The Cash Damming Strategy Could Help You Pay Less Tax

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:10] If you own a rental property or you are self-employed worker or an entrepreneur, this strategy we're going to be talking about today can help you pay less tax according to some articles from Can it is big banks that we are going to cover today?

[00:00:31] Also a quick shout out to Staff Lynn from TikTok who requested this episode and gave us the idea for it. Keep them coming. We are pretty easy to reach on all platforms for this exact reason. We want to know what our audience wants to hear from us.

[00:00:45] So please, if you have an idea, give us a shout. Yeah, and Dan, it's funny. I love when we get to do these episodes where you and I have to do a bunch of research to figure out what is going on and that is one of them here.

[00:01:00] And you have my attention sir, less tax. I fall into both rental property and self-employed end entrepreneurs. So I'm very interested to see what we have to say here. But let's kick this thing off. The quick overview.

[00:01:16] So you know what we're talking about here because that was a bit of a sales pitch but I'm not even sure what we're talking about. So Dan, what is it we're talking about today? Yeah, so it's called cash damning and it's for the people we just mentioned.

[00:01:31] It works especially well for self-employed people or property owners. Damning. Well, it just makes me think of something very Canadian. Beivers who actually became the national animal of Canada in 1975. And Dan, Beivers love trees. Do you know that Canada has well over 200 billion trees? Not crazy.

[00:01:57] That is the most trees for any country in the world. I think Russia and Brazil are up there as well but I know that I don't know the answer to that but I would assume we're probably top three. Got to be top three.

[00:02:12] On the note of Beivers who don't seem fond of trees, they like to chew on them until they fall down. I mentioned I was going to put this recording memory. I played that voice mail allowed for you.

[00:02:24] So one of the properties that we owned in the Ontario, the neighbor. Are you going to play that like augment podcast right now? No, I don't have it in front of you but I said I was going to do it.

[00:02:37] Anyway, so the neighbor of the property calls us and told them like Northern Ontario beauty and he's like, John at the end, who's my partner on the deal. I don't know what's going on over here but the Beivers got the water coming right up to the property.

[00:02:54] So I guess the Beivers had damned. There's a small lake on the property and the Beivers had damned. It's an 88 per parcel so that they'd damn this river slash lake I guess. And it's causing problems.

[00:03:09] The water has basically like the water level has basically made it like the water goes right up to the two buildings, which obviously would be a problem because it would flood the basements and so I think wildlife controls called and there was a bunch of different things.

[00:03:21] But in the dams we're getting pulled down by somebody from the M&R, the ministry or whatever, and then the Beivers would keep rebuilding them so the problem gets perpetuating. It's just crazy to me how completely independent of the conversation.

[00:03:34] We're about to have about about damming but even at the end of the day you're talking about trees and wildfires and all of these different things. It's like we're still at the mercy of Mother Nature 95% of the time on this planet and I just find that fascinating.

[00:03:51] I challenge, I would say probably 99% of the time. But yeah, listen to what I'm trying to play, play God and try and figure out your way around it. It's like you can't because it's just, yeah anyway. Just as a zither. I mean not beaver dams so.

[00:04:08] Just as a beaver builds a dam to stop the flow of water and create a pond for a tabotat, cash damming is a financial strategy that redirects the flow of money.

[00:04:17] Instead of allowing cash to flow towards personal, non deductible debt, cash damming diverting come towards paying down those debts while borrowed money is used to fund business expenses.

[00:04:28] This effectively converts non deductible debt into deductible debt similar to how a beaver's dam transforms a tranquil river into a potential flooding hazard for landlords in Northern Ontario. I love it. Okay, the beaver analogy makes a lot.

[00:04:43] I knew with cash damming there was going to be some kind of beaver analogy here and I like he did a really good job with that. It would be rude not to it in Canada, right?

[00:04:51] So, a national animal we have to. So who is cash damming for your, you're asking what we kind of already touched on that, but according to national banks website, cash damming is not a strategy that is available to everyone.

[00:05:06] There are actually in this case certain prerequisites to be able to use this system. So, according to the National Bank, the following people can use this technique. First being self employed workers who are not incorporated. Soul business proprietors.

[00:05:26] Partners of a general partnership, so a GP through additional restrictions apply, sorry though additional restrictions apply to cash damming the case of partners in a general partnership, so a bit more detailed there.

[00:05:41] And rental property owners, so I guess that's pretty convenient for, for at least two of us dam. We follow a couple of those categories.

[00:05:49] Yeah, and I would say a lot of people listening to the show would fall into those categories as well, so that it is convenient in that regard.

[00:05:56] It's funny like you know, like the sole business proprietors want to me is the big one where real estate professionals and I think a lot of people do this strategy like unknowingly or unintentionally as well.

[00:06:06] It doesn't have to be purely deliberate, but you know where you just spend, you invest a lot of money in your business and then you pay down a lot of money in your personal life with post tax income. So how does cash damming work?

[00:06:19] While it can save you a lot of money, you first need to clear and precise plan according to that same National Bank article.

[00:06:25] So you have to kind of meet certain conditions for this tax strategy to work for you. You would need to have some sort of significant personal debt for those of us who invest in property.

[00:06:36] There's a pretty easy one, it's called a mortgage and or a lot of us, you know, I mean cars are expensive these days, right? Real estate professionals are driving expensive cars, right? So that'd be another good example, although less, less investible example.

[00:06:49] Don't invest in your white BMW, you can't put it in Sweden that. Yeah, you would need to have a relatively high business expenses which I would say a lot of people in the real estate profession do, whether you are in development or your investor.

[00:07:04] You're spending a lot of money on renovations and operations and you know, if you're in the real estate profession sales and marketing meetings, entertainment, et cetera.

[00:07:15] And then finally, you need to have a good substantial taxable income for which you would be in a high tax bracket and it would be worth you going through this exercise of cash damning much like the beaver.

[00:07:29] But before we do all of this, Nick, I know you are a big housekeeping guy just like the beaver you like to keep your your beaver dam organized.

[00:07:40] Yes, okay. Well for the beaver dam of our podcast host keeping which doesn't make any sense but we do have a few announcements if you want to call it that just reminder.

[00:07:50] The meetups are are killing it or 20 hundred people across the country in twenty two different cities and Dan you and I get it up.

[00:07:58] Baby are headed to Calgary for the Calgary stampede to throw a big shaker along with our partner Sherwin Williams, cash norms and Calvert make out there. I think there's already like 60 plus people RSVP'd limit is possible. We'll also go check that out.

[00:08:17] We also hosted a webinar this week Dan on distress deals that went really well, I think provided a ton of free value as we like to do over 90 people showed up to that on a beautiful sunny Wednesday afternoon which was pretty.

[00:08:36] Cool. I think that's kind of it for housekeeping go check out the realist course of of check out the course of course and then you know in our in our real estate lives Dan, I know you and I are both same pretty active we, you know I know that our team is working on a couple acquisitions for for our portfolio.

[00:08:53] I think we've got just had a fourplex, calendar contract and another fourplex and another fiveplex. I looked at two off market deals over the weekend and I know I just took a couple of properties power sales so good listing.

[00:09:07] So you got on the distress deals no because it seems like just given the amount of people who showed up to that webinar we've got a lot of people looking for I guess the sharks are kind of circling the naked zooms now is that is that where is that the phase that we're at?

[00:09:21] I seem to be getting there tied the tides going out there's a bunch of sharks flopped around on the beach and a bunch of naked swimmers. So yeah, so I got a 16 unit building in a really beautifully renovated available for sale.

[00:09:38] If anybody's interested and large piece of land 80 to shy of 88 acres and 78 acres in Kirkfield that was owned for a race track funny story on that one but we'll get to it another time, but that was a pretty really good one.

[00:09:53] Yeah, and there's like a $300 or $300,000, almost price drop in there from the last acquisition to what it's for sale for now.

[00:10:03] So yeah, and it's three parcels as well. So we're kind of going through the process right now seeing if we can separate the three parcels and just sell them off at like 200 k apiece.

[00:10:11] But yeah, interesting piece of land if you're looking for land or if you're looking for a 16 unit apartment building. Let me know because we got them. Yeah anyway, yeah, I guess we'll go ahead and you got some to say.

[00:10:22] Yeah, I was gonna say if you're looking for if you're looking for anything awesome, I mean those are just a few of the deals we've got here as well as across the country again Dan, you and I.

[00:10:30] Great conversation with Carla from Saskatoon this morning. I have a good conversation in a few hours with a wonderful team of people from Winnipeg. So we're helping investors buy cashling properties and good investments across the country.

[00:10:45] Anyways, enough of plugging our stuff our house keeping that is it for our beaver dam. Dan hit me with this next piece here and then we'll get right into the episode. Yeah, so we have five sort of year that says great podcast for Canadian real estate investors.

[00:11:05] It's a great podcast for Canadian real estate investors. I love the information that provides it's all relevant to us in the north one of the biggest things that we get is like there's you know there's so many large podcasts in the US but the information is not exceptionally relevant to Canadian investors.

[00:11:21] So that comes from King Hut is it king Hut is it right? Yes king Hut. I love it.

[00:11:27] Yeah, okay. Yeah, yeah, we love providing stuff for Canadians. That's where we are. That's where we're focused and that is enough of that. Let it get back into the stuff you're doing. So I'm just going to do a quick quick refresher.

[00:11:41] Certain conditions for this tax tax strategy to work. Cedificant personal debt such as a mortgage or car loans relatively high business expenses and a good tax will income those are the three things that you would three conditions that you would need to have this tax strategy working your favor. So interest on personal debts like a home mortgage isn't tax deductible.

[00:12:04] Unless that money is borrowed unless somebody board is used to earn business or property income.

[00:12:11] Yeah, and so the types of business income that you could earn that would kind of fit that category would be income from a professional trade or any activity to carry out profit as an independent like which you know again a real estate professional.

[00:12:26] So you're like a skilled trade who claims a lot of personal income not corporate income property income also would fall into this category. So interest income dividends rents and royalties that you might own from property, especially rental property.

[00:12:41] Yeah, love it. And that's what we hear to talk about is this strategy called cash damning that is beneficial for unincorporated business owners or individuals who earn income from properties to optimize their personal finance.

[00:12:55] So that's like you stay listening. Yeah, so this comes from two articles one on RBC's website and the other one on national banks website. So you don't have to take it from us. You can take it from the largest financial institutions in the country.

[00:13:07] But take it from us anyways. Yeah, I mean that too. And we'll put links to these in the show notes as well. But the strategy basically involves using your business income to pay down personal debt.

[00:13:17] And personal debt being non taxed, acceptable. And then you would re-bore out to invest in your business. So obviously the banks both have an incentive to advertise this stuff because they're like, oh, we'll blend you the money.

[00:13:28] Right? And they know they can typically make more money lending you money on business debt than they can on personal debt and the cool part is that the business debt is taxed, octopus. So you're net.

[00:13:38] For that means like, oh, you might be borrowing business debt at 7%, but it's taxed, octopus. So you're actually net borrowing costs is lower than it would be on personal because you can't tax it.

[00:13:46] Okay, any of that interest. So you borrow money from one of these financial institutions who's giving you this great information and then it makes the interest payments on your loan deductible for tax purposes according to this article. This one is from example RBC wealth management.

[00:14:01] It seemed pretty reputable. So to get this as before, yeah, a couple bucks. So to get started, what you'll need is a line of credit or another loan facility now those borrowed funds that Dan was mentioning those board funds received are used to pay your business expenses or to purchase investment assets.

[00:14:25] So the funds received from your business operation are used to pay your down payment and pay down your personal debt.

[00:14:33] So the cash damage strategy may also be used if you own a rental property, and many of you do. In this case, your personal expenses can be paid directly out of the rental income well borrowed money can be used to finance expenses related to your rental property.

[00:14:50] I can say that one more time again nice and slow. The cash damage strategy may also be used if you own a rental property. In this case, your personal expenses can be paid directly out of rental income well borrowed money that loan from the bank can be used to finance expenses related to your rental property.

[00:15:11] Now eligible expenses relating to your rental property may include things like mortgage interest, property taxes, management fees, admin fees, maintenance and repair costs.

[00:15:22] Now again, this is not financial advice. You should probably say that a couple extra times in this episode here. So please consult with a qualified tax advisor. That does not stand in mind myself or not call for tax advisors.

[00:15:36] We do know a couple good ones on if you need advice on who they are reach out and they can confirm which expenses relate to your rental properties and which ones are eligible for this strategy.

[00:15:48] Yeah, or if you simply Google tax damning, I think there's a lot of like I was actually surprised when I first heard about this term and started researching it for this episode. I was like, oh, like, how have I never actually heard about this right like it's it's I think I've I didn't know a lot of people doing this that don't necessarily use it under that title, but the fact that it had a title apply to it kind of fascinated me, but if you just Google it, you will end up at the bank websites. I think someone even running ads for this so.

[00:16:17] Yeah, so like you know, you can also consult with their qualified tax advisors, you know that are where these from where these articles are written that we're quoting from the two notable ones I think that I found to be the best organized was NBC and RBC, but I think I found articles from pretty much every bank on this strategy. So it's really cool. My guess is that it's pretty legit.

[00:16:39] Did you did when you found it, did you say damn I can't believe I didn't know about this before. I did. Yeah, that was exactly it. Okay, enough of that. Let's keep that was good. I feel like we got a couple more of those in the tank.

[00:16:53] So one of the keys to note about what you mentioned there is that maintaining interested activity and one of the things they mentioned after is setting a multiple bank accounts, which again, you can understand why a bank might have incentive for you to do that, but you know, we do this like as well.

[00:17:08] We have multiple corporations, we have an events business, we have the podcast business, we have the course business and they all have separate bank accounts simply because it's easier to do the bookkeeping on that. Yeah, it's like you know we have to pay a quick books account membership for each one, which is what a couple hundred bucks a year.

[00:17:24] And that is worth it because each like we don't have to individually pull in and out all of these different deductible books for income and tax reductions on on three different businesses.

[00:17:38] Similarly, the strategy involves segregating funds received from borrowed money and other sources like business operations into separate accounts. The main goal is to ensure the interest on the borrowed money stays tax deductible.

[00:17:52] Hence it's crucial to directly link your borrowed funds to an income earning purpose. So put that tax or the borrowed money into that account and then the set expenses that they're talking about here are linked to that money that is that you can

[00:18:08] show, you know, Dan put the borrowed money into his account and then he used that borrowed money to pay for marketing or whatever it was some sort of business expense.

[00:18:17] Using that separate bank account to monitor the borrowed funds, putting that the borrowed funds into that bank account, and you can do this just as easily as having like, you know, I do my personal banking with our BC so it's easy for me to use them as an example given this comes from their article, but you can actually set up like a many different checking accounts all available within your

[00:18:37] banking and just keep it all on one login. We have separate logins for separate corporations, but if you, you know, for individuals who want a little bit more easier, my people to do that as well.

[00:18:47] So talk to your bank any of the big six banks in Canada, I imagine we'll probably any pretty much any financial institution in Canada is probably going to make easy for you to do this.

[00:18:56] Slightly incentivize to do so. Yeah, it's interesting, Dan, because you, you know, you think you want everything under that umbrella corp when you start out, but in ways it is a lot easier to keep the separate now again, especially when talking about cash damning when using those two separate bank accounts for cash damning.

[00:19:14] It makes it way easier to track that use of your borrowed money, which is very important, but not overall mandatory. So if you deposit and mix the world money with your other funds in one account, the good old CRA that is an acronym that every Canadian should know that's not a real estate acronym that is the Canada revenue agency.

[00:19:36] They will let you allocate the borrowed money to a specific use on a dollar for dollar basis. So what does that mean? Well, this means that you can examine all the uses of the money in the account and connect the borrowed funds to a specific purpose.

[00:19:54] However, you do need to deposit the board funds into the account before on the same day the funds were used. That one's actually got an interesting that like I guess you can't do it retroactively so like I can't fund it from debt thereafter.

[00:20:09] Yeah, it's kind of I guess it's really kind of got to be premeditated by the sounds of it right right.

[00:20:15] I wonder if like you know, I mean obviously credit card not being a good example but like if credit cards, like if you instantly if you just put it on a credit card the debt is immediately used for that purpose if that would qualify as well.

[00:20:25] I'll have to look into that interesting anyway so the RBC article provides an example. It's a doctor of course naturally doctor green. The owner of an unincorporated dental practice with two employees.

[00:20:38] Classic dentists example not the first time we've used dentists wealthy dentists as an example aren't they the same ones that blew up the whole Mer program in the 70s day.

[00:20:49] I did hear was doctors who were most of the most of the Merbs stuff in the 70s and doctors and dentists don't like to be confused do that.

[00:20:56] Yeah, it felt like dentists were like 90% of the buyers in 2022 actually like we were doing like to our 23 I guess last year yeah I guess last year doing like a handful of deal. A handful of deals with dentists. Yeah anyway tell me about doctor green.

[00:21:11] So the good doctor owns a house with a $220,000 open mortgage which gives her the free and to pay down her mortgage without incurring penalties that's great. In the current year the gross annual income for her dental practice is 300,000 and her business expenses total 125,000.

[00:21:37] So doctor green decides to use the cash damning strategy and uses a line of credit to pay for ongoing business expenses while using her practices gross revenue to pay down her personal non deductible mortgage.

[00:21:49] And I'm like I guess the important part here is while to notice when you take that income out you have to also pay tax on setting income before you use it for those purposes just to heads up because it like it doesn't explicitly I noticed that it didn't explicitly state that on anything that I've seen here.

[00:22:07] Yeah, this isn't like a tele-contact shelter thing. You still got to go to Delaware or Panama for for that kind of stuff but anyway the key to this strategy is that interest paid on borrowed amounts.

[00:22:18] For business expenses is tax deductible. So again interest paid on those board amounts that are used for business expenses that income that amount of money, sorry, not income that amount of money that interest paid is tax deductible.

[00:22:35] Although Dr. Reins overall that before and after using the cash damning strategy is the same her mortgage decreased by as much as her line of credit increase she effectively converted her non deductible debt with tax deductible debt.

[00:22:49] This conversion translated into tax savings of like $1,750 for the year which is actually not as substantial as I would have expected it to be.

[00:22:58] It isn't it also isn't like a massive amount we're talking about a $220,000 old bit more gauge in this example. So I guess as a percentage of that total you know, like again business expenses it's 125,000 businesses expenses so it's over 10% of that.

[00:23:15] So yeah, if Dr. Green continues to use her tax savings to make extra mortgage payments she may be able to pay down her mortgage in a much faster pace than had she not used the cash damning strategy.

[00:23:29] Now in the end she will have no mortgage and a large tax deductible business loan alternatively she could use the tax savings to reinvest in her business pay down some of the business line of credit safer retirement and treat herself to a vacation.

[00:23:44] The savings are hers to do as she sees fit. Now cash damning is a tax strategy that's primarily used by again self employed individuals or entrepreneurs it involves shifting personal interest debt into business interest debt which again is tax deductible and that's what these that's the real

[00:24:09] and goal the strategy right there it's important to note however that well this strategy can result in significant tax savings. It's also fairly complex and definitely should be undertaking with the advice of a tax professional to avoid any potential pitfalls.

[00:24:27] Please don't go listen this episode try to get a good understanding of what Dan and I explaining and then jump right into it. We use professionals to assist us when we you know embark on strategies such as this you should.

[00:24:39] Yeah, and I think like one of the big things is you're going to need a business loan to do this and so. The the big key is you have to discuss these with your lenders with your business managers with your wealth managers in.

[00:24:55] You know, so go to your bank they're going to they're going to give you options on financing so have you discussed your financing options with your lenders paying off your mortgage or other debt head of schedule could trigger a pre payment penalty as an example on a property.

[00:25:08] So you have to make sure you go and discuss these pre payment options with the lender in advance. You might also have a difficult time getting a large amount of business financing at a decent rate or if you don't have sufficient collateral or covenant.

[00:25:24] And the interest rate on on the business credit as we mentioned earlier is going to be definitely higher than what it would be on your mortgage rate. So you need to even see if the income tax savings are going to away that increase in the incremental borrowing costs.

[00:25:37] So there's a lot of key considerations here like this is definitely and you know we know we joke like about the not financial advice like.

[00:25:44] Disclaimer and stuff like that, but this is literally not financial advice like it's it's just like we're giving you this for informational purposes so that you can kind of go on the journey yourself and poke around and see.

[00:25:54] And ask the right people ask your bank ask your account and ask people if this is a strategy that would work for you. In a lot of cases it's not going to be.

[00:26:02] The net impact isn't going to be substantial enough for most people to do it, but we just wanted to put it on your radar because we had some people ask us about it and it could work for a lot of people in our audience. I feel.

[00:26:12] Yeah exactly then I think it I think it really goes back to kind of our overall mission with with the podcast and with what a lot of things we're trying to do which is just financial literacy right getting getting this stuff.

[00:26:23] That it's kind of behind that that that that curtain and revealing it to to Canadians and letting them know that this type of stuff exists again might not work for you might not be even worth it for for you to do it.

[00:26:38] But it exists and if your business partner person in an entrepreneur, you should know about programs like this that they could help. So let's get back to the story here.

[00:26:50] Do you have a long investment time horizon that is one of the biggest things we talk about this show again real estate is a long term asset. If you're not looking at it for them at the bare minimum I mean obviously you know flippers aside.

[00:27:05] If you're looking at looking at it for the bare minimum of a five year mortgage term, maybe you know something I don't but that's how we look at real estate here in the show five ten fifteen twenty year increments.

[00:27:16] So let's go back to the example with Dr. Green here in that example it illustrates that the cash damage strategy is effectively converting Dr. Green's mortgage which is debt with a set time horizon into an investment loan, which has an indefinite time horizon.

[00:27:36] So if you're in a similar situation since the investment loan does not have to not have a set repayment dates, you will need the discipline then to figure out how to repay that debt on your own accord. Absolutely.

[00:27:53] The next piece which is another big theme that we talk about here as real estate investors is cash flow, right?

[00:28:00] So do you even have surplus cash flow because a lot of businesses are like basically running zombie companies or just running businesses that can pay their employees or their owner salary.

[00:28:11] And they're not actually generating a surplus cash flow, real estate investments in a lot and you know by and large a lot of people who are making not so good real estate investments over the last little bit would fall into that category where they don't have surplus cash flow.

[00:28:25] So a big theme from our perspective is if you don't have positive cash flow, you should probably solve that problem first. Positive cash flow is a crucial component to running a successful real estate investment business which can then benefit from using strategies like cash to cash.

[00:28:40] And we're going to talk a little bit about what that looks like more specifically in the context of real estate. But understanding the terms of the investment loan you plan to use for your business expenses is essential. Some loans necessitate a monthly repayment comprising both interest and principle.

[00:28:55] And honestly from my lens like early on in the show we were talking about how I didn't really love he locks because they were kind of like a revolving credit product.

[00:29:03] They weren't amortized, they didn't require this monthly payment and I think that it encourages people to have a little bit of a lower degree of responsibility around.

[00:29:09] And so these monthly repayment mortgages could be or like art loans could be a bit of an advantage for people to actually forecast properly run the business properly plan cash flows.

[00:29:23] So it's but you also need to confirm that you actually have sufficient surplus cash flow or after tax income minus expenses from other sources then your business to meet these monthly payments.

[00:29:36] Otherwise you're just doing all of this to basically lose money or make me you know spread your losses out over two different entities. But so like you need to make sure you have enough cash flow to even benefit from a strategy like this.

[00:29:52] Yeah again I think we've to reoccurring topics real estate from long lens and cash flow cash flow and real estate assets.

[00:30:02] You know it's just so critical that you're real estate asset cash flows and and that cash flow needs to be sufficient enough to absorb the effects of an economic downturn like one of the ones we are in right now which might negatively affect your businesses cash flow.

[00:30:16] So potentially increase interest rates there by increasing your borrowing costs so if you're borrowing costs increase it's put in to have enough cash flow to cover any interest. Increases as well as any potential payments sorry demands for repayment so again.

[00:30:35] You know we talk about cash damning but also you want a stash of cash in order to be able to deal with this type of stuff and that comes from.

[00:30:44] Investment properties that are actual assets that spit out cash every month not liability is that your you know paying off several hundred dollars a month and it doesn't seem that bad very very different real estate strategies.

[00:30:56] Yeah and I think that this really rules into the kind of next conversation of risk tolerance like you have to remember that this is a debt based. Financial strategy right so if this is something you're thinking about doing you.

[00:31:10] You're committing yourself to a new financial obligation or you're committing your business to a new financial obligation and so you have to think about how comfortable you are on taking risk.

[00:31:21] Borrowing to invest introduces an additional level of risk here overall financial situation right a lot of people didn't really make this consideration when they were buying investment properties and the last couple of years.

[00:31:33] And they kind of just thought oh like everything will be okay because real estate only goes up and they were wrong and it goes down and also interest rates go up and so now all of a sudden the combination of.

[00:31:44] Very expensive asset and a lot of debt with a increasing burden capital cost burden by the interest rate is becoming.

[00:31:53] A problem for them and so it's important to assess this and think about risk before moving forward with such investment plans and I'm glad our best even mentioned this because you know I'm a big risk management guy so I'm glad to hear they talk about it.

[00:32:08] Yeah yeah it's nice when you want to make six banks kind of lands on the same page so in the context of real estate cash damning you know is is a strategy that can be applied to inventory individuals who on the rental properties the strategy involves using that rental income to pay.

[00:32:25] Personal non deductible expenses well borrowed money is used to finance expenses related to the rental property again. That's why Dan just said this whole thing is based this whole system is based off of debt the strategy uses that debt in a different way.

[00:32:40] Yeah and I think that this like properties are really easy way for people to understand it because you can take out a he lock on that property and then that he locks it's in the properties account.

[00:32:50] And then you spend the money on improving the property from that account like rather than spending your own cash on the property. That like that's a really easy way for people to very simply understand what this cash damning thing is right.

[00:33:04] Okay on rental property it needs ten thousand dollars in repairs. I'm going to go to the lender on that property and ask them if they'll give me ten thousand dollars either increase my mortgage or you know put give me a second mortgage or give me a he lock.

[00:33:16] And now that debt is applied to that property the property already has probably a separate bank account because you'll need a separate bank account where you're collecting your rent and where your mortgage payments are going out of for the corporation. Typically your lender will require this anyways.

[00:33:29] And so then once you have that debt you put it into that account the bank will require that it goes there you can't just take it out and go, you know have a party.

[00:33:37] And then you can use that to pay for eligible expenses relating to the rental property which could include but it not limited to mortgage interest property taxes management fees administration fees maintenance and repair costs.

[00:33:49] And even potentially capital costs that are in a different tax deductibility stream through capital cost allowances and again we've done a couple of episodes on like talking about the difference between opx and capex so just make sure that you know what you can spend and like if you're spending on capex and it's deductible through depreciation.

[00:34:06] Whereas if you're spending on opx it's deductible through income and again these are like that that was just for information purposes that's a pure like pure account and question. And to be honest with you this entire thing is like.

[00:34:18] Bunch of information for you to go to your account send them the link to this episode and be like can I do this?

[00:34:23] And also you know what I mean, like that that's really it's like we and if we're and if there's anything we're getting wrong or any account who wants to come on here and this disc or I've this for us better give us a show.

[00:34:32] Maybe we'll have to get Patrick back on here to talk about this. I'm sure Patrick knows the stuff inside and now yeah, I mean I think you know in conclusion it's one of those things that none none this is going to change overnight.

[00:34:45] I mean you know when these articles that we pulled from says bankers even recommend cycles of three to five years for this strategy to to really see any kind of significant change. And that's great because that lends itself to your long term investment mindset.

[00:35:02] So again Dan I completely agree this is not something that we expect you to take in runway to something that we're still discovering and figuring out the nuances of.

[00:35:11] But yes, you know great idea please send this to your accountants tell us get through the first five minutes where we talk about beaver dams instead of cash dams and.

[00:35:21] And we're we're happy to be corrected if we got any of this wrong or if we left any key things out there anyone out there who is currently practicing this strategy.

[00:35:31] So we're going to be listen to listen to systems like whether left out one of the best parts so again hope hope you got.

[00:35:39] At least some value out of this I think it's a very interesting strategy similar to kind of one of those like Smith maneuver type of type of thing so damn before we get out here one of you hit us with a quick summary of some of the main points and main takeaways here and and then we can and we can wrap up.

[00:35:58] So it's funny you mentioned this myth and we were guy too because he's going to come on the show at some point to do a session together.

[00:36:04] We probably do a Mr Smith it's actually a son like the but they are so the originator son kind of took over this myth maneuver conveniently they both have the last same last name so.

[00:36:13] But yeah, we'll have him on to talk because I know we we mentioned before like in the in the past environment we didn't really know whether or not we felt it was a good strategy and Patrick we discussed it with Patrick aset is there are the.

[00:36:25] One of the tax specialists who comes on the show and I think now as interest rates climb like they're higher if they're bigger business expense it can actually become more beneficial right because you're it's a bigger cost to you as a business person.

[00:36:42] And so you should be trying to get it into that more tax deductible stream right but anyway the quick quick summary here while cash jamming can save you a lot of money.

[00:36:52] You need to have a very clear precise plan you got to meet certain conditions you need to have significant personal debt such as a mortgage or car loan which is you know probably the two biggest categories relatively high business expenses which rental properties typically do have.

[00:37:04] And you need to have a solid taxable income which a lot of people don't have in the rental property so like this might not even work for you unless your rental property or your personal income is high.

[00:37:13] You also need certain financial products so you need to separate bank account for your business income which to be honest if you're running a rental property you should really already have this for that rental property just purely from a bookkeeping perspective you'll need a second bank account for the business expenses.

[00:37:29] And you'll need a loan your marks solely for your business expenses for example a personal and if credit or a he luck on your investment property which is its own business or you know some sort of business line that you have as a professional you'll obviously probably need a high credit score to qualify for this type of loan.

[00:37:44] And you want to have a solid credit history it is not uncommon for your personal finances that impact on your professional life and your ability to invest right.

[00:37:52] If you can't if you don't look like a credit worthy borrower then it's going to be very difficult for you to get credit and scale through using debt right so the last piece that you'll need is a gross.

[00:38:06] You'll basically need to use your gross business income to pay your expenses and personal debts such as the mortgage in this example and then pay a hundred percent of your business expenses with the loan designated for.

[00:38:17] That purpose and that's that's all from again you can find all this online on most big banks websites have articles about this so that like all of this is basically. Hold from and summarize from RBC and national banks websites.

[00:38:31] You want to quickly rip us through the advantages and wrap up here Nick?

[00:38:35] Yeah yeah for sure I mean the main the main advantage is that this strategy specifically allows you to do is pay down your personal debt faster by using your business income and in thus avoiding pain non deductible interest.

[00:38:49] It also allows you to deduct interest that you've paid on your loan to finance business expenses. You know Dan in closing I think this is one of those things that we talked to a lot of let's say people on the come up in their real estate careers.

[00:39:05] People that are either or just buying their first or about their first few properties and it's always that ability to scale and. And scaling really is a practice of not just buying more properties but building better systems and having a better business practice have no better business plan.

[00:39:24] And more aligned investment thesis and I think that's where strategies like this have a home is is when you can take the time to really work on the business and you've worked out your way out of working in the business.

[00:39:39] And then it's time to implement this type of stuff with the right power team advise you to do it.

[00:39:43] So if that sounds like you I would advise you to go and and speed to your bank and speed to your accountants and your wealth advisors and see if this strategy is right for you. Hope you got a ton of value out of today's episode.

[00:39:58] Yeah thanks a lot everyone make sure you check out our school group free free free school community check out our free webinars realist dot CA link we'll be at the top of the show notes come visit us at the Calgary stamp he'd meet up on July 9 if you cannot make it to Calgary for the July 9 meet up.

[00:40:16] Please go to one of your local meetups we have them in 20 plus cities across Canada mostly recently launched several in Ontario Hamilton, Oshawa London there's a couple on the east coast so go out there go meet some people go you'll maybe you'll find a tax professional who understands cash damning out there if not you'll probably meet some awesome people who own rental properties or are interested in real estate as much as you are so thanks a lot have a good one.

[00:40:43] The Canadian real estate investor podcast is for entertainment purposes only and it is not financial advice Nick Hill is a mortgage agent with premier mortgage center and a partner in the G and each mortgage group license number one zero three one seven agent license M two one zero zero four zero three seven.

[00:41:05] Dino photos are real estate broker licensed with rare real estate a member of the Canadian real estate association the Toronto real estate board and the Ontario real estate association.