Cash damming is a smart financial strategy that allows Canadians, especially business owners and landlords, to make interest tax-deductible by restructuring cash flow. While the concept sounds technical, walking through a cash damming example makes it easier to understand.
In this article, we’ll explore a practical example of how cash damming works, its benefits, and how Wise Equity helps Canadians apply the strategy correctly.
What Is Cash Damming?
Cash damming is a technique where personal expenses are paid from income, while business or investment expenses are covered using borrowed funds, usually from a line of credit.
By doing this:
- The borrowed money is linked to income-generating activities.
- Interest on that loan becomes deductible.
- Taxable income is reduced, improving overall financial efficiency.
It’s especially beneficial for self-employed professionals, landlords, and small business owners.
A Simple Cash Damming Example
Let’s consider Alex, a self-employed consultant in Toronto. He earns $90,000 per year from his business and spends about $20,000 annually on expenses like office supplies, internet, and advertising.
Normally, Alex would pay for both business and personal expenses using his income. However, with cash damming, he changes the flow:
- He covers personal expenses (rent, groceries, utilities) with his business income.
- He pays business expenses by borrowing from his home equity line of credit (HELOC).
- Because the borrowed funds are used for business purposes, the interest on the HELOC becomes tax-deductible.
This means Alex reduces taxable income while also building credit and keeping cash flow flexible.
How the Numbers Add Up
Suppose Alex borrows $20,000 annually from his HELOC for business expenses. At a 5% interest rate, he pays $1,000 in interest per year.
- Without cash damming: The $1,000 interest is not deductible.
- With cash damming: The $1,000 interest is fully deductible, lowering his taxable income.
If Alex is in a 33% tax bracket, this saves him $330 in taxes annually. Over a decade, that adds up significantly.
Why This Example Works
The above cash damming example works because:
- Borrowed money is strictly used for business.
- Income covers personal needs.
- Proper records are kept for CRA compliance.
It’s this balance that makes the strategy both simple and effective.
Risks to Consider
Like any financial strategy, cash damming isn’t without risks:
- Rising interest rates can increase borrowing costs.
- Poor record-keeping can cause CRA to deny deductions.
- Borrowing for personal reasons invalidates eligibility.
That’s why discipline and accurate tracking are crucial.
Wise Equity’s Role
Wise Equity helps Canadians implement cash damming by:
- Reviewing income and expenses.
- Structuring borrowing for maximum deductibility.
- Providing calculators to project tax savings.
- Ensuring compliance with CRA rules.
With professional support, the strategy becomes less complex and more rewarding.
Conclusion
This cash damming example shows how Canadian business owners and professionals can turn ordinary expenses into tax advantages. By restructuring cash flow, they not only improve tax efficiency but also strengthen long-term financial planning.
With expert guidance from Wise Equity, cash damming becomes a powerful yet manageable strategy for wealth-building.