regardless of worldwide assets.

In summary, you are exempt from U.S. Estate Taxes if you meet only ONE condition.  If you meet both conditions you must pay up.

In addition, under the Canada-U.S. tax treaty a foreign tax credit may be claimed in Canada with respect to U.S. estate taxes paid.  The credit may only be claimed to offset Canadian income tax otherwise payable to those U.S. situs assets such as:

(a)        capital gains tax triggered in Canada upon the death of the owner of U.S. situs assets, and

(b)        RRSP/RRIF income inclusions where the RRSP/RRIF held U.S. situs assets.

The latter is very important to be aware of (and your lawyer and professional accountant will know what to do) since if this foreign tax credit is not applied for, the credit will not be applied and your estate may be forced to pay both U.S. estate tax and Canadian income tax on the U.S. situs assets. Double-taxation.

Needless to say this is a very complex tax subject and U.S. estate taxes can make investors’ heads spin.  Furthermore, I just scratched the surface with this post today.  So, to wrap up, some considerations for you for a complex but important subject:

• Make sure you have an up to date will with an executor named,
• Make sure you have beneficiaries identified for all your investment accounts which permit beneficiary designations,
• If you have a large worldwide estate, choose an executor who will strategically maximize your estate’s ability to claim a foreign tax credit in Canada for any U.S. estate tax required to be paid.

I want to thank Mark Goodfield and namely his colleague Katy Basi for providing some assistance on this blogpost.  You can follow Mark’s stellar personal finance blog here.  Katy Basi is a barrister and solicitor in the Toronto area, focusing on wills, estate planning and income tax law.  While Katy is not qualified to practice U.S. law, she did review this post based on her current knowledge in this complex area.  Katy’s expertise is available to Canadians here.

Over the years I’ve spend on ton of cash on things that didn’t provide value. I can’t offer that list today because that’s an entirely new set of blogposts which I’m sure I’ll cover at some point  As I become more financially aware about what I spend my money on I find I’m wasting less money; which is a great thing.  Value for money is an important principle to me.  In the name of value, some things in life are definitely worth splurging on; I get value for money from different sources.  For today’s post I’ll share some specific things I enjoy spending my money on and have little regrets in doing so.

Dining Out

For special occasions, this is a no-brainer for me.  I’m no foodie or wine connoisseur but I enjoy a great meal paired with some tasty grapes now and again to celebrate something.  Dining out every week is definitely not my thing.  I can’t afford it first of all and secondly I’m too money conscious (cheap) for that.  Because I don’t dine out all the time I have no problem spending my cash on a nice meal at a good restaurant every few months since I consider this evening out as an experience or a reward.

Travelling

In my former life, I might have been a gypsy.  I love to travel and try to do so for pleasure as much as I can afford it.  Seeing new places and meeting new people is a rewarding experience for me and I suspect it always will be.  Over the last decade, I’ve been very fortunate to travel to countries like Cuba, Mexico, Spain, Italy, Argentina, Costa Rica and many U.S. states on vacations.  I don’t regret spending that money on those experiences for a second.  Travel has enriched my life and given me tons of perspective I would never have otherwise gained.  I can only hope as I age and become financially free I maintain my good health to visit many more lands I have yet to experience.

Buying a nice TV

I don’t watch an abundance of movies but I love sports.  I can’t imagine not owning a decent cable package, with a decent TV at home that does not include The Golf Channel or access to NHL hockey for 8 months of the year.  Forking over good money for nice big screen TV is well worth the cost in my opinion.  Although watching the game(s) live is great, and I pay money for that as well, I do it infrequently because of the costs involved:  the time to get to the game, the parking, the food and drink at the concessions not to mention the ticket prices themselves.  For example, watching an NHL game in Ottawa, with all that factored in can easily cost about $100 per game in the cheap seats.  If you want to sit closer to the action, the cost might be double or triple that amount, especially so during Round # 1 of the NHL playoffs right now.  Live sport is awesome but I can still be a fan of my Ottawa Senators at home most nights, certainly when there are more pressing financial priorities this spring and summer around our house.  There is only so much money to go around…

There isn’t a day that goes by that I regret getting my big screen TV and on the topic of my Ottawa Senators, I can’t wait for tonight’s game between my hometown team and the Montreal Canadiens.  #GoSens!

If you’ve always wanted a nice big screen TV then you’re in luck!   I am co-hosting a killer giveaway brought to you by QuoteMeAPrice.com where you can win a Samsung UN50EH6000 50-Inch 1080p 120Hz LED HDTV.  How awesome is that?!

How do you win this huge TV for your home?  Just enter this FREE contest using the rafflecopter widget below.  The contest closes the end of May during Round # 3 of the NHL playoffs and is open to everyone.  Good luck!

a Rafflecopter giveaway

Almost impossible to imagine some four months ago but we’re now watching NHL hockey folks.  At the time of this post, there is lots of chatter on Twitter about the Eric Gryba hit (from my Ottawa Senators) on Lars Eller (Montreal Canadiens).  Gryba’s hit was hard and the result was bloody but it was clean.  I’m sure some Habs fans will argue with me on that one.  In the end, the best team won 4-2, it was a gutsy road game win and we’re up 1-0 in the series going into Friday’s game in Montreal again.  I can’t wait for it.

Spring seems to have finally sprung in our Nation’s Capital, we hit the mid-20s this week (for my friends in the U.S. that’s about 80 degrees Fahrenheit) which means it’s time to get my ass in gear and get working on the lawn and gardens over the next couple of weeks.  I actually enjoy this work outside…

Also, I want to take this opportunity to congratulate one lucky reader who I recently contacted to announce they had won a copy of How Much Is Enough?  Thanks to everyone who entered this giveaway and promoted it via social media over the last month.  Thanks to recent bloglove I’m approaching 1,000 subscriptions.  On that note, this is probably a good time to remind you Google will be pulling the plug on its Google Reader service on July 1st.  To follow my blog, you might be using Google Reader.  If so, I encourage you to find another reader to use or subscribe to my blog via email.  By subscribing you’ll get my updates every time I have a new post about saving, investing, the psychology of money, stuff to giveaway and much more.

Thanks for being a fan of this site and enjoy these great articles this weekend.

Mark

I liked the tips on Canadian Budget Binder this week, protecting your vegetable garden.

Canadian Personal Finance wondered if Bitcoins will be a viable currency.

Prairie Eco-Thrifter said you should be wary of financial rules of thumb.  I’m not so sure.  Spend less than you make is a pretty darn good one.

My buddy The Financial Blogger questioned whether paying off your debts is a good thing.

The Passive Income Earner said to get retirement ready with proper asset allocation.

Modest Money is giving away a friggin’ TV!  Come back next week for a chance to win it on my site.

Dividend Ninja encouraged you to take control of your financial future.  I couldn’t agree more.

Million Dollar Journey shared how to prevent credit card fraud.

Michael James has a handle on his car costs.

Big Cajun Man reminded you about tax day 2013.  It’s over for another year just in case you were wondering, or late, or forgot.

Retire Happy suggested you stress test your debt.

Preet Banerjee interviewed one of the co-authors of More Money for Beer and Textbooks, Kyle Prevost.

Robb Engen from Boomer & Echo provided a few good ways to save on your next vacation.

Don’t forget to check out Grocery Alert’s Guide to Cross Border Shopping for Canadians.

I’ve got a bunch of debt – mostly from my mortgage.  I wish there was a way to convert this mortgage debt into a tax-deduction, you know, like the Americans can, to kill off my mortgage faster.  Sounds like fiction in Canada right?  Well, this can happen to you and me if we follow The Smith Manoeuvre.

While The Smith Manoeuvre is tricky to set up and takes some significant financial discipline to keep it going, it is perfectly legal and complies with our Canadian tax code.  I’ve been considering this approach for my portfolio for some time and a recent conversation with someone piqued my interest again, pun intended.

This manoeuvre has already been described across the blogosphere quite a bit; Google-it and you’ll find these great posts over at Canadian Capitalist and Million Dollar Journey.

Canadian Capitalist and Million Dollar Journey links:

Smith Manoeuvre Part 1.

Smith Manoeuvre Part 2.

Smith Manoeuvre Part 3.

Smith Manoeuvre Part 4.

Canadian Capitalist also reviewed Fraser Smith’s book here.

Million Dollar Journey links:

Smith Manoeuvre – Part 1.

Smith Manoeuvre – Part 2.

Should I Start the Smith Manoeuvre?

The Smith Manoeuvre Money Flow.

Million Dollar Journey also paid tribute to the late Fraser Smith here.

Smith Manoeuvre Facts and Flow

The idea is to convert your existing mortgage debt into tax-deductible (investment) debt and use the tax deduction and income, if you choose from investments made to pay down your mortgage.

To make the idea a reality:

• You need a readvanceable mortgage whereby you can tap into your Home Equity Line of Credit (HELOC).
• As you pay-off the mortgage principle, like you’re doing today, the amount of equity available in the HELOC goes up over time.  Mortgage goes down; available credit to borrow goes up.
• That available HELOC can be used fund investments.  Refer to the figure below courtesy of National Bank:

Take available money out of HELOC and invest it – preferably into solid income-producing investments in a non-registered self-directed discount brokerage account.  When you borrow money for investment purposes, the interest paid on the loan is tax-deductible.

Use the tax-deductions and investment income (e.g., dividends) to pay down your non-deductible mortgage debt.

So, mortgage debt does down; available HELOC keeps going up, as you use the HELOC to buy more income-producing investments.

Smith Manoeuvre Considerations

This type of leveraged investing is not for the uninitiated investor.  This process has tax, investment and more than a few psychological risks.

On the tax-side, you must present a clear audit trail of your investment approach in case Canada Revenue Agency comes knocking.  Simply taking money from your HELOC and using that money to invest is NOT the Smith Manoeuvre.

On the investment-side, you better ensure your income-producing investments are in your non-registered account.  Using money from your HELOC to invest in your RRSP or TFSA will NOT give you a tax deduction.  Also, be mindful, the essence of borrowed money – it must be repaid at some point.  So, make sure your income-producing investments have the potential to exceed the interest burden you are taking on.

On more of the psychological-side, you must be aware you are re-borrowing money to pay down your mortgage.  Canadian Capitalist, Million Dollar Journey and other prominent bloggers have stated time and time again when discussing this strategy, you need to be very comfortable with leveraging to perform this trick.  What happens if your income-producing investments don’t cover your loan?  What happens when house values drop and you need to move?  What if you need money in an emergency?  What happens when interest rates change and/or borrowing costs go up?  Investing is not just about buying assets it is very much about psychology and planning for the unplanned too.

You must also consider the time and maintenance this process takes.  Probably most investors who have a decent income, to perform this trick don’t need to do it anyhow.  Check out what Michael James on Money said:

“I suspect that the Smith Manoeuvre is too risky unless your income is high enough to pull you out of any problems with your investments or a drop in the value of your home. But, if your income is high, why not just go for the low risk strategy of paying down your mortgage and investing some of your excess earnings?”

Smith Manoeuvre Conclusions

The Smith Manoeuvre is tricky to set up and take some smarts to keep it going but it is a perfectly legal and an accelerated way to kill your mortgage debt while growing your investment portfolio.  For those investors ready to take it on, great stuff and I wish you well but personally I’m not ready to take this leap yet.  Although I’m very intrigued about using this strategy myself, it’s just not the right time for me.  I want to thank my brother-in-law from inspiring me to write this post and I look forward to hearing from him if, when, how and how long he intends to use this process on his own journey to financial freedom.

Have you used The Smith Manoeuvre?  Are you considering taking it on?

Want to read even more about this strategy?  Check out an outstanding post by fellow blogger The Passive Income Earner.