Your mortgage, working as an investment loan
In Canada, the interest on the mortgage for the home you live in isn't tax-deductible. Interest on money borrowed to invest generally is. The Smith Manoeuvre is a way to move your debt from the first kind to the second, a little every month, without paying more than you already do.
The idea behind it
The strategy is named after Fraser Smith, a Canadian financial planner who wrote about it in the early 2000s. His point was simple: most homeowners spend 25 years paying down a debt that gives them nothing back at tax time, and only start investing once it's gone.
The Smith Manoeuvre does both at once. Every dollar of principal you pay off is borrowed back right away and invested. Your mortgage still shrinks on schedule, but a portfolio grows beside it, funded by money that was already leaving your account.
The rule it's built on
Interest is generally deductible when borrowed money is used to earn income from property, such as dividends or interest. CRA's Income Tax Folio S3-F6-C1, Interest Deductibility looks at what the borrowed money was directly used for. The Supreme Court of Canada's Ludco decision (2001) is the one usually pointed to here: an investment can qualify even if income isn't your main goal, so long as it's reasonable to expect some. Borrowing purely in hope of a capital gain isn't enough on its own.
That's why the investments are usually income-producing, held in a non-registered account, and bought with a line of credit used for nothing else.
What you end up with
At the end, you owe roughly what you owed at the start. The difference is that none of it is a personal mortgage any more. It's an investment loan whose interest you can deduct, and against it you own a portfolio you built along the way.
Each spring the tax refund on that interest goes onto the mortgage too, so the conversion finishes years before a regular mortgage would be paid off.
Where the benefit comes from
There are two engines. The first is the tax refund: each year, part of your interest comes back and pays down more of the mortgage. The second is the portfolio itself, which has decades to grow and pay income.
On the other side is the interest on the line. The strategy comes out ahead when what the investments earn, plus the refunds, beats that interest over the long run. Borrowing to invest magnifies results in both directions, which is why time is your friend here.
Ways to speed it up
The basic version converts your mortgage as fast as you pay it down. Some people add fuel. A debt swap converts a chunk on day one using non-registered investments you already own. Rental Cash Damming uses rent to pay the home mortgage down faster. Even putting every refund straight back on the mortgage makes a real difference over the years.