Cash Damming 101: How Canadian Homeowners Can Turn Their Mortgage Into a Tax Deduction

Every year, Canadians pour tens of billions into their mortgages — with no tax break to show for it.

Meanwhile, landlords and investors deduct thousands in interest from income taxes, simply because of how their debt is structured. Similar loans. Same banks. Different outcomes.

But what if you’re both? What if you own a home and a rental property?

There’s a tax strategy that addresses exactly this scenario — one that’s been hiding in plain sight. It’s called Rental Cash Damming, and for homeowners who collect rental income, it’s worth understanding.

In short, it allows you to turn your non-deductible mortgage interest into deductible investment debt — legally, without increasing your debt, and often with immediate tax benefits.

🧭 Want the full walkthrough?
👉 Read the full guide: The Ultimate Guide to Rental Cash Damming in Canada
(Includes step-by-step setup, tax treatment rules, real-world examples, and more.)

What Is Cash Damming?

Rental Cash Damming is a financial technique that re-routes your cash flow to make personal mortgage debt behave like business debt — in the eyes of the CRA.

Here’s the broad idea:

• You use rental income to pay down your non-deductible home mortgage
• You re-borrow the same amount using a re-advanceable line of credit (like a HELOC)
• You then use that re-borrowed money to pay rental property expenses

This strategy works because CRA allows tax deductions on interest payments when the borrowed money is used to earn income. Cash damming meets that condition, and when executed properly, it aligns directly with CRA guidelines — no grey area, no gimmicks.

A Working Example

Let’s say you receive $2,500/month in rental income.

Rather than using that to pay your rental’s mortgage, insurance, and taxes (which you can already deduct), you:

1. Use it to pay down your personal mortgage
2. Access $2,500 from your re-advanceable HELOC
3. Use the borrowed funds to pay the rental expenses

Because the borrowed money is now tied to an income-producing activity, the interest on that $2,500 becomes deductible.

Over time, this cycle compounds. The portion of your home mortgage that qualifies for deductibility grows — often rapidly — and the result is increasing annual tax refunds, which can be used to pay down your mortgage even faster. For many, this means shaving years off their amortization schedule.

What You Need to Make This Work

This isn’t something you wing on a spreadsheet. You’ll need:

• A re-advanceable mortgage or HELOC, such as Scotia STEP, TD HELOC, or Manulife One
• At least one rental property — this strategy works whether the property is cash-flow positive or negative
• A dedicated account structure to keep personal and rental funds separate
• Clean records. Every transaction must show intent and use
• An accountant who can help you structure and file properly

CRA compliance depends on clean execution and documenting a proper paper trail. This isn’t about being aggressive — it’s about being precise.

Why You Haven’t Heard Much About It

There are a few reasons:

1. It’s not mainstream. Most lenders don’t promote it. Most borrowers don’t know to ask.
2. It requires bookkeeping. And discipline.
3. It sounds complex. But once set up, the process becomes highly repeatable.

It’s been quietly used for decades by those who treat their real estate portfolio like a business. It just hasn’t made it to the front counter at your bank branch.

Is It Worth the Effort?

Let’s look at a conservative example:

Say you re-borrow $30,000/year from your HELOC to cover rental expenses. At a 5% interest rate, that’s $1,500 in annual interest.

If you’re in a 43% tax bracket, your refund on that interest would be $645 in the first year.

Now here’s where it gets interesting:
As you continue this strategy year after year, the deductible debt (and the refund) grows:

• Year 2: $1,290 refund
• Year 3: $1,935
• Year 4: $2,580
• Year 5: $3,225
• Year 10: $6,450+ annually

Total refund over 10 years, compounded linearly:
$645 + $1,290 + $1,935 + ... + $6,450 = $35,475

That’s not theoretical. That’s based on math, proper structure, and following CRA rules. If you’re strategic, that refund stream can be directed right back to your mortgage — accelerating your payoff schedule significantly.

Want the Full Playbook?

If this article sparked your curiosity, and you're ready to go deeper into how Rental Cash Damming works — from setup to compliance, risk management to case studies — I’ve written a comprehensive, step-by-step guide:

👉 Access the Full Guide to Rental Cash Damming
(Clear instructions, use-case analysis, tools, and a checklist to see if it’s right for you.)

Final Word

Cash damming won’t magically erase your debt. It doesn’t increase your leverage, or ask you to invest in volatile markets. It simply restructures how your money flows — and in doing so, it can reposition your mortgage as a tax-efficient tool rather than a passive liability.

Used correctly, this strategy creates real-world financial leverage, through nothing more than intentional planning and consistent execution.