Cash Dam – Best Mortgage Strategy if You Own a Small Business or Rental Property

This article was originally published on November 20, 2017. We have since made updates to it based on relevant, new information. We’ve also added a video and podcast episode that articulates the content in the article.

What Is the Cash Dam and How Does It Work?

Cash Dam is a simple but powerful concept to help you make your mortgage tax-deductible if you own either a small business or a rental property. It’s an especially attractive option if you are familiar with the Smith Manoeuvre or other tax minimization strategies. Cash Dam (sometimes referred to as the “cash flow dam” is a pure tax strategy without investment risk that does not require any of your cash flow.

What is cash damming?

The Cash Dam allows the owner of a small business or rental property to more quickly convert the mortgage on their home into a tax-deductible mortgage. It’s a variation on the Smith Manoeuvre, but without  investing. The Cash Dam is essentially an expedient way to change bad debt into good debt.

The Cash Dam involves using a line of credit to pay your business expenses. Then you use the increased business cash flow to pay down your ordinary non-deductible mortgage or loan. The result is an increasing tax-deductible business credit line, while paying down your non-deductible mortgage or loan. The Cash Dam will only work if you own a non-incorporated personal or partnership-based small business or a rental property.

Is it legal?

The Cash Dam is specifically allowed by the CRA. It is explained in the Income Tax Folio S3-F6-C1, Interest Deductibility. You are allowed to segregate your borrowing into separate accounts, so you can trace which borrowing is for a tax-deductible purpose and which is not.

The critical issue is that you need to be able to trace the amount borrowed to a tax-deductible purpose and be able to show that the “current use” of that borrowed money is still for the tax-deductible purpose.

To understand the concept, if you could not find a tenant for your rental propety for a full year, you would just borrow to pay all the rental expenses. If you keep that separate from other borrowing, you can deduct the interest as a rental expense.

Now if you do have rent, you can use the gross rent for any purpose, such as paying down your mortgage, while continuing to borrow to pay all your rental expenses.


You own a small non-incorporated business that has $2,000 in expenses each month. You also have a readvanceable mortgage on your home with a credit line (HELOC) linked to your mortgage. The $2,000 per month business expenses could be paid by the home equity line of credit (HELOC). You then use the additional $2,000 cash you have because you did not have to pay your business expenses to make extra payments on your non-deductible mortgage. Each extra payment of $2,000 gives you $2,000 additional credit in your credit line to pay the next months’ expenses.

Interest paid on money that’s borrowed for business expenses is tax-deductible. By using the Cash Dam, you’ll be left with a growing tax-deductible business credit line and a non-deductible mortgage that’s been quickly paid down.

One of the keys to the Cash Dam, however, is capitalizing the interest on the business line of credit. Use your Cash Dam credit line to also pay its own interest. That way, you avoid using any of your own cash flow.

Best Real Life Example

A great example is Tony, a client that is a general contractor without a corporation. He has $1 million in sales from construction contracts that he gets done with $800,000 of sub-trades and a $200,000 profit. He has a large $800,000 mortgage on his own home because he did major renovations on it.

For Tony, the Cash Dam was extremely advantageous. We helped him get a readvanceablbe mortgage on his home. He used $800,000 of his sales to pay off his mortgage in one year, while using a credit line linked to his mortgage to pay the $800,000 in subtrades.

In just one year, his entire $800,000 mortgage became an $800,000 tax-deductible business mortgage!

In most cases, this process takes years as the owner of a small business or rental property slowly uses his gross sales or rent to pay down his mortgage, while borrowing from the linked credit line to pay all business expenses. The credit line interest is also a business expense.

How does the Cash Dam differ from the Smith Manoeuvre?

The Cash Dam and Smith Manoeuvre both convert your mortgage into tax-deductible mortgage over time. However, the Smith Manoeuvre also allows you to buy investments without using your cash flow.

Investing from your credit line is why the Smith Manoeuvre has a much higher benefit and risk than the Cash Dam. This investment risk is not high if you stick with the Smith Manoeuvre long-term and invest effectively and tax-efficiently.


To do the Cash Dam, you need to get a readvanceable mortgage linked with a credit line, so that you gain credit in the credit line with each mortgage payment. Then you need to setup how you will trace the flow of cash.

In practice, it can be tricky to accomplish. Many people that do the Cash Dam also do the Smith Manoeuvre, which has a far higher benefit from the long-term growth of the investments.

If you are doing both the Smith Manoeuvre and the Cash Dam, it is important to make sure that the Cash Dam does not end up with you having a smaller Smith Manoeuvre, because the smaller amount of investments can more than wipe out all the benefit of the Cash Dam.

The tricky part is that you pay down your mortgage to reborrow for 2 purposes – investment with the Smith Manoeuvre and paying your business or rental expenses. However, you only get the extra credit from your higher mortgage payments in one credit line. Which strategy will get the regular extra credit and which will not – your Smith Manoeuvre credit line or your Cash Dam credit line?

The solution is usually to have a separate unsecured credit line for the Cash Dam expenses for one year. Do the Smith Manoeuvre normally, but pay the cash from your business sales or gross rent onto your mortgage. You will build up extra credit in the Smith anoeuvre credit, but don’t invest it. At the end of the year, you split off a separate Cash Dam credit line to pay off the unsecured credit line.

You can then pay for another year of business or rental expenses from the unsecured credit line. At the end of year 2, you ask the bank to increase the limit on your Cash Dam credit line to pay off the unsecured credit line again.

This process is technical and takes some work, but is necessary to make sure you separate your Smith Manoeuvre credit line from your Cash Dam credit line. Both are tax-deductible, but on different lines on your tax return. If CRA audits you on either item, you need to be able to prove each deduction you claimed is correct.

Long-Term Plan

It is most effective to do the Cash Dam as part of your long-term Financial Plan. You eventually convert your entire home mortgage into tax-deductible. Then what do you do?

The most effective strategy is usually to keep it forever as a tax-deduction and only pay it off whenever you sell your home. However, the Cash Dam credit line only is tax-deductible as long as you have that business or rental property. Keeping the credit line forever means you never have to use your personal cash flow for it.

If you will eventually retire and close your business or sell your rental property, but plan to retire in your home, then after your mortgage is fully tax-deductible for both strategies, you can do the Smith Manoeuvre on your Cash Dam credit line to slowly convert it all to tax-deductdible with the Smith Manoeuvre. You can keep the Smith Manoeuvre tax-deductible mortgage or credit line right through your retirement until you eventually sell your home.

You can also pay  off your Cash Dam mortgage slowly, if you want to eliminate the debt, but this will mean you have to increase your payments to also pay off the principal of your tax-deductible mortgage over time.

Best Mortgage Strategy for  Business Owners and Landlords

The Cash Dam is a pure tax strategy that gives you tax deductions just for setting up your mortgage and transactions in the right way. There is no investment risk. Your only risk is CRA audit risk if you don’t setup your separate credit lines and transaction tracing properly.

If you are already doing the Smith Manoeuvre, you already know most of how to do it. You can convert your mortgage to tax-deductible more quickly with both strategies at once, but make sure this does not mean you end up with a smaller Smith Manoeuvre.


Planning With Ed


Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax  accountant, expert in many tax & investment strategies, and a popular and passionate blogger.

Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.

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  1. Mike on July 15, 2024 at 11:30 AM

    Hi Ed,

    If you can confirm/clear up some confusion about this process.

    Do you need to have a min 20% equity in your home to have a readvanceable mortgage?

    And on a basic level on – how the process works is if I have $10,000/mth business expenses and a $2,500/mth mortgage, I would use my HELOC portion of my readvanceable mortgage to pay my business expenses and the money that would normally be used to pay said business expenses goes against my readvanceable mortgage going against my mortgage portion and the HELOC?

    Thank you,

  2. Ali on April 30, 2024 at 1:40 AM

    Hi Ed,

    What is your recomendation for someone who is in my situation.

    Borrowing from a Principal Residence HELOC to buy a second property to live as PR and renting out my current principal residence.

    My thoughts are below, let me know if it makes sense

    – Take out 20% down plus closing costs from principal residence heloc and convert entire amount to a mortgage segment (RBC Homeline) I understand this segment is no tax deductible as its being used to buy principal residence

    – Current house becomes rental property after i move. (get the house evaluated for changing of status from PR to investment)
    – New House mortgage should also be re-advanceable
    – Rental House mortgage interest (minus 1 segment for downpayment) is tax deductible
    – Put all rental payments in primary house mortgage and pay for expenses with new HELOC

    I have two questions,
    1- Is my approach correct?
    2- In the start my rental mortgage payments plus expenses will be more than my new HELOC, do i pay with what i can with heloc and rest from my rental income until i build enough heloc room in principal residence?

  3. Marinet Platon on March 5, 2024 at 3:07 PM

    Hi Ed. I hope you can help me clarify something about cash damming . I have a rental property under my name, my spouse and a friend . I wanted to do cash damming to help with my negative cash flow , but apparently one mortgage consultant told me I shouldn’t do it be an there are 3 owners for the property . Is that accurate? Thanks

  4. Ed Rempel on June 12, 2023 at 11:13 PM

    Hi Kal,

    The Cash Dam is money borrowed to earn rental income. Claim the Cash Dam interest on line 8710 (interest expense) on form T776 (rental income). Add it to the interest from your rental mortgage.


  5. Kal on April 10, 2023 at 11:10 PM

    Hi there.

    One thing I’m confused about with is where the interest expense from the HELOC is claimed for cash damming purposes. Would it be claimed on form t776 line 8710 or line 22100?


  6. Ed Rempel on April 8, 2023 at 11:07 PM

    Hi Aaro,

    Yes, you can increase your rental mortgage to include the Cash Dam credit line. In fact, it’s a good idea. The all the rental debt and interest cost is secured against the rental.

    Some people with rental properties think they can increase the rental mortgage and spend it, and then still claim the rental mortgage interest as a rent expense. That does not work. The interest deduction is based on what the money was used for, not what was used as collateral.


  7. Ed Rempel on April 8, 2023 at 10:36 PM

    Hi Abid,

    Doing the Cash Dam with a basement apartment is technically possible, but likely not worth the effort. I have not seen anyone go through the trouble.

    You can’t use allocations of your expenses, such as those from your tax return. You have to have cash transactions you can trace.

    For example, you would need to pay 3/4 of the bill from your main chequing and the othe 1/4 from a separate account. Then you need a separate credit line that you borrow from to cover those expenses.

    It might be possible to do separate cash transactions for utilities and property taxes, but the bank likely won’t allow it for your mortgage interest.

    The Cash Dam does not increase your main rental expenses. It only gives you some interest expense for money borrowed to pay rental expenses.

    For example, if you do the Cash Dam to pay for 1/4 of $5,000 of property tax & utlity expenses, that’s only $1,250. The interest on that at 6% is $75/year. If you are in a 40% tax bracket, you save about $30/year for your trouble.

    The Cash Dam is a pure tax strategy, so there is no risk (other than CRA risk). However, the benefit is far lower than Smith Manoeuvre, since there are no investments involved. Perhaps consider the Smith Manoeuvre instead?


  8. Aaro ln on March 29, 2023 at 6:21 PM

    Thanks for the article, I have been doing this for 4 years, my home is almost paid off and my rental property has gained a lot of value in the last few years. Can I remortgage my rental property at its current value and use the extra money to pay off the maim (now very high) line of credit I used to complete the cash damming?

  9. Abid on March 19, 2023 at 12:26 PM

    Hi Ed,

    I have a legalized basement suite in my primary residence (i.e., 25% of house is rented). Can I use cash damming for the rental expenses? or is that offside with the CRA? The current use of the funds is towards a rental property technically.

    As an example, suppose the utility expense for the whole house is $100. $25 is towards the basement rental and $75 is towards my primary residence. I already declare the rental income and claim $25 towards my rental expenses in my tax return. For the carrying charges, can we prepay the mortgage by $25, and use $25 from the readvanceable HELOC to pay utility expense for the basement portion?

    Thank you,

  10. Ed Rempel on November 26, 2022 at 5:27 PM

    Hi JJ,

    Great question. I have several insights for you.

    The goal of Cash Dam is to convert your entire home mortgage to tax deductible as a rental expense. You have done that. Rental properties are normally only a good investment if you have a large mortgage and little of your own money invested in them. Real estate grows much more slowly than the stock market over time, but having a large leverage effect by only having a small amount of your capital invested in it usually makes rental properties a decent investment. The Cash Dam does this for you by keeping your tax-deductible debt large and giving you cash flow to use for more productive purposes.

    Now you can continue to borrow to pay rental expenses, as long as you have credit available and a good use for the money. You can use the gross rent for anything, including RRSP or TFSA contributions, or non-registered investing. It’s a good time to invest, since stock markets are low.

    Converting a large tax-deductible credit line to a mortgage means you get a lower interest rate. The payment is higher, since it is P+I, but you can reborrow from the credit line to help you make the mortgage payment. This process means you essentially pay interest-only at a mortgage interest rate, instead of a credit line interest rate.

    One issue with Cash Dam is that, if you ever sell your rental property, your home mortgage stops being tax-deductible. It is a rental expense and only tax-deductible while you own a rental property. We find clients often don’t want to continue to be landlords after they retire, to give themselves more freedom. So they sell their rental properties and invest the procees.

    For this reason, converting your Cash Dam credit line to a mortgage and doing the Smith Manoeuvre on it makes sense. It would convert a credit line tax-deductible as a rental expense to a credit line tax-deductible as an investment expense. After you retire, you will probably maintain an investment portfolio for life to fund your retirement lifestyle.

    A growth strategy for you here would be to convert your Cash Dam credit line to a mortgage and start doing the Smith Manoeuvre on your home. That gives you the extra 15% credit available, which would give you a lump sum to invest now while the market is low.

    You have a bunch of options. I can’t give you a recommendation, since I don’t know your full financial position and your life goals, but I hope you find this helpful.


  11. Ed Rempel on November 25, 2022 at 6:12 PM

    Hi Clint,

    The Cash Dam credit line interest is a rental expense and should be claimed on your rental statement – which is joint for you.

    There is no issue in using 2 credit lines on your home for different purposes with different taxation. You borrowed for rental purposes with the Cash Dam and should continue to claim it jointly. You borrow to invest with the Smith Manoeuvre and can claim it on just your tax return.


  12. Ed Rempel on November 25, 2022 at 5:58 PM

    Hi Kwong,

    With the Cash Dam strategy, when you borrow from your credit line to pay down your mortgage, interest on the entire amount in the credit line is tax deductible. The interest portion of your payment is an expense you borrow to pay for. The principal portion is a transfer of a tax-deductible debt from a mortgage to a credit line.

    If you pay off a tax-deductible debt from another debt, the new debt maintains the tax-deductibility of the old debt.

    The Cash Dam credit line interest is deducted as a rental expense. It reduces your rental income, not your total income.


  13. JJ on November 14, 2022 at 6:19 PM

    Hi Ed, how are you ?

    I found your info on cash damming over 5 years ago and implemented it as I have multiple rental properties.
    I thought I would reach out since most people I talk to do not know what to do once the cash dam is complete, so any advice would be greatly appreciated.

    I have completed the cash dam and paid off my principal mortgage and now have (approx. $200k) revolving credit line since July 2022. Since then I have been using rental income to pay rental expenses since the cash dam is complete, and all my debt is tax-deductible. Was this the correct move or no ?

    I haven’t borrowed anymore to pay rental expenses, only to capitalize the interest for the last couple months.
    As for what to do about the credit line, I was wondering how do you keep it the whole time while capitalizing the interest as you will eventually hit your limit (mine would run out in approximately 1 year). I have had discussions with my bank about converting the cash dam to a mortgage over 30 years to lock in a rate (with raising interest rates the cost has doubled since the spring)and that would unlock more equity (as only 65% can be revolving, with it locked in I can get access the remaining 15% available). I’m not sure if this is the right thing to do or just keep paying the interest for now.
    I’ve also thought that perhaps I should start borrowing from a new credit line and implement the smith manuevre, as right now I have lower cash flow than previously due to higher interest rates and mortgages renewing during this year (timing was just bad for that I guess), and that affects our ability to save (besides having the rental income when I decide to sell).

    Any feedback would be appreciated,
    Thanks have a good weekend,

  14. Clint R on November 13, 2022 at 12:49 AM

    Hello Ed,

    Great information!

    My question regarding cash damming is on joint ownership with my spouse on the rental. My wife doesn’t earn any employment income. I have recently started running the Smith Manouvre for myself as the higher income earner to build our retirement savings.

    With our rental, we have historically been claiming the rental income and expenses evenly. I have now also started prepaying our home mortgage with the rental income and then paying rental expenses from our primary residence HELOC and then tracking it separately in a subaccount. Would the interest on the cash dam also need to be claimed by both of us equally, or could I claim that on my own taxes as a personal investment loan to invest in a jointly owned “business” (the rental property)?

  15. Kwong Sum on November 10, 2022 at 8:12 PM

    Hi Ed,
    Thanks for the article and Q&A. I do have a few clarification questions.

    When you borrow money from your line of credit to pay down rental property mortgage payment, the obvious part is that the interest portion of the mortgage is definitely considered as an expense, and hence tax deductible. But what about the principal portion of the mortgage payment, is that also considered as an expense when you use borrowed money to pay that portion.

    Also, when you borrow money from your LOC to pay for the expenses of a rental property, is the interest on the LOC directly applied as a tax credit to your TOTAL income (including salary or rental income or everything else in your T1).


    Kwong Sum

  16. Ed Rempel on November 10, 2022 at 11:06 AM

    Hi Paul,

    So I understand your question, when you start renting your principal residence, it should become tax-deductible at that point. If you use your HELOC to pay your entire mortgage payment on it after it becomes a rental property, the HELOC should also be tax-deductible.

    The rule is that if a loan is tax-deductible, the interest on the interest should also be tax-deductible.

    Borrowing to pay the principal portion of the mortgage payment is really transferring your tax-deductible mortgage to a HELOC. It’s still a debt originally borrowed to buy the rental property.

    Does that answer your question, Paul?


  17. Paul Roddick on September 21, 2022 at 1:11 PM

    Ed – great information.
    In your reply to Corey Mar31/2020 about using HELOC for the principal portion of the rental mortgage, you said ‘If the mortgage was tax-deductible, then moving the same amount onto a credit line keeps it tax-deductible.’ So when I start renting my old PR (so not deductible), I can use the new HELOC for the ongoing principal payments, as well as interest?

  18. Patrick on September 14, 2022 at 1:38 PM

    Hi Ed,

    I would love to discuss this with you in more detail.

    I just filled out your contact form and chose the Interview option.



  19. Ed Rempel on August 4, 2022 at 9:19 PM

    Hi Jules,

    The Cash Dam is a simple concept, but a bit tricky to setup. The goal is to make a credit line tax-deductible by using it to pay rental expenses. It’s critical to track the flow of cash so the credit line was only used for rental expenses. A separate chequing account is a very good idea, since you can’t pay all expenses directly from a credit line.

    If you pay some of the expenses from cash by putting the first $5,000 in, it does not affect the tax-deductiblity of the credit line. All the money from the credit line was still used to pay rental expenses. The only loss is that you could have made $5,000 more of the credit line tax-deductible.

    My suggestion is to use your $5,000 to prepay your mortgage. That should create $5,000 credit available in the credit line and then transfer it to your separate Cash Dam chequing account.

    I hope that is helpful, Jules.


  20. Jules on May 31, 2022 at 9:38 PM

    Hi Ed,
    I have a bit of a nitty gritty question.

    I’ve seen many places that recommend having a seperate bank account to pay all expenses out of. Should this seperate account be seeded with personal funds or HELOC funds?

    For example, I open a seperate bank account, and my monthly expenses are less than $5K. So I’d like to put $5K in the account so that when mortgage payments are automatically made, there are funds available.
    Does it matter where the funds are from for the initial payment? I know that after the very first payment, the HELOC should top up the account, but what about that very first payment? Wouldn’t the CRA question that I am paying some interest to hold $5K in that account that isn’t generating income?

    Just not sure on the logistics for how to get the payments started.
    If it helps, everything is with Scotia, including Scotia STEP.

  21. Jo on April 17, 2022 at 6:33 PM

    Hi Ed,

    I’m not using a HELOC, so my situation is a unique. I’ve just taken out an additional loan and will implement a cash dam, by using the loan proceeds to eventually pay expenses on a rental property. Initially, the proceeds of the loan are being invested until the expenses are incurred. I’ll then use the rental proceeds for other personal expenditures I have planned. My question is this: Can I use the loan proceeds to make the monthly repayments (interest and principal) on the loan itself? Or will this somehow taint the deductibility of the interest? (Just to be clear: I’d be periodically cashing out a portion of the investments, to make the loan interest and principal payments.)

  22. Ed Rempel on April 17, 2022 at 11:19 AM

    Hi Adam,

    The effectiveness of the Cash Dam depends on how high the expenses in your business are. If your expenses are very low, then the benefit is very low. There are still guaranteed tax benefits of it, but if the benefit is too low, then it may not be worth the effort.

    The Cash Dam can be amazing for businesses with very high expenses. We helped one independent construction contractor convert a large mortgage entirely to tax-deductible in just one year.


  23. Luca Dela Roca on February 16, 2022 at 12:21 AM

    One more question please. Can we start the cash damming strategy in the middle of the year or CRA would like that to be from the begining of the year?
    Thanks again!

  24. Luca Dela Roca on February 15, 2022 at 11:48 PM

    Hello Ed, fantastic blog!
    My wife and I own a primary home and a rental. To set up a cash damming strategy, I assume we would need to get a joint HELOC. We are in different tax brackets, one has 43% while the other 36%. Based on current rates for Heloc and with the primary mortgage at 1.84% for another few years it looks like the cash damming would work for one of us while not for much for the other.
    Is that correct, and how should we set this up to be most beneficial?
    Thank you very much!

  25. Adam Greenberg on January 16, 2022 at 7:43 AM

    Would/how would the cash dam work for a home based business which doesn’t seem to have significant expenses like a rental property. I am an independent consultant that works from my home office. I have a few contracts where I do work for clients directly and/or firms as an independent contractor. I invoice for my time plus HST and get paid directly and manage my own taxes and remittances to the govt when I file my taxes.

  26. Ed Rempel on June 25, 2021 at 9:58 PM

    Hi Rick,

    The point of the Cash Dam is that you can borrow for all your expenses and use your gross rent for anything. You can use the HELOC to pay all your expenses. No need to stop when the interest + expenses is more than your rent. As long as you have credit available on either property, you can keep borrowing to pay all the expenses. The interest is all an expense against your rent, even if it creates a loss.

    This means your gross rent can be used for anything, such as RRSP contributions or increasing your home mortgage to give you more Smith Manoeuvre to invest from your home.

    The big picture here is that rental properties that are highly leveraged are usually good investments. But a rental property with a small mortgage is usually a lousy investment. My rule of thumb is that if the rental mortgage is down to 50% of the value of the property, you are usually better off selling it and just investing the remaining half in equities.

    The Cash Dam is a method to keep your rental property at the maximum leverage forever, which can keep it as a good-return investment.


  27. Rick on June 1, 2021 at 4:17 AM

    Hi Ed. Great blog.
    I stumbled upon this and was wondering if it would work for me
    I have two properties. My primary home and rental home. I just refinanced and switched both to my bank at a lower interest. And got helocs on both properties
    I have 78000 heloc on my rental. Can I pay my monthly expenses for my rental on this and just build it up until the intrest on it levels out my income that I make on rent. And do I have to put the income on my primary property. Or can I hold on to it, It only has a 28000 heloc on it Thanks

  28. Ed Rempel on April 27, 2021 at 10:25 PM

    Hi Maxim,

    With the Cash Dam, you are borrowing the money and taking the position with CRA that these amounts were borrowed to pay the expenses for your triplex. There is no fixed time frame to be accepted, but it needs to be “reasonable”.

    We have clients doing the Cash Dam that pay their expenses all year and then withdraw from the credit line to cover the expenses at the end of the year. The longest that I would consider “reasonble” would probably be early in a new year. For example, borrowing in January for the entire prior year could be considered “reasonble”.

    Beyond that, you might get away with it, but it would be challenging to try to claim that you are now borrowing to pay expenses from 4 years ago.

    Given that we are now in April, going back to last year in April should be reasonable. Going back to last January is a bit past reasonable, but not by much and may not raise any eyebrows. I would suggest not to go back longer than that.


  29. Maxim on April 18, 2021 at 2:59 PM

    Hi Ed,

    How far back in time I can go to take advantage of the cash damn strategy? I have detailed records from the past 4 years… I wish I knew all this when I bought my triplex back in 2017.

    Thank you,

  30. Ed Rempel on January 31, 2021 at 8:34 PM

    Hi Danraj,

    No. The tax-deductible Cash Dam credit line keeps rising, but your non-deductible mortgage is declining at the same rate.

    The higher interest on the Cash Dam credit line should be more than offset with lower mortgage interest plus your tax refunds.


  31. Ed Rempel on January 31, 2021 at 7:47 PM

    Hi Brad,

    The Cash Dam is a pure tax strategy. You borrow to pay all the rental expenses, which builds up a credit line with tax-deductible interest.

    Meanwhile, you can use your gross rent to pay onto your personal mortgage. With a readvanceable mortgage, this frees up extra credit to continue to borrow to pay the rental expenses.

    The result is that your non-deductible mortgage is smaller and a tax-deductible credit line is larger. The credit line should stay tax-deductible, probably as long as you own the rental property.

    Not sure if that answers your question or what you may be missing. The key is that you borrow for all rental expenses, including the Cash Dam credit line. You use the gross rent to reduce your non-deductible mortgage.


  32. Ed Rempel on January 31, 2021 at 2:46 PM

    Hi James,

    When to pay off the “good debt” is a good question. It’s an issue we look at within a Financial Plan.

    There are 3 main options:

    1. Sell investments to pay it off when you retire and retire debt-free.
    2. Keep it forever as long as you own your home and pay it off whenever you sell your home. If you die in your home, your estate pays it off. If you can’t maintain it and move to a retirement home at age 85, it is paid off by selling your home.
    3. Convert the tax-deductdible credit line to a mortgage and pay it off slowly over 25 or 30 years.

    Option 1 gives you a feeling of being debt-free, but a lot lower retirement income.

    Option 2 gives you the highest retirement lifestyle. Your investments are only used to provide you with a retirement lifestyle. Your house pays off the credit line. You keep your investments growing and maintain your tax deduction as long as possible. Most of our Smith Manoeuvre clients choose this option.

    Option 3 is for people that like leverage, but don’t like the idea of always having the debt. This gives a feeling that it will eventually be gone. You make a higher payment, since the mortgage is P+I and your tax deduction declines, but some people prefer this option.


  33. Danraj on November 29, 2020 at 7:48 PM

    Hi Ed, I implemented the cash dam strategy in January of 2020. I’m using my heloc (2.95%) to pay monthly mortgages on 2 rentals and using rental income to make additional payments on principal property (3.14%). Marginal tax rate is above 40%. My concern is, the accumulating debt on the heloc ($1225/month), the interest on this is tax deductible. I understand I’m supposed to let this accumulate year after year. At some point does the interest cost overtake the tax savings? Should I borrow from heloc to pay this interest cost as well? Am I doing this right?

  34. Brad on November 22, 2020 at 7:10 AM

    Hey Ed,

    Thanks for this blog.

    By paying the rental expenses with a HELOC, I in-turn create another monthly payment.
    A payment that will increase over time and add to the costs for the principal and rental properties.

    Do I need to worry about the HELOC payment or does it just get drawn from my personal account and as it increases, I have less of the rental income to pay down my principal mortgage? I feel like i am missing something.

    Thanks in advance.

  35. James on October 30, 2020 at 11:35 AM

    Thanks for clarifying Ed. My HELOC rate is prime + 0.0. 🙂 Yes, I am not seeing benefit now but years later I will I guess. But when do I pay off that good debt?

  36. Ed Rempel on October 24, 2020 at 8:13 PM

    Hi James,

    Your HELOC is probably prime +.5% or 2.95%, not 2.45%. If it is 2.95% and you are in a 43% tax bracket, your after tax cost of tax-deductible interest is 1.68%. That is lower than your 1.97% mortgage, so there are some savings that will grow as your Cash Dam credit line grows.

    The other factor is that interest rates are weird today, both being so low and the proportional difference between mortgage and credit line rates. Your Cash Dam credit line should stay tax-deductible as long as you have that rental property, which could include years in the future when the benefit is much larger than today.

    The Cash Dam does not use up your available credit, since your principal residence mortgage goes down at the same rate as your Cash Dam credit line rises. It’s a bit tricky, though, since you have to set your mortgage payment very high to have this work efficiently. Your mortgage payment should be your normal mortgage payment plus the $35K/year rental expenses.

    The Cash Dam is a nice tax strategy, but can be tricky to implement. We have some clients doing both the Smith Manoeuvre and the Cash Dam. Since the extra credit available from paying the mortgage down readvances into only one credit line, you have to decide whether you want it to readvance into the Smith Manoeuvre credit line or the Cash Dam credit line. This usually means you have to leave credit available and adjust your credit line limits once or twice a year.

    In these cases, adding the Cash Dam effectively means you have less to invest in the Smith Manoeuvre. Since the benefits of the Smith Manoevure are many times higher than the Cash Dam (since it includes investments), this often makes the Cash Dam not worthwhile.


  37. Shaun on October 21, 2020 at 9:35 PM

    Hey James,

    From my understanding, the main benefit of the cash dam is converting your non-deductible mortgage for your primary residence into a tax deductible mortgage.

    You would use your rental income to pay down your primary house mortgage, which frees up room on your HELOC. You then use the HELOC room to service your rental expenses. This shifts your non-deductible mortgage slowly into being deductible via the HELOC.

    I hope that makes sense. 🙂


  38. James on October 20, 2020 at 5:02 PM

    Hi Ed,

    I am purchasing a rental property, using a portion of my HELOC at 2.45% as the downpayment ($125k). My principal mortgage is at 1.97%. I am trying to determine the benefits of cash damming for my case. I am in the 43% tax bracket. If I pay all my rental expenses from the HELOC (approx $35k/yr) this would be another $857 in interest on top of the interest I am paying on the portion I used for the downpayment. Every year, my HELOC debt would grow by approx this amount ($35k). So the incremental tax savings from cash damming does not seem that big to me since I am already deducting the amount used for the downpayment. Is my understanding correct or a I missing some other benefit? I also would like to keep some room in the HELOC to purchase another property. I realize I would accelerate paying down the primary mortgage but would increase my deductible mortgage.

  39. Ed Rempel on September 20, 2020 at 6:31 PM

    Hi Jonathan,

    Generally, Cash Dam is only used for your primary residence, since it converts a non-deductible debt into a deductible debt.

    If you use 2 rental properties, you can convert a debt deductible against rental #1 to be deductible against rental #2. Since both are normally deductible, you have not gained a deduction.

    This might work if you have a non-deductible credit line against a rental (borrowed for a non-deductible purpose) or if you plan to sell one of the rentals. Normally, when you sell one rental, all the dollars you borrowed to buy that rental are no longer tax deductible, including amounts you borrowed against a different rental to buy the first rental. You need to track the dollars and which borrowed dollars were used for which rental.

    If you plan to sell one rental, you can use the Cash Dam to convert the debts related to that rental to deductible against a different rental.


  40. Jonathan on August 14, 2020 at 3:09 PM

    Hi Ed,

    Your blog is always helpful! Thanks.

    One thing I’ve never been clear on with cash damming is whether it only works if property #1 is your primary residence. I live in a rental. I own an income property with a mortgage that’s up for renewal. I’d like to invest in a second income property. If I can get a heloc on the first rental property can I make use of this tax strategy in the purchase of the second (or third…) rental property.

    Thanks again!

  41. Ed Rempel on July 13, 2020 at 9:29 PM

    Hi Sarah,

    It is not just today’s interest rates that matter. It is your interest rates as long as you have that debt. Interest rates are weird today, both with being very low and with the longer term mortgages having lower rates.

    Your HELOC is 2.95%. If it is tax-deductdible and you are in a 43% marginal tax bracket, then it is costing you 1.68%. Your mortgage is 1.7%, so only very slightly higher. However, when interest eventually normalize with short-term rates being lower than long-term rates, this difference is likely to be much larger.

    In this case, it is better to keep paying down your mortgage. Even though there is hardly any benefit now, there will almost definitely be a larger benefit in the future.

    This point does not apply with your LOC at 5.45%. If it is tax-deductible, it is costing you 3.1%. That is way more than the mortgage and will probably always be higher than the mortgage. It’s probably better to pay this off first.

    Having said that, with our clients we often reappraise their home every few years to increase their secured limit. If you do this, you can move your unsecured LOC at 5.45% into your HELOC at 2.95%. If you can do that within the next couple years, then it is better to pay down your non-deductible mortgage and accumulate your tax-deductdible debt.

    You make the best decision by thinking through what you expect to happen in the next few years and in the long-term.

    I hope that is helpful, Sarah.


  42. Ed Rempel on June 21, 2020 at 11:02 PM

    Hi Nilay,

    Your best stratgy depends on what you want to achieve. However, you can still continue to do the Cash Dam and borrow to pay all the rental expenses and the HELOC interest (assuming the HELOC interest is all from the rentral properties or the Cash Dam).

    If your HELOC on your home is at the limit, you can get readvanceable mortgages on the rental properties and borrow from them to continue the Cash Dam.

    You can then use the rent for whatever gives you the maximum benefit. This would probably be contributing it to your RRSP or TFSA, or just investing it non-registered.

    There is another option. One possible issue is that if you evern sell your rental properties, the HELOC on your home would stop being tax-deductible. You can fix this by converting the HELOC on your home to a mortgage and doing the Smith Manoeuvre on it. This converts your HELOC over time to deductible against your retirement investments, instead of being deductible against your rental properties.

    I find people with rental properties often want the freedom to travel and don’t want to bother managing the properties after they retire. Doing the Smith Manoeuvre on it means you can build up a retirement portfolio without using your cash flow and it means your HELOC can still be tax-deductible after you sell your rental properties.


  43. Sarah on June 21, 2020 at 8:36 PM

    Hi Ed, I am wondering if, after calculating the effective interest rate based on our tax bracket, if my mortgage is still the lowest interest rate, do I pay that down since it is non deductible debt, or do I pay down higher interest debt even though it is tax deductible? The principle residence mortgage is 1.7% right now and the LOC is 5.45%. The HELOC is 2.95%. I am in a 43% tax bracket from my full time job, pmus rental income that we need to minimize taxes on.
    Thanks, Sarah

  44. Nilay on May 14, 2020 at 12:49 PM

    Hi Ed,

    Firstly, I’m a fan and have referred to your site many times. I do have a question of my own though. I have two rental properties and pay for all business expenses from the HELOC on my personal property.
    Next month, my personal mortgage will be paid off (hooray), but I’ll have the HELOC balance of about $400K. My question is what I should be doing with the rental income every month (about $4K) when I no longer have personal mortgage payments. I’ll still have to make the monthly HELOC payment at a minimum. So, should I pay down one (or both rental mortgages), pay down the HELOC or save the money for my personal use?

    Thank you!

  45. Corey on April 1, 2020 at 12:01 AM

    Awesome, thanks Ed!

  46. Ed Rempel on March 31, 2020 at 11:07 PM

    Hi Corey,

    You are right. You can borrow to pay your entire rental mortgage.

    Borrowing to pay the principal portion is really just moving the amount you borrowed to buy the rental property onto a credit line. If the mortgage was tax-deductible, then moving the same amount onto a credit line keeps it tax-deductible.


  47. Lenora on March 28, 2020 at 6:32 PM

    Hi Ed,

    Wondering if I am doing the cash dam right as I’ve been reading some confusing things.

    Rental mortgage comes out of TD chequing. HELOC is with Scotia and I have a chequing account with Scotia. Am I able to move HELOC to Scotia chequing and transfer the rental mortgage amount to TD? Does this need to be the day of? Or before?

    Also, saw a comment that says I have to pay the rental mortgage interest (with my own money, not borrowed) by the end of the year to keep the tax deduction for it. Is that true?

    Also, I have been borrowing from the HELOC to pay the HELOC interest every month. That is OK too right?

  48. Corey on March 4, 2020 at 11:24 PM

    Hi Ed, thanks for all the great information on your site!

    I’ve been looking into cash damming with my rental properties but one thing I haven’t been able to find anywhere is if the principal portion of the rentals monthly mortgage payment can be paid with the HELOC using this cash damming strategy. To me it seems like if I use my HELOC for the full rental mortgage payment I’m essentially just keeping my debt level the same and should therefore be able to deduct the interest.

    Your insight would be greatly appreciated!



  49. Ed Rempel on February 22, 2020 at 10:01 PM

    Hi Calvin,

    You are clearly trying way to hard to get a tax deduction! Invest the $100K in an equity portfolio and you should make far more than the Cash Dam can get you! I estimate $100K invested in equities should have an expected gain 10 times higher than $100K used for the Dash Dam.

    Remember, the Cash Dam is a tax strategy only. No investments involved. So the gain is much smaller than with investment & tax strategies like the Smith Manoeuvre.

    Using the HELOC to pay rental expenses that you charged on a credit card it fine, as long s you can trace it. You would still be borrowing against your HELOC to pay rental expenses.

    I would suggest to just do the Cash Dam as it is intended to work. Get a readvanceable mortgage. Increase your mortgage with an optional additional payment of the amount of the gross rent you receive. Pay for all your rent expenses from the secured credit line linked to your mortgage.

    And then invest your $100K! 🙂


  50. Ed Rempel on January 26, 2020 at 11:41 PM

    Hi Sanket,

    You can still do the Cash Dam with your rental property. Your corporation cannot be part of it, though.

    The rental property works with the Cash Dam because you claim the income and expenses on your personal tax return. Your corporation’s income and expenses are on the corporation return, not on your personal return, so it cannot work for the Cash Dam.

    There are many factors in determining whether your business should be incorporated or not. Accountants normally advise you about risk of being sued and possible tax deferrals from having a corporation, but most do not know about the Cash Dam.

    Depending on many factors, in some cases such as when your business has a lot of expenses, the Cash Dam can give you a large tax advantage that might be more than the advantages of having a corporation.


  51. Ed Rempel on January 26, 2020 at 8:52 PM

    Hi Roy,

    Sorry, but I do not understand your question.

    The key point with the Cash Dam is that you should always keep the Cash Dam credit line separate from your personal mortgage and credit line.

    How can increasing your home mortgage help you?

    We have clients that reappriase their rental property periodically in order to transfer the Cash Dam credit line back from their home to being on their rental property. Then they can also make it part of the rental mortgage at a lower interest rate than the credit line.

    I don’t think I have answered your question, but I don’t really understand what you are asking, Roy.


  52. Calvin on January 13, 2020 at 1:49 PM

    Hi Ed,
    I have read your articles from various websites, great writing. I always have questions on this strategy. Say if I have 100k cash on hand that I pay into my principal mortgage and then borrow out for rental house expenses.
    1. The 100k gets in and out and I am not reducing the principal mortgage amount. It just becomes interest deductible.
    2. It will create another new loan where you have to also pay on top of your existing monthly mortgage payment. I have a new problem having to cope with increased monthly payment. Unless you stretch your existing mortgage back to a longer amortization.
    3. If I use a dedicated credit card to pay for the rental expenses, then use the HELOC to pay the credit card bill. Is this HELOC payment still considered as legit rental expenses? Provide I keep a statement of Credit card along with the HELOC statement.

  53. Sanket on January 2, 2020 at 12:07 PM

    Hello Ed,
    Thanks for this great article. I would definitely want to leverage this strategy. But I do have a question when you say – “Be advised that the Cash Dam as described above will only work for those who own a non-incorporated personal or partnership-based small business or a rental property.”

    In my case, I own an incorporated business but have a rental property purchased using my personal income in partnership with my wife and mom. Besides that my primary residence, also purchased using personal income funds, is in partnership with my wife. Both me and my wife are also employees of the corporation. But my incorporated business is not on the title of any of our properties and neither do we use its funds to pay off our mortgages. Can I still use Cash Dam as described in your example?

  54. Ed Rempel on December 4, 2019 at 10:28 PM

    Hi David,

    Your situation is somewhat complex and might depend on factors you have not mentioned. With corporations, I would need to know all the details to be sure.

    In general, you need a sole proprietorship to do the Cash Dam, not a corporation. However your swap is a different question.

    When you invested the $100,000 into your company, how was it recorded? Was it an investment of capital, such as buying shares to start the company? Or was it a shareholders’ loan or fully-documented loan to the company?

    If it was a loan, your corporation can borrow from the bank (even if it uses your home as collateral) and can use that money to repay a loan to you. Your corporaiton would just be refinancing a loan.

    If it was a capital investment, like buying new shares, then it’s more complex. Nothing stops your corporation from borrowing (even if it uses your home as collateral), but paying the money to you would probably be taxable to you in some form. It could be a share buyback. It could be a shareholder draw, which would have to be either a salary or dividend at year-end.

    I would suggest you ask your corporate accountant about this. It’s a complex situation and I would have to know your entire picture to give you a definite answer.


  55. Roy on November 18, 2019 at 2:28 PM

    Hi Ed, thanks for the great sharing. For the cash damming strategy, when I renew my primary residential mortgage, should I borrow more to return the HELOC or keep the same mortgage amount? I doubt that the previously claimed tax-deductible amount is able to continue or not once I group the original mortgage and HELOC. Thanks.

  56. David on October 27, 2019 at 2:17 AM

    Hi Ed. Thank you for the great article. Can you please give your suggestion on my situation? I started a small corporate company 2 years ago and have spent approx. $100k after tax personal money to fund the business. I was recently approved a HELOC on my primary residence. I am wondering if I could use $100k HELOC money to swap the $100k personal money by transferring $100K from HELOC account to the corporate account, and then transferring the previous invested $100k from corporate account back to my personal account. The business hasn’t made much profit and I haven’t taken any salary or dividend from it yet. But I am concerned about CRA may question the “current use” of the fund. Am I allowed swap the money?

  57. Ed Rempel on September 15, 2019 at 9:34 PM

    Hi Andre,

    If I understand your question correctly, it’s most effective for you to start Cash Dam now.

    There is no point in delaying the Cash Dam only to spend 2 years paying off tax-deductible debt.

    Rental properties are often a decent investment when fully leveraged, but are usually a poor investment once your rental mortgage/debt is low. Having the rental mortgage plus credit line for the down payment plus Cash Dam credit line all deductible against your rental income gives you the biggest tax savings.

    If you are going to pay any debt down, focus on the mortgage on your home, which is not tax deductible.


  58. Andre on August 31, 2019 at 4:47 PM

    Hello Ed,
    Could you please give me your opinion? I’m considering buying a rental property, the down payment is mainly from debt (HELOC + LOC+ some cash). I also want to implement the Cash Dam on my primary home mortgage as soon as possible. Should I focus first on paying off the debt (which will take roughly 2 years) and once paid I can implement the Cash Dam or I can mix both?
    Thank you,

  59. Ed Rempel on July 3, 2019 at 9:54 PM

    Hi Claire,

    Whether or not a loan is tax deductible depends on the “current use” of the money borrowed. What was the purpose of borrowing the money and where is that money now?

    Whether the loan is secured or unsecured, a mortgage or credit line, or what is used as collateral are not important.

    You can use a personal loan or line of credit, if you want. As long as you keep it separate for tax tracking purposes.


  60. Claire on June 4, 2019 at 1:41 PM

    Does the LOC have to be tied to the property (HELOC), or can you do this with a personal loan/ LOC?

  61. Arnold on January 28, 2019 at 2:26 PM

    Hi Ed, Glad to see someone writing about cash damming. Way to go! Do you mind sharing any strategies you have used to maintain the interest deduction in cases where a proprietor has fully cash dammed his mortgage and then subsequently rolled his proprietorship into a corp? I’ve done it by maintaining enough business in the proprietorship to still be able to make use of the deduction, but I’m wondering it there are other ways people have managed it.

  62. Nat Young on May 10, 2018 at 10:55 AM

    Hi Ed
    I have been studying this strategy in hopes that it could work for us to pay down our principal non tax deductible mortgage sooner.
    To clarify, are mortgage payments on our rental property considered a business expense and therefore we can use the HELOC for the rental mortgage payments as well?
    And when the principal mortgage is paid off, do we then start paying off the HELOC with the principal mortgage payments + rental income?

  63. Ed Rempel on April 3, 2018 at 1:51 PM

    Hi Josh,

    CRA does not specify the amount of time that you can go back to claim expenses. It has to be “reasonable”.

    I would suggest you can go back to the beginning of 2018 pretty easily. Going back to the beginning of 2017 is aggressive, but you could argue that you plan to capitalize only once per year for simplicity. The might fly.

    I would not go back farther than that.


  64. Josh on March 21, 2018 at 2:28 AM

    Hi Ed,

    I’ve been following your writing for quite some time. I’ve been setup to do the smith cash dam for a few years but did not have enough room on my HLOC to convert all my expenses. Can I go back now that I’ve had my HLOC increased and convert old expenses? Is there a maximum amount of time an expense is eligible?

  65. Ed Rempel on January 22, 2018 at 10:09 AM

    Hi Mat,

    Yes. You understand it correctly. You would save 3.19% interest on your mortgage. You would pay instead 3.95% tax-deductible interest on your rental property, but after tax that only costs you 2.37%. YOu save .82%.

    If rates were similar, there should still be a long-term benefit for you. For example, if rates rise quickly this year by 1.5%, then your HELOC would be at 5.45%. After your 40% tax savings, that costs you 3.27%, which is more than your mortgage rate. In this case, you would temporarily be behind.

    However, once you convert the interest to tax-deductible, it usually remains deducitble as long as you own the rental property. As long as interest rates adjust to your benefit again, you would be back in a gain.

    In the example, once your mortgage comes due, if rates are still quite a bit higher, your mortgage rate would likely rise and the Cash Dam would be a benefit for you again.

    With a 40% tax bracket, you would almost always benefit from the Cash Dam.


  66. Mat on January 22, 2018 at 9:38 AM

    Hi Ed, I’m wondering about using the cash damming strategy for my rental property. I understand that you’re exchanging non tax deductible debt (mortgage) for tax deductible debt (HELOC) but if the interest rates between the two vehicles are similar does it make sense? I have a $270k mortgage at 3.19% a HELOC at 3.95% and a tax rate of 40%. This mean that my interest rate on the HELOC is actually 2.37% (3.95*40) correct? Saving me 0.82% in yearly interest?


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