If you’re a self-employed Canadian or small business owner, understanding how cash damming works could help you save thousands in taxes each year. This strategy allows you to reclassify your debt in a smart, CRA-compliant way — turning non-deductible interest into tax-deductible business interest.
Let’s explore how it works, why it matters, and how Wise Equity can help you put it into action.
What Is the Concept Behind Cash Damming?
Cash damming is based on separating personal and business cash flow to make interest on borrowed funds tax-deductible. In simple terms, it changes how you manage money — not how much you spend.
When structured properly, this method enables you to pay for business expenses directly from your personal income while borrowing for personal needs, effectively shifting the nature of your debt.
How Does Cash Damming Work in Practice?
Here’s how cash damming functions step-by-step:
- Use personal income for business expenses.
You use your non-deductible personal cash to pay for business-related costs such as supplies, rent, or marketing. - Borrow the same amount for personal expenses.
Using a HELOC or investment loan, you borrow money to cover personal living costs like groceries or mortgage payments. - Track and deduct interest.
The interest on your borrowed funds becomes tax-deductible since it indirectly supports your income generation. - Repeat monthly.
Over time, this pattern creates a “cash dam,” where all your deductible and non-deductible debts are clearly separated.
Example: The Power of Cash Damming
Consider Jason, a self-employed contractor earning $120,000 annually. He has a $300,000 mortgage and $50,000 in personal debt.
Instead of using business income for personal expenses, Jason applies the cash damming method. He pays for business costs personally, then borrows the same amount from his HELOC for family bills. Now, part of his loan interest becomes deductible, saving him hundreds in annual taxes.
Why Cash Damming Works in Canada
The CRA allows tax deductions for interest paid on borrowed money used to earn income. This is where cash damming fits perfectly. By structuring cash flow intelligently, Canadians can stay compliant while optimizing tax benefits.
It’s most beneficial for:
- Self-employed professionals
- Freelancers and consultants
- Rental property investors
- Small business owners
Benefits of the Cash Damming Strategy
Understanding how cash damming works can unlock major financial advantages:
- Tax Efficiency: Convert personal interest into deductible business interest.
- Cash Flow Management: Maintain smooth personal and business liquidity.
- Long-Term Financial Planning: Build capital faster through tax savings.
- Debt Optimization: Shift “bad debt” into “good debt.”
When executed properly, this strategy strengthens both your business and your financial stability.
Risks to Be Aware Of
Despite its benefits, there are key risks to keep in mind:
- Mismanagement can lead to CRA disallowances.
- Poor record-keeping can complicate tax filings.
- Borrowing too aggressively may increase financial stress.
That’s why working with a professional firm like Wise Equity ensures your plan remains structured, compliant, and profitable.
Wise Equity’s Role
Wise Equity helps Canadians safely implement cash damming by:
- Reviewing your mortgage and line of credit structure.
- Setting up proper bank accounts for clean transactions.
- Using calculators to forecast potential tax savings.
- Ensuring CRA compliance throughout the process.
Their customized approach helps homeowners and entrepreneurs make informed, tax-smart decisions.
Conclusion
So, how does cash damming work for Canadians? It’s a financial strategy that helps convert personal debt into business leverage — legally and effectively. With a well-structured plan, accurate records, and support from experts like Wise Equity, you can reduce taxes, grow wealth, and make every dollar count.