Could Cash Damming Work for You? How Your Mortgage Could Save You Money

How Cash Damming (Smith Maneuver) Works

Cash Damming, also called the Smith Maneuver, is a strategy used by Canadian homeowners to make their mortgage work smarter. It helps turn non-deductible mortgage interest into tax-deductible investment interest while paying down your mortgage faster. Here’s how it works step by step.

Step 1: Use a Line of Credit (LOC) for Rental Property Expenses
Instead of paying rental property costs like mortgage payments, repairs, or taxes from your own money, you use a home equity line of credit. This lets you keep cash flowing through your main account while using your home equity strategically. The borrowed money covers the rental expenses, which sets the stage for tax-deductible interest.

Step 2: Direct Rental Income to Your Primary Mortgage
All rental income goes straight to your main mortgage. This reduces your balance faster without extra effort from you. Every dollar from your rental property lowers your mortgage and the interest you pay. This step combines your income with your repayment strategy for faster results.

Step 3: Make the LOC Interest Tax-Deductible
The interest on your line of credit becomes tax-deductible because the money is used for investments, like covering rental expenses. This can reduce your annual tax bill, freeing up cash that can be used to pay down your mortgage faster or invest elsewhere. Accurate record-keeping is key to ensure the interest qualifies for deduction.

Step 4: Use Tax Savings for Additional Prepayments
The tax savings you get from the deductible interest can be applied to your mortgage or line of credit. This step accelerates your mortgage payoff, reduces interest costs, and builds equity faster. By using the savings immediately, you make your money work more efficiently toward debt reduction.

Step 5: Build Wealth Through Tax Optimization
Over time, the combination of using the LOC for rental expenses, directing rental income to your mortgage, claiming deductible interest, and reinvesting the tax savings grows your net worth. Cash Damming helps you reduce non-deductible debt while increasing tax efficiency. It requires careful tracking and discipline, but it is an effective way to accelerate mortgage repayment and build wealth.