Episode 237: Cash Damming Explained: The ‘Older Sibling’ of the Smith Maneuver for Business Owners

Listen here on our website:

Or jump to this episode on your favourite platform:

Watch Now!

Are you sitting on rental or business cash flow that could be quietly accelerating your mortgage payoff and cutting your tax bill at the same time?

If you’re a Canadian business owner, sole proprietor, or personally hold rental properties, chances are cash flows into your account each month—and then slowly leaks out to cover expenses. In this episode, Kyle and Jon unpack how that “idle” money can be put to work instead of collecting dust, using a strategy that builds on the Smith Manoeuvre without requiring you to go all-in or take on more risk than you can handle. They walk through real-world scenarios, common misconceptions, and the practical constraints that determine whether this strategy fits your situation.

By listening, you’ll learn how to:

• Turn non-deductible mortgage interest into deductible business or investment interest using cash damming—without increasing your overall debt.

   

• Improve cash-flow efficiency by recycling the same dollars to pay down your mortgage faster while still funding business or rental expenses.

   

• Apply the strategy conservatively or aggressively based on interest rates, mortgage rules, and your personal comfort level—so you stay in control.
  

Press play now to see how cash damming could quietly boost your net worth and tax efficiency using money you already have.

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. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• 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.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

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.

Mortgage optimization and smart tax strategy are at the core of building long-term wealth in Canada, especially for entrepreneurs and real estate investors navigating the Smith Manoeuvre, cash damming, and other tax-efficient investing strategies. By intentionally directing home equity, managing business expenses, and structuring financial buckets across personal and corporate accounts, Canadian business owners can improve cash flow, reduce personal vs. corporate tax drag, and accelerate wealth building without inflating lifestyle spending. When paired with thoughtful financial planning—such as RRSP optimization, salary vs. dividends decisions, capital gains strategy, and real estate investing in Canada—these systems support financial independence, early retirement strategies, and legacy planning, even while maintaining a modest lifestyle. At Canadian Wealth Secrets, the focus is on helping investors design a clear financial vision, optimize corporate structures, diversify investment buckets, and implement repeatable financial systems that create financial freedom in Canada over the long run.

Transcript:

Kyle Pearce:

Hey, hey there, Canadian Wealth Secret seekers. We are here today to chat about mortgage optimization and tax strategy. We know that the Smith maneuver is something folks love digging into. Here we’re going to kind of take it’s, is it the younger brother of the Smith maneuver? Is it like an ex?

Jon Orr:

Mmm, our favorite. No, I think it’s the older brother. I think it’s the older brother because we’re talking, hey, I’m doing the Smith maneuver on my personal mortgage thinking about transferring that debt from one bucket to another to make it tax advantageous. You’re talking now about business owners. You’re now taking it up a level. You’re going like, hey, I’m a little bit more mature. I’m a little bit more advanced, because now I’m going to apply this technique to my personally owned business to take advantage of the same idea. To me, that’s an older brother. Sister, maybe it’s an older sister.

Kyle Pearce:

I love it, I love it. And what’s the name of this sibling, this relative? It is Cash Damming. And yes, we have chatted about it before. We wanna go down the rabbit hole here because we actually had a listener reach out to us recently and they have some rental properties. Remember, Cash Damming works well with rental properties and we’ll talk a little bit more about that momentarily. But keep in mind, it can be for any other type of investment as well. Like it could be for a business that you’re running. It could be for other types of investments that bring back say dividends to yourself. There’s all kinds of things that you could be doing here. The one nuance though with cash damming and the concept we can kind of extend beyond the personal level. The reality though is that these have to be using dollars that are flowing into your personal life. Okay, so if you are an incorporated business owner, you have an incorporated set of rental properties that are all in a holding company, this isn’t quite going to be as helpful for you. But for those people who are sole proprietors, maybe they have a business that they’re running, and they’re running it at a personal level. Some people are like, why would I ever do that? Of course, I’m going to incorporate and the reality is that’s not true. As you’ll know, in some of our other episodes about when to incorporate, maybe there isn’t enough retained earnings from year to year to justify opening up a corporate structure. And in this case, using something like cash damming may be one of the reasons that keeps you from incorporating a little bit longer.

Jon Orr:

Yeah. Well, not only that, it’s likely, like how many of the business owners that we’ve talked to who are incorporated business owners also do investing or have a real estate side gig or have some properties that they’re managing or you’re doing some sort of generating income, because any way you’re generating income and therefore incurring expenses on the personal side through business actions or moves you’re making. This applies, right? So because that’s what it really is. Like a sole proprietor, hey, we’re sole proprietors and we’re incorporated business owners. We generate income through other means, investment income, real estate income, other income, on our personal side, not in our corporation. So if I’m an incorporated business owner and I’m making moves on the personal side, this applies to you today.

Kyle Pearce:

Yeah, absolutely, absolutely. So what we’re going to be talking about is this idea, this process of cash damming. So we’ll start with the Smith maneuver. It’s a very common phrase out there. A lot of people are talking about it. Keep in mind that the Smith maneuver is more complex than simply borrowing to invest or borrowing to put into a business or anything of that sort. The Smith maneuver is the active process of actually putting extra dollars into your primary home’s mortgage and that primary home mortgage does have interest on it likely unless you’re a very lucky person or someone’s giving you 0%. I’d love to meet them. If that’s the case for you where you’re paying interest that interest is not tax deductible because you have this massive advantage on your primary residence which is the exemption from capital gains tax on the growth of that property or the value of that property. So that’s a big win, right? That’s a huge win. 

If I’ve got a property and I hang on to it over my lifetime, I’m going to see some gains there. I don’t have to pay any tax on it if I do choose to downsize, sell or completely leave. So that’s huge. So I can’t write off the interest on that primary home mortgage, but if I am able to borrow funds from any source, it doesn’t matter if that source is like against a home, if it’s against other securities, could be against, it could be completely unsecured. But if the purpose of borrowing those funds is to put into an investment in order to generate income, if that’s the goal and the intention here, then I can write off the interest we pay as an expense. So that’s what the Smith maneuver is all about. Whereas cash flow or cash damming is kind of, it’s kind of extending this process where you’ve got cash coming in from some source. And in this particular episode, we’re gonna talk about like cash coming in from maybe rent of personally owned rentals that are coming in first of every month. The money sits there, it sits in your bank account and then slowly throughout the month that cashflow sort of dwindles down, right? We have a mortgage on each of these properties. We’ve got expenses, we’ve got insurance, we’ve got all these different things that we have to spend every month. But there was a period of time where that money was sort of sitting there collecting dust, probably earning less than a percent, maybe half a percent, depending on the account you have. And ultimately, there are some ways that we can maybe put those dollars to use and kind of build off this idea of the Smith maneuver, and then simply borrow back what we need to cover those business or investment expenses that are going to happen later in the month or maybe even later in the year.

Jon Orr:

Right, right, so you can imagine that, instead of having it sit there, you’ve got your influx of revenue, that revenue, since you’re a sole proprietor, you’ve got a mortgage, you can be directing those funds into the pay down your mortgage, maybe you can double up a payment, maybe you have that like, hey, I can pay up to this percentage on my mortgage every year to pay it down, you’re gonna do that which, because you now have, say, an attached re-advanceable home equity line of credit, you now have an opportunity to go, I can borrow against or borrow that money from there now to go, do I use this to pay for my expenses?

Kyle Pearce:

Yeah, absolutely. I’m going to add this just because I’ve had this question recently by a number of people like, Kyle, I’ve got $500,000 home equity line of credit, but it’s not re-advanceable. So like, I’m not able to like take advantage. And it’s like, no, you’re totally able to take advantage. You can do the same process. You’re not going to gain more room when you put an extra dollar on your primary residence. But the reality is you’ve got $500,000 already available to you. So this isn’t really a problem for you until you run out of home equity line of credit room, right? So re-advanceable mortgage is really helpful. And I would argue it’s like the go to when let’s say you’re already fully leveraged. 

So let’s say you’re maybe a new home buyer and you don’t have much equity in there and you’re only able to access little by little month by month as you pay it down. But for many people who are exploring the Smith maneuver, usually it’s something that sort of happens to you after you’ve gained a little bit of momentum, which means you probably have some equity, you may already have a home equity line of credit, maybe it’s not re-advanceable. And that’s not the end of the world, you can definitely continue to utilize these strategies. Just noting that the big goal here is that we’re reusing the same dollar in order to pay down that non tax deductible interest. And that’s going to be non tax deductible principle, which is generating that interest and then it’s going to be re-borrowed for investment or business purposes on the other end. So net, you still have the same amount of debt. You may even be paying a little bit more in terms of the interest rate on that home equity line of credit compared to your primary mortgage rate, but at the end of the year, you now have interests that you can write off against your income to help you save on your highest marginal tax bracket that you’re in.

Jon Orr:

Right.

Now, this is going to sound tomato, tomato, but help our listener who’s thinking about this and be like, wait a minute. So let’s say I use my business, my sole proprietor business revenue, pay down the mortgage, borrow from the home equity credit. So all I did was transfer debt. I transferred mortgage debt into HELOC debt. I now have this chunk of money that I’ve So imagine you withdrawn this money, so the money is sitting in your hands or sitting in your bank account. And now it’s like, okay, but I’m going to use this. The original intent was the revenue needed to offset the business expenses. now I don’t, me putting on the mortgage, I don’t have that anymore. So my business expenses are going to come up. My mortgage payment on the rental property is going to come up. If I’m paying for utilities, that’s all going to come up. Whatever you got to repair to do, it’s going to come up. And now I have to use that, say, borrowed amount to pay down those expenses to keep them going. So I need to pay them off. But then it’s like, is it tomato, tomato? And you’re like, wait a minute, the money that I borrowed, is it for income purposes? And then probably the tomato, tomato here is like, you have to think of it more as probably, you’ve now taken that borrowed funds and you’ve invested it in your own business. Whether that money pays for the lights to be on or whether it pays for an investment opportunity doesn’t matter. It’s all in the same pot and your business needs it to make money, otherwise it wouldn’t be able to make money.

Kyle Pearce:

Yeah. Yeah, a hundred percent. And I would say, it’s an interesting comparison because depending on the situation with your rental properties at the onset, this can go a number of different ways. So first and foremost, the extremist approach when we’re borrowing against our primary residence is like on paper, borrowing as much as you can against your primary residence and putting it into an asset that’s going to outpace the growth of your property and the interest and all of that wonderful stuff logically is the right move to make. But it doesn’t mean you have to do that, right? Cause there’s a behavioral aspect of it. We know We’re human. I know that I always like to know I have dry powder. That’s just who I am as a person. I might be considered a little more risk on than the average Canadian, but the reality is, is that I always, always leave room for me, maybe not knowing everything. Imagine how wonderful that I’m not thinking I know everything here, right? So in this world, if you take an example, like let’s pick properties that are literally cashflow neutral at the end of every month currently. So meaning money comes in and then at the end of the month, all the money’s gone, not an extra dollar out of pocket and we didn’t get an extra dollar of profit to spend on other things. It’s like the money’s in, the money’s out. 

The reality is if we were to just take that money and flow it through our primary mortgage first, if we’re able to, we’ll talk about some restrictions in a second that you might run into. And then we were to borrow back from the HELOC in order to pay down any of those additional expenses that are coming up later in the month. What we should see is we should see that your actual home mortgage is going to continue to drop at a quicker rate than the home equity line of credit is growing. And the reason why is because your original mortgage payment already had some principle that was getting paid down there. And since we literally just have a flow of $1 in and we’re going to borrow that dollar back out. It’s like nothing ever happened. We’re gonna transfer $1 of non-tax deductible interest over to the home equity line of credit. And what you’re gonna see over time is actually your debt is going to go down when we consider the primary home from the original mortgage and the home equity line of credit. And the beautiful part is here is that now we do get that tax write-off. And because as you mentioned, We’re borrowing against the primary residence in order to produce more income. We got to keep the lights on in my rental properties. We are able to write that off. 

Now we want to make sure this is nice and clear. We don’t want to be playing with personal expenses out of that same line of credit and things just to make the waters muddy. But ultimately at the end of the day, it’s almost a no brainer here is specifically if you are say cash flow neutral on these properties and you’re putting it in and then borrowing back. Now, if you’re cashflow positive, let’s think of what really happens here. What really happens is, is that your primary residence mortgage starts to get paid down even faster and we’re borrowing back less than we’re putting on the primary mortgage every year. So not only are you saving an interest in general, but we’re still getting some tax deductible interest on the other end, which is going to of course be, putting your net worth at a higher standpoint over time. What we can’t do though, is let’s say there was an extra $1,000 of cashflow. We put the extra $1,000 of cashflow on that property on the primary mortgage and then borrow back the $1,000 and then go spend it on dinners and go spend it on entertainment. It’s gotta be valid. So make sure you’re bringing out your business partners or doing something like that and making sure you document it. But ultimately at the end of the day, moral of the story is is that you’re at least paying down that mortgage. And if you didn’t need that thousand dollars for your personal lifestyle, that could still be a great move. And you could still borrow back to invest in something else, right? So ultimately, there’s some moves here that can be made, that you can do them. And you can be very aggressive with it. But you could also be pretty conservative with it and still gain additional ground each month as time goes on to try to save and tax and actually build more net worth over time.

Jon Orr:

Well, yeah, yeah, I was what I was thinking, what I wanted to say is another key idea, right? It’s like, if you’re not creating a new expense, the expense was there already. Right? Like you had the expense, the expense was your interest that you’re paying the lender. It’s an expense. Sometimes we just don’t think of it that way because it’s so common to have a mortgage and now I got a mortgage payment. It’s just like what I do. But you had that expense in both, you have it in both scenarios. You now have just shifted it to be a business expense. And now, because it’s not, it shouldn’t take more money out of your pocket on the business side, because I think sometimes people might say like, wait a minute, aren’t I adding more expenses to my business? And therefore, is that just money out of my pocket? It’s not. It was there already. You shifted it, and so now it’s a business expense and actually is putting more money in your pocket because you get the tax write-off. You can say that’s an expense, so it actually reduces your business income. So that’s, think, where people think, but wait a minute, my business income is gonna go down. Sure, the business income, like your net profit is gonna slightly go down by that interest expense because you added that to the business, but you had it already. You just had it not in the business in a way, but as a sole proprietor, the CRA, it doesn’t matter to them. You’re all one pot anyway.

Kyle Pearce:

Right. Right. Yeah, for sure. Where this could see some divergence from this idea is if, let’s say, the difference between the interest rates is extreme, right? So for example, let’s say my home equity line of credit interest rate is 6% and let’s say my primary residence mortgage was 2%, right? So now we’re going, okay, well, I mean, unless even if I’m in the 50% marginal tax bracket at a personal rate, it’s like I’m still paying 3% on those dollars on my home equity line of credit and on my primary I was paying 2%, right? So it’s like there could be scenarios, but it’s fairly extreme. And I would argue unless you’re still writing a mortgage like from 2020, Mine just came up for renewal. I had like 1.76%, something ridiculous, right? So cash damming at that time with that mortgage compared to where the prime rate was and the HELOC is gonna be connected to prime, it’s gonna be variable. So at that time, didn’t make a ton of sense for me to necessarily do cash damming. And I would even argue like it didn’t even really make sense for me to do additional payments on my mortgage in order to open up more home equity line of credit room. Why? Because I already had the room there. I could just reinvest that now as is without putting an extra dollar on the primary mortgage. We just want to make sure that we don’t have an extreme difference between the interest rates, but I would argue that, given that we have five year terms traditionally here in Canada, that seems to be the most common term length. Within a five year period, there’s going to be times at least where this is going to be a huge benefit for you to do. 

And to your point, John, about extra money, like a lot of people will say things like, well, I mean, I have to pay interest only on this home equity line of credit. So like, where am I going to get that money from? And there’s really two things that are happening. First of all, like you said, you owed the money somewhere. So if the interest rates are close enough, that money was getting paid, whether it was in the mortgage or whether it’s on the home equity line of credit. You have the option of literally paying out of your personal account, the interest on the home equity line of credit, and then borrowing that interest back in order to deal with it. So in a scenario like rental properties, like every month as you contribute the rent, let’s say you have three rental properties and you’re getting six grand, every first of the month, when you take that six grand before you go and take that six grand and go put it all on your primary mortgage, you might consider taking a little small chunk of that to pay the interest in the HELOC, right? 

So there’s some strategies here that you can do in order to make sure that whatever itch you have that’s holding you back from maybe doing a strategy like this or optimizing your scenario, there are ways around it. Now, I would be lying if I said that everything’s easy here because everyone’s mortgage. Like if we talk about some of the restrictions that are on mortgages, sometimes these are good things and sometimes they’re bad. For example, my current mortgage allows me to make up to double the payment every single payment cycle. So whether it’s bi weekly, weekly, monthly, it doesn’t really matter, but I can pay up to double. And then once a year, I can pay up to, I wanna say it’s 10 or 20% of the entire principal, but that’s only once a year. So in this scenario, if your regular mortgage payment was $2,000 a month or $3,000 a month, doesn’t matter. Let’s say it’s 3,000. I could pay up to $6,000 every month. But if I have $4,000 of rental income coming in, it’s like basically I’m actually limited into how aggressive I want to go in this cash damming strategy. So in some ways, that’s a good thing, because sometimes a limitation allows the decision to be made for you so that like you’re not like having to go all in or all out because we oftentimes do that. Like when we think Smith maneuver, people like, if I do Smith maneuver, I’m going to borrow every dollar of equity that I have in my home available on my home equity line of credit, and then they get cold feet, and then they don’t do anything at all instead of maybe starting something smaller. So if you’re thinking about some of these things, we always say start small. So like you don’t necessarily have to go all in on this strategy, like try it on a little bit, see how it makes you feel and see if you can monitor that progress. 

And I would say number two, let’s not see if you monitor the progress, let’s actually monitor the progress, right? So let’s make sure that we’re tracking month by month what’s happening to my mortgage balance. what’s happening in my HELOC balance. Let’s see the difference between that. And let’s actually like monitor it so that you have sort of this motivation to say like, I’m seeing it happen now. You can of course project this out ahead of time, but when you see it happen, it’s very motivating for you to continue doing that process. And if you did start small, you start in your mind to say, you know, If I started like with a quarter of this income that’s coming into my world, maybe I should double that up now. Like an LC double the benefit happening here. One other nuance I want to mention for those people who don’t have personal rental properties and they’re not a sole proprietor, they don’t have this extra money coming in. Keep in mind your T4 income or your dividends you’re earning from your business or whatever it is, those dollars that are flowing into your life, if they’re sitting around in an account for too long, This is an option that you have. Just make sure that if you are borrowing back against the HELOC, that it is going back into some business or revenue generating enterprise like an investment, and that would allow you to also benefit and essentially be making this the Smith maneuver, the original idea that will help you to transfer some of that non-tax deductible interest over to tax deductible interest.

Jon Orr:

Right. Yeah, no, I’m glad you brought up the tracking because I think the tracking is the motive for me. This is specifically for me. If you’ve listened to many episodes before, you know that I talk about that all the time in my life because the tracking is exactly what you just said. It’s the little wins you see that help you stay true to your habits and keep your habits going. And that’s an essential component for not only being able to report to the CRA if you ever got tapped on the shoulder or you need to like show someone that this is, these are the moves you made and this is why it’s tax deductible. It not only helps, but it keeps you focused on what the habit can be and so you can see those wins. It’s an essential component. We’ve written many times and we’ve had many episodes about the Smith maneuver and cash damming. But we’ve written a blog post over on the Canadian Wealth Secrets blog or website. You can read that blog post, which is the ultimate guide to the Smith maneuver and wealth strategies in Canada. There’s sections in there about cash damming and others. There’s specifically a section in there that refers to what you just talked about, Kyle, and thinking about cash damming and the Smith maneuver in high interest rate environments and why that works. We dug into the math behind that. So it shouldn’t shy you away from making those moves, but you can understand the math behind why it can still be profitable and beneficial to you in the long run. You can head on over to CanadianWealthSecrets.com forward slash Smith dash maneuver. Make sure you spell maneuver right. And then we’ll put that link in the show notes so can just scroll below and click that. There is a full guide there. There’s also an instructional video there for you to watch.

Kyle Pearce:

Yes, absolutely. And friends, keep in mind, this is a volume game. You’ll hear us say it on the episodes and on the podcast so often investing wealth building is a volume game. And this is one of those strategies and maneuvers that we can create more volume in terms of the investable assets we have. And then it’s all about managing the tax issues. I always say it’s a good problem to have if you’re battling a tax problem. Because I mean, let’s not get into the CRA and a tax problem with them, but when you have a big tax bill, that’s because you’ve hit that first goal in the list, which is volume, right? Building a strong income, building your net worth, and then it becomes all about minimizing those taxes and getting efficient as possible, taking risk off and being able to protect the pile. If you’re interested to learn more about where you are along the journey, In our four stage process, you should head on over to CanadianWealthSecrets.com forward slash pathways. And if you’re ready to hop on a discovery call with us, we are an education first firm. So come on in, pick our brains, get your next best step by heading over to CanadianWealthSecrets.com forward slash discovery. And we will see you in our next episode.

Jon Orr:

Just a reminder, content you heard here today is for informational purposes only. You not consider any of the information as legal tax investment or financial advice. And Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.

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.

OPTIMIZE YOUR FINANCIAL FUTURE