The Cash Dam is a simple but powerful tax strategy I have used with quite a few clients.

It is an especially attractive option for those who are familiar with the Smith Manoeuvre or other tax minimization strategies. It can help you with tax optimization if you have a mortgage and own either a small business or a rental property.

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

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34 Comments

  1. 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?

    Thanks



  2. 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.

    Ed



  3. 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?



  4. 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.

    Ed



  5. 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?



  6. 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.



  7. 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?



  8. 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.

    Ed



  9. 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,
    Andrei



  10. 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.

    Ed



  11. 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?



  12. 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.



  13. 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.

    Ed



  14. 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?



  15. 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.



  16. 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.

    Ed



  17. 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.

    Ed



  18. 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! 🙂

    Ed



  19. 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!

    Thanks,

    Corey



  20. 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?



  21. 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.

    Ed



  22. Corey on April 1, 2020 at 12:01 am

    Awesome, thanks Ed!



  23. 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!



  24. 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



  25. 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.

    Ed



  26. 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.

    Ed



  27. 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!



  28. 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.

    Ed



  29. 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.



  30. 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. 🙂

    Shaun



  31. 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.

    Ed



  32. 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?



  33. 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.



  34. 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?



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