Converting non-deductible interest. Is it possible?

Did you know that you can convert your personal debt (e.g.: a personal mortgage), for which interest is not deductible, into a new debt to cover your business expenses, for which interest is fully deductible. This is called “cash damming”.

Target clientele

Cash damming is particularly useful for people who earn higher taxable incomes, have significant personal debt, considerable business or rental expenses and who:

• are self-employed (e.g.: pharmacists, physicians, attorneys, notaries, accountants)
• possess an individual business (e.g.: carpenters, non-registered convenience store owners)
• are rental property owners

How it works

Cash damming requires that you open 2 separate business accounts at your financial institution to:

• segregate your gross income from business expenses
• set aside some cash to cover your personal expenses
• borrow to pay your business or rental expenses

The first account is used to deposit gross business or rental income. We recommend that you exclude GST and QST on sales to avoid confusion when determining the amount of your personal debts and expenses.

The second account features a line of credit used exclusively for operating or rental expenses.

This way, interest becomes tax deductible because personal debts are gradually converted to the line of credit used for business or rental expenses. Remember that loan interest is tax-deductible when the borrowed money is used to generate operating profit or property income (rent, interest).

Terms

Capital payments on personal loans are accelerated and paid from the first account. Similarly, the line of credit balance increases with these payments.

The line of credit is to be used exclusively to cover the business or rental expenses, which is essential when deducting the interest paid. When a business or rental asset is used for personal purposes, it is important to exclude the personal payment from the line of credit. The higher the business or rental expenses, the more the line of credit balance increases and the quicker the cash damming is completed.

You have to have sufficient guarantee for the line of credit. When the mortgage has been completely paid off, your personal residence can be used to guarantee the line of credit.

For all of the articles, visit the Did you know page.

	Online (Members and non-members)	Read the Cash damming technique page
	At the caisse	Make an appointment with a caisse advisor: online by phone
	At a Desjardins Business Centre (Members and non-members)	Contact an account manager at a Desjardins Business Centre.