First, let’s talk about Cash Damming. This tax savings technique is available to the following Canadians:
- Rental property owners
- Unincorporated self-employed workers
- Sole business proprietors
- In some cases, partners of a general partnership
Cash Damming takes advantage of the fact that when one borrows to invest in a business (in this case, their own), they can deduct the resultant interest from their personal income. This, of course, leads to personal tax savings – in many cases, significant tax savings. And how Cash Damming works is by setting up the appropriate banking and loan structure in order to allow you to use your business revenues to pay down expensive, non-deductible personal consumer debt and borrow from your new loan (e.g., personal unsecured line of credit) in order to service the expenses of your business. Because you are using borrowed funds to service the expenses of your business – effectively ‘investing’ in your business – not only are you generating personal tax deductions, but you are freeing up the business revenues to speed up the elimination of expensive personal consumer debt.
Now what about The Smith Manoeuvre? The Smith Manoeuvre is a financial strategy for Canadian homeowners which operates by taking advantage of the fact that if one has the appropriate financing on their principal residence, they can get back at any principal reduction occurring due to the regular mortgage payment being paid or any constant or periodic prepayments made against the balance. For example, if $1,500 of your mortgage payment reduces principal on your mortgage, you can reborrow that $1,500 and get it invested (stocks, bonds, mutual funds, MICs, REITS, etc.) This process of continually re-accessing what you pay down on the mortgage and getting it invested leads to growing tax deductions, the ability to speed up the payout of your expensive mortgage, and the ability to build up a portfolio of investment assets that otherwise wouldn’t be possible. Unlike Cash Damming, Canadians, whether employed or self-employed, can take advantage of the process.
Now, if we bring Cash Damming into The Smith Manoeuvre, we see even better results as regards the payout of your expensive mortgage debt and the generation of personal tax deductions and investment portfolio.
In Smith Manoeuvre parlance, we call it the Cash Flow Dam Accelerator. As described above, if a Canadian homeowner is implementing The Smith Manoeuvre and also owns a business as described above, they can take the revenues from their proprietorship and make a monthly prepayment against their mortgage. And these prepayments can be significant – on top of the mortgage principal reduction of $1,500 from the regular monthly mortgage payment, if they are also prepaying the mortgage with $2,000 of monthly rental receipts, that expensive mortgage will disappear many years earlier. So, with a total mortgage principal reduction for the month of $3,500, that $3,500 becomes available to pull out. $1,500 can get invested wherever they like and $2,000 is available to make the expense payments on the rental property such as the mortgage, maintenance, property tax, utilities, etc. And as above – because the homeowner is borrowing to invest ($1,500 in investments and $2,000 to service the expenses of their rental business), they can deduct the interest on that entire borrowing.
The Smith Manoeuvre plus the Cash Flow Dam Accelerator – a significant opportunity for the owner of both a house and a proprietorship.