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How to Use Cash Damming with a Rental Property to Make Your Mortgage Tax-Deductible
July 18, 2025 | Posted by: Nicholas Pratile
If you own a rental property in Canada, there's a little-known strategy that could help you turn your mortgage interest into a tax-deductible expense—even if your mortgage is on your personal home. It's called cash damming, and it’s a smart way to use your rental income to your advantage.
What is Cash Damming?
Cash damming is a CRA-approved strategy where you replace personal, non-deductible debt (like your mortgage) with deductible investment debt. This technique is especially useful for self-employed individuals or real estate investors who want to optimize their tax situation.
How It Works with a Rental Property
Let’s say you have a mortgage on your principal residence and you also own a rental property that generates income.
Here’s the typical setup:
- Your rental property brings in monthly rent.
- You use that rental income to pay the mortgage and expenses on the rental.
- Meanwhile, your personal mortgage payments come out of your after-tax income—and none of that interest is tax deductible.
With cash damming, you flip the script.
The Cash Damming Strategy
- Open a re-advanceable mortgage (like a Manulife One or Scotiabank STEP) on your principal residence. This allows you to borrow back the principal you pay down.
- Use your personal funds to cover rental property expenses, including:
- Mortgage payments on the rental, Property taxes, Repairs and maintenance, Insurance
- Borrow an equivalent amount from your home equity line of credit (HELOC) to reimburse yourself. The borrowed funds are now traced directly to an income-producing asset (your rental), so the interest on this borrowed amount becomes tax deductible.
- Repeat this monthly. Over time, your non-deductible home mortgage gets replaced with deductible investment debt.
An Example
- You pay $2,000 in rental property expenses this month using your personal account.
- You then borrow $2,000 from your HELOC on your primary residence and move it back into your personal account.
- Because the borrowed $2,000 was used for the rental property, the CRA allows you to deduct the interest on it.
- Over time, this process builds a larger investment loan—with tax-deductible interest.
Why It Works
The CRA cares about the purpose of the borrowed funds, not the collateral used. Since you’re using borrowed money to pay for rental property expenses, you can write off the interest.
Important Notes
- Keep clear records of all transactions to prove the flow of funds.
- Work with a mortgage broker and accountant to ensure proper setup and tax compliance.
- This works best when your HELOC is separate from your personal spending—keep it clean!
Final Thoughts
Cash damming is a powerful strategy for anyone looking to maximize deductions, reduce taxes, and build wealth through real estate. By using the rental income to reduce your personal mortgage and borrowing for rental expenses, you create a more tax-efficient financial structure.
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