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Converting non-deductible interest

Interest on personal debt is not deductible. However, if you meet certain criteria, you can use cash damming to convert your personal debt into a business debt, for which interest is tax deductible.

Target clientele

Cash damming is useful for people who earn higher taxable incomes, have significant personal debt, considerable business or rental expenses and who fall into one of the following categories:

  • are self-employed (e.g., pharmacists, physicians, attorneys, notaries, accountants)
  • operate an unincorporated individual business (e.g., non-registered convenience store)
  • are partners in a general partnership
  • own rental property

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 expenses for your business or rental properties (rental expenses)

The first account is used to deposit gross business or rental income. You should exclude the GST and QST you collect on sales. That way, you have accurate numbers when you calculate the funds available to repay personal debts and cover personal expenses.

The second account has a line of credit to be used exclusively for operating or rental expenses.

This way, interest becomes tax deductible because personal debts are gradually converted into business debts, the interest on which is deductible.

How much you can save

You can save thousands of dollars this way. The higher your business or rental expenses, the more your line of credit balance increases, and the quicker the cash damming is completed.

For example, if your annual professional expenses amount to $50,000, you can convert a $200,000 mortgage into a mortgage line of credit within 4 years. The interest on this line of credit is tax deductible, which represents considerable tax savings as shown in the table below.


10 years 25 years
Personal debt converted into business debt 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

Note: This example considers an interest rate of 6% and a taxation rate of 45%.


To find out if you are eligible for cash damming, meet with a finance advisor to discuss whether this is the right strategy for your specific situation and needs.

Certain conditions apply

When business or rental property is used for personal purposes, you need to exclude the payment of the personal portion from your line of credit.

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.

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