The Bank of Canada held the overnight rate steady on September 2, but the advertised HELOC rates at major lenders crept up anyway. The five largest banks now quote 4.95% as the bottom of their published range, as bank HELOC pricing persisted in the mid-5s range. That half-point move matters less for the monthly payment than for what it does to the arithmetic behind the Smith Manoeuvre™.

The Smith Manoeuvre™ works by converting non-deductible mortgage debt into deductible investment debt. You borrow against your HELOC to invest in a taxable account, deduct the interest on your return, and use the tax refund to pay down the mortgage. The whole structure depends on one condition: the borrowed money must go directly into income-producing investments. Put it into a TFSA or an RRSP and the interest becomes non-deductible immediately, no matter how well-intentioned the strategy.

At 4.95%, the cost of that mistake is higher than it was in March. A $50,000 HELOC advance into a TFSA now costs $2,475 in annual interest with zero deduction. The same dollar amount borrowed against a property with 35% equity produces $866 in tax savings at a 35% marginal rate when the advance funds a taxable account instead. Miss the distinction and you pay $2,475 to fund an account that could have been filled with after-tax cash, while the interest deduction you thought you were building never materializes.

The Income Tax Act draws a bright line. Interest is deductible when the borrowed funds are used "for the purpose of earning income from a business or property." A TFSA generates no taxable income. The growth inside an RRSP is tax-deferred. Neither structure generates the dividend or interest income the deduction rule requires. The Canada Revenue Agency treats any HELOC advance used to fund these accounts as personal borrowing, and personal interest is not deductible.

That rule hasn't changed. What changed is the rate, and rates at the current level make the spread between deductible and non-deductible borrowing wide enough to ruin a household budget. Someone running the Smith Manoeuvre™ correctly on a $200,000 HELOC at 4.95% saves $3,465 annually at a 35% marginal rate. Someone who misunderstood the rules and used half that balance to fund an RRSP loses $4,950 in non-deductible interest with no offsetting refund. The error costs more than the correct strategy saves.

The problem compounds when the RRSP contribution itself generates a refund. That refund feels like validation. It isn't. The RRSP refund comes from the contribution amount you put in, not from the HELOC interest. The interest on the borrowed money remains non-deductible, and now the borrower is paying 4.95% on a balance that will take years to clear while generating no tax benefit. The RRSP refund should have been used to pay down the mortgage or reinvested. Instead it's being absorbed by the cost of the mistake.

HELOC posted rates among major banks have settled in the 4.95% to 5.45% range. It coincided with stabilization in the overnight rate but reflected lender pricing adjustments independent of the Bank of Canada's target. The old rate made sloppy execution of the Smith Manoeuvre™ expensive. The new rate makes it unworkable.

If you borrowed against your HELOC to fund a TFSA or RRSP in the last year, review the interest you've paid and the deductions you claimed. If the advance went into a registered account, no deduction is allowed, and the balance should be repaid as quickly as possible. If you are planning to start the Smith Manoeuvre™, confirm the destination account is taxable before signing the advance. The structure requires precision, and at 4.95%, imprecision costs $99 per $1,000 borrowed annually, with zero relief at tax time.