Saving money on your taxes with the cash damming strategy
The cash damming technique lets you reduce your income taxes by gradually converting your personal debt, for which interest is not deductible, into a new debt to cover your business expenses, for which interest is fully deductible.
This tax strategy is for self-employed workers, individual business owners, rental property owners and members of a general partnership.
Requirements
- Be an individual operating an unincorporated business.
- Earn high taxable income.
- Have substantial personal debts (residential mortgage, auto loan, credit card, etc.).
- Have substantial business expenses.
How it works
Cash damming requires that you use:
- 2 separate everyday accounts to segregate your gross income from business expenses
- A line of credit
You use your gross income to:
- Cover personal expenses
- Pay your business debts (if applicable)
- Pay back your personal debts sooner, the interest of which is not deductible
You finance 100% of your business expenses with line of credit cash advances. You could also use your line of credit to finance future personal projects (such as a cottage, boat or new car).
Example
An individual in business with a $150,000 mortgage, amortized over 25 years, could save a total of $62,061 in taxes.
| Amortization[ 1 ] note | 10 years | 25 years | ||
|---|---|---|---|---|
| Personal debt converted into business debts | Interest | Tax savings | Interest | Tax savings |
| $150,000 | $49,172 | $22,127 | $137,913 | $62,061 |
| $200,000 | $65,562 | $29,503 | $183,884 | $82,748 |
Cash damming has been accepted by tax authorities since 2002.
See a caisse advisor or Desjardins Business centre account manager to find out if you are eligible and whether this strategy is right for you based on your situation and needs.