For BC landlords, cash damming is a practical, legal tax strategy that helps BC landlords use borrowed funds to turn personal debt interest (such as from your personal mortgage) into deductible interest under CRA rules..
This strategy is supported by the Canadian Income Tax Act, section 20(1)(c), which allows interest to be deducted when borrowed money is used for the purpose of earning income. For rental properties, that means expenses you pay to operate your suite, condo, or home.
Landlords often use either a stand-alone LOC or a HELOC (Home Equity Line of Credit) to make this strategy work.
What Is Cash Damming for Landlords?
Cash damming is simple:
- You use rental income to pay your personal living expenses
- You pay all rental property expenses using a dedicated LOC or HELOC
- Because the borrowed money is used to earn rental income, the interest becomes tax-deductible
Over time, more of your debt becomes deductible, and you can use your own cash to pay down non-deductible personal debt faster.
Why BC Landlords Use This Strategy
BC landlords face:
- High property prices and mortgages
- Strata fees and special assessments
- Ongoing maintenance requirements
- Increasing operating costs
Under the tax rules:
- Interest on personal debt is not deductible
- Interest on rental-related debt is deductible (under section 20(1)(c))
Cash damming allows BC landlords to:
- Shift borrowing to deductible purposes
- Reduce non-deductible personal debt
- Improve cash flow
- Maximize tax efficiency
- Keep bookkeeping clean and CRA-friendly
How Cash Damming Works for BC Landlords (Step-by-Step)
1. Set up a dedicated rental LOC or HELOC
Most BC landlords use a HELOC because:
- It’s easy to track
- It usually has lower interest rates
- Limits increase automatically as you pay down your mortgage
- It can be segmented into sub-accounts for clean bookkeeping
Whether you use a stand-alone LOC or a HELOC, it must be completely separate from personal banking.
2. Use rental income for personal living expenses
Deposit your rental income into your personal account to cover everyday living costs, such as groceries, utilities, and your personal mortgage. By doing this, your own cash is freed up and can be used to pay down non-deductible personal debt or fund the line of credit that covers your rental property expenses.
This step is key to cash damming: it ensures that borrowed funds from the line of credit are used solely for rental-related expenses, which is what makes the interest deductible under Income Tax Act section 20(1)(c).
3. Pay all rental property expenses using the HELOC/LOC
Examples:
- Repairs and maintenance
- Property taxes
- Insurance
- Strata fees
- Special levies
- Utilities (if you pay them)
- Cleaning
- Advertising
- Tenant screening costs
Because these expenses are paid with funds borrowed to earn rental income, the interest becomes tax-deductible under Income Tax Act 20(1)(c).
4. Put your freed-up personal cash toward non-deductible debt
This may include:
- Your personal mortgage
- Car loan
- Personal LOC
- Credit cards
You’re not increasing total debt.
You’re moving your debt from non-deductible to deductible categories.
Example Using a HELOC
Imagine you rent out a suite in BC and collect $1,700 per month. Your rental expenses average $375 per month.
Without cash damming:
You would normally pay the $375 in rental expenses from your personal cash.
With cash damming:
- Deposit the $1,700 rent into your personal account to cover living costs—groceries, utilities, and your personal mortgage. This frees up your personal cash.
- Pay the $375 rental expenses from a dedicated line of credit.
- The interest on the $375 borrowed is now deductible under Income Tax Act section 20(1)(c).
- Use the freed-up personal cash to pay down your personal mortgage or other non-deductible debt.
By repeating this every month, you gradually shift personal cash out of rental expenses, reduce non-deductible debt faster, and increase deductible interest, all while keeping your records CRA-compliant.
HELOC Benefits for BC Landlords
A HELOC offers several advantages:
Low interest rates – HELOCs often offer lower rates than credit cards or unsecured lines.
Easy tracking – You can create sub-accounts or “tranches” for:
- Rental repairs
- Strata fees
- Taxes
- Utilities
Clean separation is important for CRA.
Revolving credit – You can reuse the credit over and over as expenses arise.
Works well with the Smith Manoeuvre – Many BC landlords combine:
- Smith Manoeuvre (for personal home mortgage)
- Cash Damming (for rental property expenses)
They complement each other, though they are different.
Important CRA & Tax Compliance Rules
To stay safe under section 20(1)(c):
- Use the HELOC/LOC strictly for rental expenses. Even one personal transaction can contaminate the deductibility.
- Keep rental and personal accounts separate. Never mix rental payments into the HELOC.
- Maintain receipts and interest statements. A HELOC makes this easy since the bank provides annual summaries.
- Track the “purpose of borrowed funds”. CRA focuses heavily on this concept. The purpose must be rental-income generation.
- Consider professional advice. Most accountants understand cash damming, but it must be executed cleanly.
Who Benefits Most in BC?
Cash damming is ideal for:
- First-time landlords with a mortgage
- Condo owners facing strata fees or special levies
- Landlords with frequent repair costs
- Anyone wanting to reduce personal mortgage debt faster
- Landlords wanting more deductible interest without taking on new debt
Final Thoughts for BC Landlords
Cash damming — especially when done through a cleanly managed HELOC — is one of the simplest and most effective ways for BC landlords to turn non-deductible personal debt into deductible rental debt under Income Tax Act section 20(1)(c).
By routing rental expenses through a HELOC or LOC and using rental income for personal bills, landlords can improve tax efficiency, reduce personal mortgage debt, and maintain fully CRA-compliant records.
