I wrote an article on this topic in August, 2010. However, I listed the article under the heading “Mortgages for Entrepreneurs.”

While the contents of the article per se are valid, the subject of “Cash Damming” perhaps deserves mention as a separate topic.

I say this because it has come to my attention rather often quite recently in conversations with entrepreneurs.

So… Following is a portion of the article on Cash Damming, with the full text available here:

You may also be interested in “Self Employed and Seeking a Mortgage”.

Cash Damming

If you operate an unincorporated business, a “multi-component” mortgage can convert your personal debt into tax-deductible business debt.

The strategy is called “cash damming” and is fully approved by the Canada Revenue Agency (CRA). The tax-saving benefits are substantial, and it’s easy to implement.

Essentially, you convert your personal debt into business debt in order to benefit from tax-deductible interest.

This is done by using the gross revenue from your business to pay off your personal debts and then using a separate line of credit or loan facility (used exclusively for your business), to pay your business expenses.

You can use cash damming if you:

  1. Operate a professional practice or business that is not incorporated
  2. Generate income from the operation of your business
  3. Incur expenses in order to generate your income
  4. Have personal debt.

An unincorporated business is essentially any activity that earns revenue and does not generate a T4 as a statement of income.

The business can be large or small, home-based or not.

Incorporated Businesses

The application of this practice to an incorporated entity is entirely different, as a corporation per se, is treated differently under the tax laws.

A corporation is subject to restrictions on paying off personal debt. This area is beyond the scope of this article, and any discussion on the benefits of lending to your own company will require tax advice from a competent, experienced tax lawyer of financial advisor.

(Copyright Dara Fahy. All rights reserved.)