Episode 191: The Costly Mistake Canadian Real Estate Investors Make With Their Tax Strategy

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Are you overlooking a tax-saving tool worth thousands that’s sitting right in front of you?

Many high-income professionals and real estate investors get caught up in complex strategies like the Smith Maneuver or cash damming—powerful, yes, but painfully slow to pay off. The truth is, these long-game approaches can distract you from simpler, more immediate wins. In this episode, we break down how one investor, focused on advanced tactics, was missing an obvious opportunity that could put thousands of dollars back in his pocket this year. If you’ve ever wondered whether you’re working too hard for too little tax relief, this conversation will hit home.

You’ll discover:

• How cash damming works—and why clean record-keeping is non-negotiable.
• When it makes sense to hire an investor-savvy accountant and how the costs compare to the actual tax savings.
• Why RRSP contributions, often ignored by real estate investors, can create instant tax refunds worth thousands while still supporting your long-term wealth strategy.

Press play now to learn how to stop missing the forest for the trees and unlock immediate tax savings while still building for the future.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
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• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
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Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Building long-term wealth in Canada requires more than just working hard—it’s about mastering tax strategies and aligning them with a clear Canadian wealth plan. From cash damming and RRSP optimization to investment loans and corporate wealth planning, T4 earners and Canadian entrepreneurs alike can unlock powerful tax savings. With the right accountant and smart financial planning tools, you can balance salary vs dividends in Canada, create effective financial buckets, and design a financial vision setting process that supports both early retirement strategies and legacy planning in Canada. Whether you’re pursuing real estate investing in Canada, weighing real estate vs renting, or exploring corporation investment strategies, the path to financial independence in Canada lies in applying tax-efficient investing, capital gains strategies, and business owner tax savings within a system built for both security and growth. By diversifying with modest lifestyle wealth practices, passive income planning, and corporate structure optimization, you’ll be better positioned to achieve financial freedom in Canada while building a sustainable legacy.

Transcript:

In today’s episode, we unpack a discovery call with TJ, a T4 earning professional from the GTA, who’s been exploring how to use cash damming with his primary residence and rental property. But as we unpack the numbers, a bigger, simpler opportunity comes into focus. This is a classic case of don’t miss the forest through the trees.

While the Smith maneuver and cash damning are powerful strategies, they often take years to meaningfully reduce tax bills. Meanwhile, TJ’s overlooking a low hanging fruit that could deliver thousands in immediate benefit. What tool is sitting in plain sight worth nearly $13,000 in immediate tax savings that he’s not tapping into currently? We’ll find out in this episode. Specifically, we’re gonna be talking about what cash damning is and how it works.

why implementation and clean record keeping are essential, the cost and the benefit of hiring an investor savvy accountant, the timeline it takes before cash damning really pays off, and why in this case, a more simple and accessible tool can offer instant results for someone like TJ or maybe someone just like you. All right, let’s dig in here. So as we’ve mentioned, we’ve got an awesome case

where someone’s trying to think outside the box of ways that they can reduce their tax bill. For those who recall in some of our previous episodes, we’ve talked about the Smith maneuver. This is where we basically take additional capital that’s coming into our world through T4 income, through maybe other income sources. We put it down on our own mortgage and then we borrow against the home in order to create an investment loan. And we put it into some type of investment.

A lot of times people put it right into the stock market. Other times people put it into rental properties. The Smith maneuver is a great move. it’s usually, you know, I say usually, it’s quite often one of the ways that real estate investors get started. Less likely that people get started in the stock market by doing the same. However, it can be a really helpful strategy there. When we talk about cash damming, basically what we’re doing,

is we’re taking income that’s coming into us and hasn’t necessarily been taxed yet because we haven’t paid our tax return yet. And we flow that money into our property. Now, this usually comes from someone who’s a sole proprietor. So that’s someone who maybe has a business and they’re earning money coming into their own personal hands, not into a corporation. Or in this case, as we’re discussing, we’ve got TJ who has a rental property, owns the property personally.

and is receiving rent each and every month from the actual renter. Now, as you probably know, that rent comes in probably on the first of every month. And let’s say, you know, it’s $3,000 every month, that $3,000 comes into his world. And before that $3,000 really does something, it sits in your bank account, and it really does nothing. And maybe the mortgage is due on the 20th.

Maybe the insurance is due on the 15th. Maybe the hydro and such are due on the 5th. They’re all scattered throughout the month. So that money’s just sort of sitting there doing nothing. Well, when we take that $3,000 in, cash damming is the idea that where you take the $3,000, we actually put it on our primary home. So we take $3,000, we put it directly on our home, and

we’d have to have a home equity line of credit set up for this, either enough of a balance where it’s available for you, or maybe it’s a re-advanceable balance, meaning I put $3,000 extra onto my mortgage, and now I have $3,000 of additional home equity line of credit room on that credit line. And I have access to those dollars. They’re just sitting there sort of waiting. We’re not paying interest on them because we haven’t used that money yet. We’re actually

paying less interest because we paid down some on our home. And that money is now waiting for us to reborrow and then pay all of the expenses related to our business or in this case to our rental property from that line of credit. So as you can see here, it’s Smith maneuver like in that we’re taking these extra dollars. We’re paying down our personal or primary mortgage.

And let’s just assume here for a second that this is a cash flow neutral property, OK, just to keep things simple. Those $3,000 go on the home. My whole mortgage balance goes down. Keep in mind my mortgage payment every month doesn’t go down until we come up to the renewal and we decide to refinance or do things like that. We’re still paying our regular mortgage amount. We’re just putting this extra $3,000 on it. So now we’re no longer paying personally interest out of pocket.

on those $3,000. The $3,000 is now opened up on my home equity line of credit because it’s re-advanceable, or maybe I already had a large balance or a large line of credit available to me. It doesn’t really matter as long as it’s available to re-borrow. And then when the mortgage for the rental property comes due, or when the insurance comes due, or when the hydro comes due, or any other expenses related to that property come up, property management or anything like that,

We actually make those payments from the home equity line of credit. So that home equity line of credit is now going to essentially be funding all of these expenses. Now, in a cash flow neutral scenario, we would have maybe a $2,000 mortgage, $500 for property taxes, a couple hundred for this, a couple hundred for that, and the final hundred. We’ve spent $3,000 from the line of credit.

What’s important to note here in a cashflow neutral situation is that my primary mortgage has gone down by $3,000, but my home equity line of credit went up by $3,000. So I still owe the same amount of debt in this particular case, OK? In this particular case, because we’re cash flow neutral. The money coming in from the property is going right out the door the same month, maybe just later in that month.

What we now have is we have an investment loan because we’re actually utilizing this loan in order to fund an opportunity to earn income, which in this case is the property. Some might argue that if it’s cash flow neutral or cash flow negative, maybe the CRA might have a problem with this over time because if it is cash flow negative, you may not have the opportunity to earn quote unquote income. You’re actually losing money here.

you know, we could look at the Income Tax Act and maybe interpret it such that, you know, you’re doing this only for tax avoidance and not, you know, simply to actually earn income. However, we’re going to assume in this particular case that none of that is a concern here and we’re cash flow neutral or cash flow positive in a perfect world. So in this particular case, we’re no further ahead in terms of the amount of debt we have. However, I am paying less

non-tax deductible interest every month, and I’m paying more tax deductible interest each and every month. So with TJ coming to ask about how to set this thing up, what we need to make sure first is that TJ understands what cashflow damning is. So obviously he had an understanding of what that was, but wasn’t exactly sure how to set this up. One thing you’re gonna want to definitely do is keep your books.

So if you’re going to be doing any type of cash flow damming, you want to make sure that that home equity line of credit account is only used for an investment loan purpose, which in this case would be borrowing to pay for expenses related to this rental property. The same would be true if you’re a sole proprietor or if you have any other type of scenario here where you want to apply cash flow dam or cash. Yes, cash damming now.

What’s really important is that we try to avoid having any other transactions that are not related to the investment. All right, so for example, you get short on cash in a month, you don’t want to dip in to use that money, even if it’s only temporary, or even if you pay the interest back, or even if any of those things, just because you don’t want to expose yourself to a situation where if you were audited that the CRA throws out the whole thing. You just want to make sure it’s super, super squeaky clean.

so that it’s nice and easy. Now, for a lot of people, where they get into trouble when they get into sole proprietorship or when they get into buying rental properties, especially in their own personal name, is that oftentimes they try to be a hero and they try to be their own accountant. They try to be their own bookkeeper and their own accountant because guess what? It costs money to do those things. I’ve been there. I’ve done it. I totally get it. But the problem is if you do that and you do make mistakes along the way,

that could expose you to potentially having an issue if you’re audited and maybe the CRA throws out your goal here, which is to write off that interest. So you certainly don’t want to do that. So in this particular case, I’d suggested to TJ that unless he’s very confident with his bookkeeping and his counting skills, I would recommend having an accountant. He actually does already have an accountant. However, he had said, my accountant doesn’t know what cash flow damning or cash damning is. If that’s the case,

If you were to explain it to them, they’re probably going to be completely fine with it. They’re going to understand what an investment loan is, and they’re likely going to understand the concept fairly quickly. If not, though, this might suggest that maybe you’ve outgrown your accountant that you’re working with, and it might be worth looking at an investor-focused accountant. The problem with doing this is when you get into someone who’s more specialized than, the H &R block person at the corner,

is that they’re probably going to charge a little bit more. So then you have to start asking yourself, how long before this cash damning is going to actually pay me dividends? OK, now it’s not actual dividends, but actually some tax savings. Because the reality is here, let’s pretend we have TJ who’s earning $3,000 of rental income. He takes that $3,000. We multiply it by 12.

and we are now looking at about $36,000 of income coming in. That $36,000 that you put on your primary mortgage is now gonna be reborrowed and the interest is now tax deductible. Now, depending on what the interest rate is, you’re probably gonna get to write off $1,800 to $2,200, something like that in the first year. All right, so that first year, the write-off that you’re gonna get

is probably going to be around the same cost as what a good accountant is going to cost you. if, let’s say, you’ve been doing your own accounting, you haven’t been paying for accounting, this might be a little bit of a difficult step for you to take because you’re actually going to go into this and you might not actually save a whole lot in the first year. You might actually cost you some money. However, over the long term, this can be a really great strategy.

If I think about this and we go 10 years out and we say, well, like if it was $36,000 in the first year and we do this for 10 years, that’s $360,000 without counting rent inflation. So without like considering the fact that rent can go up by, you know, two ish percent per year because the government keeps us capped and you know, we can get into that another time and how I disagree with it. However, the reality is, is like that line of credit balance is going to grow to a place and your home mortgage, your primary mortgage is going to

decrease to a place where you’re actually going to be in a in a spot where now you’re writing off interest on three hundred and sixty thousand or maybe four hundred thousand right. So if we think four hundred thousand dollars and let’s say it’s five percent well five thousand for every one hundred thousand so that’s going to be twenty thousand dollars. That you’re able to write off in interest against your income and.

that could be really, really helpful over time. But again, it’s going to take time for this to happen. Now, another part they have to be OK with is the fact that if you’ve written off this $400,000 worth of interest, so not $400,000 of interest, but interest on $400,000 line of credit balance, you have to be OK with the fact that, guess what? The money that you put on that primary mortgage has gone down, but your home equity line has gone up. And therefore, it’s actually like,

break even in terms of what you still owe. All right. So that’s really important. Like you haven’t actually paid off your house any faster because you still owe money on your house, but you have been writing off income or writing off the interest against income, which can of course is, is a better situation than say not doing this strategy. However, when we dug deeper here and after we discussed all these things about

looking at cash damning and all these things. A lot of times, a lot of the listeners of Canadian wealth secrets in particular, you folks are optimizers, right? You wouldn’t be listening right now if you weren’t geeked out on this stuff. Most people have shut this off a long time ago if they’re going, I don’t want to, first of all, I don’t like investing, and second of all, I don’t care about a few thousand dollars here and there. Those people aren’t listening to this show. The people who listen are the ones who like

geeking out on this stuff. You’re thinking about ways that you can arbitrage and ways that you can get a little bit ahead and over the long run, have a great game, just like using cash damning, like we’re discussing here. Well, oftentimes it causes you to sometimes be so distracted by some of these strategies that you miss some of the obvious ones that are sitting right in front of your face. Now TJ here is a T four earner and is has a household income of about $280,000.

And actually, he earns much of that income himself. So when we look at this and we start to think about what could be hanging right in front of his nose, now he isn’t a real estate investor, which means automatically you’re probably less inclined to put money into an RRSP. I’ve been there. I totally get it. When I was starting my real estate journey, I did not want any of my dollars to go into an RRSP because it was difficult to take that money and put it into

property that I would personally own without doing all kinds of other, you know, rigmarole around to go and, you know, go to a trust and do this and do that and do all of those things. I wanted to have this money accessible for real estate. So it makes sense. However, when you start earning higher and higher T four incomes, the RRSP can be a great win and can be definitely worth exploring in more depth. So

In TJ’s case, he has at least $30,000 of RRSP room. If we use that as an example, he does not use his RRSP, so he’s not been using it to date. But we think about $30,000, and he’s in about a 44 % marginal tax rate, meaning the last dollar that he earns in his annual salary is going to be taxed at about 44%. The first dollar is not taxed at all.

right? And then there’s of course the average, but the marginal rate is like the amount of tax you pay on that last dollar that you earn. He is in the 44 % marginal tax rate. So when he puts $30,000 into the RRSP, he can expect around $13,000 to be coming back to him based on his marginal tax rate and his T4 income. So why that’s important is that

Right now, we’re talking about cash damning, and he might get maybe a $1,800 write-off, which, again, $1,800. Let’s pretend it’s $2,000 write-off. It’s not $2,000 back in his pocket. It’s that his income goes down by $2,000, which means he’s going to get maybe $500, maybe $600, maybe $700 back in tax savings in that first year. Whereas here, he could take $30,000. I get it. It’s a big chunk of money, but $30,000 and boom.

$13,000 right in your hands, which we often recommend to clients could be worth taking and stuffing the tax-free savings account with. A lot of times people will look at one versus the other. And they go, I don’t like RSPs because it’s a tax deferral tool. I get to not pay tax now, but I got to pay tax later. And of course, there’s the capital gains issue that you’re going to pay on 100 % of the capital gains if you sell and then take that money out in the same year and all of these things.

There’s some negative to it. However, the reality is here is like, he can take that $30,000, put it in the RRSP. So now he’s got a $30,000 investment. The $13,000 that comes back to him in that first year, he can maybe take and put in the tax-free savings again, which he also has more than $13,000 of room in. And now he’s got essentially $43,000 invested. And he had only put $30,000 in. So if we do some quick math here, that’s up.

pretty awesome return right away, like an instant return of like over 35%, right? If you think about this, you know, if you think about it as if that 30,000 grew to $43,000 right away, okay? There’s tax implications and such, but this is something that we wanna make sure we don’t lose sight of is that sometimes we put a lot of time, effort, and even like time researching into some strategies that…

are very, long plays. And maybe there’s something that is much easier hanging right in front of our nose. Now, I don’t want it to cripple him so that he’s not able to buy that next investment property. However, if he’s using, let’s say, this cash damming strategy, or if he just allows the regular principal payments that are going on his primary and his rental property mortgages,

to do their thing, he’s going to be creating equity just through principal pay down. And of course, there’s going to be potential appreciation. I know not everything’s appreciating in the real estate market like we’d like to see right now in this time. But there’s going to be more equity there that also is available for reinvestment. So there’s a lot of things for him to be thinking about here. So in the short term, we’re going to recommend that TJ

does consider utilizing some of that RRSP. It doesn’t have to be 30,000, like I said, it was just an example, but should really think about some of the impact that may have and how that could be helpful for him. Now, in the medium term, I would definitely be thinking about when is gonna be the right time to maybe refinance that rental property. Maybe it’s the primary mortgage. If he’s using cash damming, then obviously refinancing the primary mortgage is probably gonna be less helpful.

than refinancing the rental property. However, at the end of the day, if he does choose to do some of this cash damming, I would definitely recommend starting to look at investor savvy accountants. We know many. There’s great ones out there. We would be more than happy to make some introductions. So there’s some big, big takeaways here. Cash damming does work, but it is slow. RSPs are fast, which is really helpful in terms of saving in tax.

And it’s never too early to have the right accountant in your corner. Now keep in mind, your accountant is not your tax planner. So don’t go blaming them if they’re not coming up with all of these ideas. You’re doing the right thing by listening to shows like ours and reaching out to us for discovery calls in order to get your ideas straight so that you can bring them to your team and then put them into place.

Note that we will help you put some of these strategies in place just because that’s how we operate. So we don’t charge anything for our calls. And if you do choose to use leverage strategies like high early cash value insurance, we can put those in place for you. And that is what allows us to be funded so that we can help as many Canadian entrepreneurs and high income T4 earners along their wealth building journey. So.

If you’ve been Googling the Smith maneuver or cash damning strategy and you’re wondering if it’s right for you, you should definitely, definitely re listen to this episode. And of course, reach out to us if we can be of any help as for TJ, TJ’s doing great when it comes to our four stage process. First of all, he’s designing a vision for freedom. While he’s got a nice long term vision, he is right now still kind of grappling with

how he’s going to get there and which strategies in particular he’s gonna put in place so that he doesn’t get into overwhelm or maybe even just throw his arms up and quit on some of these ideas. One thing that he needs a little bit more focus on is building a wealth reservoir. So right now his line of credit is fairly thin, however,

If he uses cash damning, he’s gonna be creating that line of credit, but it still doesn’t leave him with much of an opportunity or emergency fund in order to buy the next property or deal with unexpected expenses. So there’s some attention that needs to be paid there. As for the wealth plan, he’s clearly open to advance strategies. He’s seeking professional advice. Look, he’s reached out to us. Now he’s looking at potentially getting some contacts with new accountants that are investor friendly.

However, there were some gaps there around ownership structures and even some compliance risks and ultimately at the end of the day, some of that underutilized RRSP room. So keeping a focus on that is gonna be really important. And then finally, legacy and estate strategy. We didn’t really get into it on this call. So it would be unfair for me to say whether he’s well-prepared or not prepared, but I would argue that he’s going to want to be looking at.

increasing his term life insurance at minimum because he does have now two mortgages and with cash damning, he’s not going to be paying off the mortgage any faster. He’s just going to be trying to arbitrage and save a little bit in taxation. So what happens if something, you know, we’ll say very low probability, but if something were to happen to him and his income is now gone,

there could be some problems to be had there. So definitely some patchwork to be done on legacy and estate planning. But overall, TJ’s on the right track. He’s doing great things. He started with that rental property and we’re here rooting behind him so that he continues to do all of those great things. Where are you along your four stage wealth building journey?

If you’re not sure or if you just want a quick little check-in to see where things are going well and where there are some opportunities for optimization, you should head on over to CanadianWealthSecrets.com forward slash pathways. And that will get you to our short assessment that will give you a full, differentiated and individualized report that will give you some of those strengths and some of your next steps. Head on over to CanadianWealthSecrets.com forward slash pathways.

and you can do that today. If you’re ready to hop on a call with us to have a conversation, head on over to CanadianWealthSecrets.com forward slash discovery, and we’ll do our best to help you get on the right path or take that next step down the current path that you’re on. All right, Canadian Wealth Secret seekers, we will see you next time. And this is just a reminder that this is not investment advice, it’s entertainment and education.

only and the content is there for you not to construe as any such material or legal tax investment financial or any other type of advice and a reminder Kyle is a licensed life and accident and sickness insurance agent and the president of Canadian wealth secrets incorporated.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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