Cash damming: run your business costs through a HELOC
A cousin of the Smith Manoeuver for people who earn business or rental income. Here is the idea, who it can suit and why the paper trail matters.
How it works, in three steps
- 1Your business or rental income pays down your mortgage. The mortgage is personal debt, so its interest is not deductible.
- 2Your business or rental expenses are paid from a HELOC. The borrowed money then has a clear income-earning use, so the HELOC interest can be deductible against that income.
- 3Over time, personal debt falls and deductible debt rises. Your total debt does not change, but more of it has a tax-deductible use.
Cash damming does not make mortgage interest deductible. It changes which debt you hold, and the usual interest rules decide what is deductible.
A simple example
Your business earns $10,000 and has $10,000 of expenses. The income pays down the mortgage and the HELOC pays the expenses. The mortgage is $10,000 lower and the HELOC is $10,000 higher.
At a 4% mortgage rate you no longer pay $400 a year of non-deductible interest. At a 5% HELOC rate you pay $500 of interest, and in a 40% bracket the deduction returns $200, so it costs $300. The figures are round numbers for illustration.
Could this fit me?
It may suit you if you
- Are self-employed or own rental property and have steady deductible expenses
- Own your home with a mortgage and have a HELOC or a readvanceable mortgage
- Can keep the HELOC for business or rental costs only
It is not for you if you
- Only hold investments, with no business or rental expenses to run through the account (the Smith Manoeuver is the relevant strategy)
- Operate through a corporation and have not taken advice, since the company's income and expenses are not yours
- Mix personal spending into the same credit line
The honest catches
- Tracing is everything. Interest is deductible when the borrowed money can be traced to an income-earning use. The CRA says that on a mixed credit line, repayments do not clear the personal part first, so a mixed line causes trouble.
- Scrutiny. The CRA has not approved this specific structure. It applies its normal interest rules, and a plan that looks built only to make mortgage interest deductible can draw questions.
- Rates and discipline. HELOC rates are usually higher than mortgage rates and are often variable. The strategy also depends on keeping separate accounts and detailed records.
- Get advice first. An accountant should set this up with you, and your bank must offer a suitable HELOC.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Compare deductible and non-deductible interest
This calculator models the borrow-to-invest version, not cash damming, but it shows how the HELOC interest refund compares with mortgage interest.
Open the Smith Manoeuver CalculatorKeep the trail the CRA expects
The HELOC Interest Tracing Ledger records each HELOC draw, what it bought and your monthly interest, flags draws that were only partly or late invested, and gives your accountant a line 22100 summary.