Your dividends can do two jobs, not one
A dividend can only be reinvested once. Unless you route it the right way first.
If you hold dividend-paying stocks in a regular taxable account, most people just set the dividends to auto-reinvest. Cash comes in, buys more shares, done. Nothing wrong with that at all.
But if you happen to be running the Smith Manoeuvre, there's a better path for that same cash. Quick version of the strategy for anyone who hasn't seen it: it slowly turns your regular mortgage, where the interest is not tax deductible, into an investment loan, where it is. You use a readvanceable mortgage, which just means a line of credit that grows as you pay the mortgage down. You borrow that room and invest it. This is not new debt. You're converting a balance you already owe into a form the tax rules let you deduct.
Now the dividend part. Instead of letting it auto-buy more shares, take the dividend in cash. Use it to make an extra payment against your non-deductible mortgage. That frees up the exact same amount of room on your line of credit. Borrow it back, invest it. Same dividend, two jobs: it shrank the bad debt on the way through, and it still ended up invested.
Quick Ontario example. A $600000 mortgage, a portfolio around $40000 paying 4 percent. That's about $1600 a year in dividends. Reinvested straight, it just buys shares. Routed through the mortgage first, that same $1600 knocks down non-deductible principal, converts a little more of your mortgage to deductible, then buys the shares anyway.
And the tax doesn't change. A dividend is taxed in the year you receive it either way, cash or reinvested. So doing it this way costs you nothing extra at tax time. You're just making the money work twice.
The honest part. This only works if you're set up properly, with a separate account that keeps the borrowed money completely apart from your personal cash. The CRA wants a clean, traceable line from the borrowed dollar to the investment. Let personal money mix in and you can lose the deduction. And the real risk isn't the debt, it's that the converted balance is invested now, so the market can drop while you still owe it. On a small portfolio this barely moves the needle. It only starts to matter once the dividends get big enough to notice.
Not investment/tax advise. talk to professional regarding your unique circumstance.
