April Newsletter-RBC

Turn personal debt into tax-deductible business debt with cash damming 


Cash damming involves using the gross revenue generated by your business to pay off your personal debts. Then, to cover your ongoing business operating expenses, you use a separate line of credit or other loan facility used exclusively for business.

In effect, your personal debt is replaced by business debt, which makes the interest costs tax deductible.


Three main criteria determine your eligibility for this strategy:

• You must generate professional or business income through an unincorporated entity.

• You must incur professional or business expenses in order to generate your income.

• You must have personal debts.


To implement a cash damming strategy, you will need three separate bank accounts:

1. An account used only to deposit your gross business or professional income, and to pay off your personal debts.

2. An account used only to pay business expenses. Note that GST and PST collected from gross revenues should be deposited into this account.

3. A line of credit (or other loan facility) that you will use to replenish the second account as needed.


Let’s take the example of Dr. Green, the owner of a dental practice with two employees, and a house with a $220,000 open mortgage. This year, the gross annual income from his practice will be $300,000, and he’ll have business expenses of $125,000. After income tax, this will leave him with about $114,000 (assuming an average income tax rate of 35%). 

However, if the dentist were to pay his business expenses using a separate (business) line of credit instead of his revenue, he’d have $125,000 in extra cash.


Before you pursue this strategy, there are some potential pitfalls to be aware of.  For instance, repaying your mortgage or other debt ahead of schedule may trigger a penalty from your lender. You’ll want to review all the potential associated costs and benefits to ensure that cash damming will work for you.

In addition, it may be difficult to secure a large business line of credit unless you have sufficient Collateral.


At least for now, it seems unlikely that this tax-planning strategy would be challenged under the Income Tax Act’s General Anti-Avoidance Rules. In an income tax ruling published in February 2003 (F2002-018052) the Canada Revenue Agency (CRA) acknowledged cash damming as a legitimate strategy that would not be challenged. As with all tax planning, however, there’s a Possibility that tax legislation will change and render the strategy less effective.

In the meantime, to successfully employ this tax-planning strategy, meticulous bookkeeping is essential. Each bank account and credit line or debit instrument must be administered accurately in order to demonstrate to the CRA that the line of credit is for business purposes.

Note: The above information is based on the current and proposed tax law in effect as of the date of this article. The article is for information purposes only and should not be construed as offering tax or legal advice. Individuals should consult with qualified tax and/or legal advisors before taking any action based upon the information contained in this article.




Febuary Newsletter

Hello everyone,  I just wanted to introduce myself to the individuals I haven’t yet met.  My name is Rob Celebre, Commercial Account Manager with RBC Royal Bank.  I have recently replaced Leslie Burn as she has moved on in her career to RBC Dominion Securities. 

This will replace Leslie’s monthly newsletters. 

Rental Real Estate

There are many advantages and drawbacks of owning rental properties.  I have listed some advantages and Disadvantages below.


There are advantages of owning rental real estate directly.

  • To start, you get control over the property, cash flow and tenants.
  • The investor can pick and choose which properties to purchase, as well as which repairs/upgrades to create value.
  • There’s something to be said about having capital in a physical property that’s more “real” than having money in the market.
  • There are many tax deductions when owning rentals and if you own multiple units, you can claim a portion of your vehicle and home office.


As with any investment, there are also drawbacks.

  • Owning rental real estate is a business and can be time-consuming.
  • Working with non-paying tenants can be challenging and stressful if cash flow is tight.  Of course, this can be partially alleviated by hiring a property manager which of course eats into monthly cash flow.
  • Owning rental real estate directly is illiquid and quite costly to dispose of should the need arise (real estate, legal fees, time on market etc).

Now for a few things to be wary of:

  • Don’t settle for questionable tenants. Always get a credit check on each renter and get statements from the vendor on each tenants’ payment history, if applicable. A few months of vacancy, or a non-paying renter, can crush your cash flow projections and put you under water.
  • Make sure to analyze the property with a magnifying glass. Are there ANY improvements or major fixes that might need to be done? Unexpected expenses will also kill your monthly net income. Capital reserves are crucial in this business. I’ve seen borrowers get into serious trouble because they didn’t budget for contingencies.

Todays Low interest rates and long amortization help with cash flow, while reduced down payments help investors build property portfolios faster than they otherwise could.

However prudence is the key, Build your rental empire slowly and methodically, and make sure each property cash flows well before buying the next one.

If you’d like more information, contact me.

Rob Celebre
Commercial Account Manager
RBC Royal Bank
T: 705-494-7125
F: 705-494-7156
Email: roberto.celebre@rbc.com