The cash flow dam (aka. cash damming) is a strategy that converts personal debt into tax deductible business debt.  The goal is to save taxes.

Here’s how most people implement it:

1. They get a line of credit for their business

• Their allowable business expenses are then paid each month using this line of credit

• They use their business revenue to pay themselves instead of their business expenses (so they can pay down more of their mortgage and avoid non-deductible mortgage interest)

• Since the line of credit is used for a business that generates income, they deduct the line of credit interest on their tax return

Keep in mind, cash damming requires you to have an sole proprietorship or partnership.  It won’t work with a corporation.

As with the Smith Manoeuvre, the cash flow dam is a powerful strategy, but there are implementation risks.  There are lot’s of little caveats (e.g.  you can’t pay your own salary from the line of credit).  CRA could invalidate your use of the strategy if they deem it’s done incorrectly.  Therefore, always consult a licensed tax advisor before considering it.  If you need a referral just ask us or your favourite mortgage planner.

Last modified: April 26, 2014