Cash Damming

If you own a proprietorship, whether it be a home-based business or a rental property, you can use the Cash Flow Dam to great advantage.  Essentially what the Cash Flow Dam entails is first using the business’s revenues to prepay the mortgage on your principal residence – the house in which you live – then reborrowing the same amount, and then servicing the business’s expenses.  

Generally, many Canadians with proprietorships are missing out on a large financial opportunity – they are servicing the proprietorship expenses directly from proprietorship revenues.  The monthly rental receipts go into the homeowner’s rental property bank account and then almost immediately going out again to pay the mortgage and other rental property expenses.

But if they were to employ the Cash Flow Dam, they would be reducing the amortization of their non-deductible mortgage loan debt exceedingly quickly while accelerating the increase in their tax deductions and saving tens or hundreds of thousands of dollars in non-deductible mortgage loan interest payments.  And by earning significantly higher tax refunds with which to prepay the mortgage annually, this further increases the pace of mortgage loan elimination and the pace of investment asset accrual. 

What expenses qualify for the cash flow dam?  Basically, any expense that you are currently deducting from income due to your business, whether a rental property or home-based business, will still qualify.  So, in the case of a rental property: the mortgage, maintenance and repairs, utilities, property tax, etc.  And for a product or services-based proprietorship, business supplies, utilities, salaries and wages and other expenses.

It is important to understand that this is available for those who own proprietorships, not incorporated businesses.  A corporation is a legal entity separate from the owner, but a proprietorship is not.  Essentially, any revenues from a proprietorship are considered by the CRA to be of the same character as your employment income so you can use these revenues to prepay the mortgage just as you can your employment income.