Cash Damming

What would you say if the mortgage interest on your new personal residence was tax deductible from your income?

None incorporated self employed people can take advantage of this fantastic technique. Following a recent decision by the Supreme Court of Canada, combined with a new administrative position taken by Revenue Canada, self employed individuals may now use the ” cash damming ” technique and therefore convert non-deductible mortgage interest on their personal residence into deductible interest.

Figures that will blow you away

For example, a self employed individual that uses the “cash damming” technique could deduct from his revenues an impressive sum of 106388$ (this amount s calculated based on a residential mortgage of 150000 $ at a 6% interest rate on a 20 year period) if the individual is being imposed at 45%. Using the Cash Damming technique the self employed individual will be 47875$ richer after income tax. Not bad !

How does Cash Damming work?

Usually, self-employed individuals that aren’t incorporated use their own gross income (their total sales or billing) to pay their operating expenditures and they finance their major personal expenses, for example their home mortgage.

By using the cash damming technique, those same individuals will use the gross revenue from their business to speed up payment of their personal mortgage and, from now on, will finance 100% of their operating expenditures. By operating this way, they will gradually convert non-deductible interest (from their mortgage) into deductible interest (from their business loan).

Take Mike, for example?

Mike is a self-employed, non-incorporated worker and, within his profession, he incurs $75,000 in business expenditures (lease, salaries, supplies, etc.), which, so far, are being paid from his gross business revenues of $200,000.

Mike has just bought a new house and will have to pay down a mortgage of $150,000. Once the cash damming technique is in place, Mike will use that part of his revenues that would have normally gone toward paying his business expenditures, to make an additional mortgage payment on his personal residence.

Then, the financial institution will allow Mike to use a mortgage line of credit for an amount equivalent to the additional mortgage payment that he has just made. And so, with his mortgage line of credit, Mike will therefore be able to cover the cost of his current business expenditures.

And since the amounts loaned against the mortgage line of credit will have been loaned for business purposes, Mike will then be able to deduct, from his revenue, the interest incurred on the loaned amount. He will have consequently converted non-deductible interest (from a residential mortgage) into deductible interest (from a line of credit for business purposes).

With annual business expenditures of $75,000, it will take Mike barely 2 years to completely convert his initial mortgage of $150,000 into a mortgage line of credit, simultaneously making the interest deductible for the full remaining term of his debt debt.

In this way, Mike will recover over $47,875 net in taxes.

A salaried individual and income-producing property

A salaried individual, just like a self-employed individual, who owns or buys an income-producing property, will be able to use a different variation of cash damming so that he, too, can convert non-deductible interest from his residential mortgage into deductible interest.

In fact, in such a situation, that individual will then be able to use that portion of his rental income that normally would have been spent on paying the operating expenditures of the rental property (taxes, insurance, maintenance, mortgage payments, etc.) to make an additional mortgage payment on his personal residence. And just like Mike in the previous example, once this additional payment is made, this salaried individual will then use a mortgage line of credit to pay current expenses on his income-producing property.

And since the amounts loaned against the mortgage line of credit will have been loaned for business purposes, he will have then gradually converted non-deductible interest (from his residential mortgage) into deductible interest (from his line of credit for business purposes).

A few important recommendations

Since there are other planning strategies designed to maximize the tax benefits within the cash damming technique, consult a professional who will be able to set up a strategy that is perfectly in keeping with your needs, taking into account such aspects as:

The rules on partition of the family patrimony
Personal and business expenditures (a car, etc.)
QST and GST collected on your sales within your business
Situations where the spouses are co-owners
Etc…