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Tax deductible Interest Income


What is “Cash Damming”?

“Cash Damming” is an accounting technique that allows non- incorporated self-employed individuals or individuals who own rental properties to gradually convert all non-deductible interest into tax deductible interest.

According to Yves Chartrand, M. Fisc. of the Quebec tax system training Centre – CQFF, this tax strategy is supported by the Singleton decision of the Supreme Court of Canada, a ruling request made with the CRA (Revenue Canada) as well as some writings published by Canadian tax authorities since October 2002. This document reflects the tax rules in force on 1 May 2004.
In fact, the “cash Damming Strategy” is intended to gradually convert your personal debts (whose interest is not deductible) as business debts (whose interests are fully deductible).

How can we structure and implement the necessary elements to “Cash Dam” the money?

The recipe is both simple and complex. This is to keep your cash to pay loans and other expenses, such as paying personal debts; your spouse’s car, the mortgage on the residence or RRSP contributions, whose interest is not deductible, and use a line of credit to pay for the business expenses whose interest is tax deductible. For example, you should not use a line of credit to pay your personal debts or contribute to your RRSP, but rather you should have a line of credit as a self-employed individual and use this line of credit to pay business expenses and other expenses whose interest is deductible. The line of credit increases at the same rate as the amount paid to reimburse personal debts such as your spouse’s car or your mortgage on your principal residence or your RRSP contributions.

Remember that tax rules may change at all times. In addition, in the implementation of such a tax strategy, it is important to comply with all tax rules.
In short, do it well or do not do it at all.

What purpose does the “cash damming strategy” have?

Insofar as the order and method are applied in the right way, this technique of “Cash Damming ” money can be used in many situations. Whoever uses this technique properly, will use cash to pay for goods and other investments such as: the payment of overdue taxes, the payment of premiums on a universal life insurance policy and possibly pay down the mortgage on his residence faster, accelerate the payoff of other debts, catch up on unused RRSP contributions, etc… Ultimately significantly reduce the interest paid on debts and increase capitalization.

Is this strategy only for unincorporated self-employed people and owners of rental properties?

Unincorporated self-employed people and owners of income properties can use this tax technique. People who hold shares in unincorporated businesses can also use this strategy.

Important caveat

This document is for informational purposes only. It creates no legal or contractual obligation for the management company Pro / Action, its affiliates or its officers. The reader should validate the applicability and advantageous nature of the “CASH DAMMING STRATEGY “with his accountant or tax expert.

Use your business income for daily expenses and gradually pay off your personal debts.
You pay your business expenses with a loan. (Line of Credit).
First Result
Interest payable on the loan is deductible. You can save on your taxes. If you don’t use the “Cash Damming strategy” you pay your current expenses and repay your personal debts with your net business income. Obviously, the interest payable on your personal debts is not tax deductible.
You use your business income to progressively pay off your personal debts, let’s say $ 200,000. (Mortgage and others debts)
Assuming you have annual business expenses of $ 100,000 that you will pay off with a loan. You will do this until the end of the conversion of your personal debt to business debt .
Second Result
Over a period of 20 years, you will pay $ 158,200 in interest on your business debt. This interest is tax deductible.
Final Result
If your tax rate is 42 % you will realize a tax gain of $ 66,444.
Again, remember that tax rules may change. Furthermore, in the implantation of such a tax strategy, it is important to follow tax rules and the order in which the transactions should be done.
Again , do it well or do not do it at all.
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