Good debt, bad debt
Most people treat debt as something to escape. But not all debt is bad, especially if you can make it work for you.
Every dollar you earn gets taxed. Every house you buy gets taxed. Every tank of gas, every loaf of bread. Tax touches almost everything.
That’s why structuring your finances to reduce lifetime tax is worth the effort.
Here’s the simple version:
If you borrow money to earn income, the interest you pay can often be deducted from your taxable income. That’s what we call tax-efficient debt.
Example:
Let’s say you borrow $300,000 to invest. The interest costs about $13,500 per year.
If your tax rate is 40%, the after-tax cost of that interest drops to roughly $8,100.
Same loan. Lower real cost.
It’s not a loophole — it’s a strategy. But you must do it properly:
- The money you borrow has to be used to earn income (like dividends or rent).
- You must keep a clean paper trail showing how the borrowed funds were used.
- You can’t mix personal spending with the borrowed amount.
Two common approaches:
- Re-mortgage with intent. Pay off your mortgage using investments, then re-borrow for investing. Now that interest is deductible.
- Cash-damming (or the Smith Manoeuvre). Use your business or rental income to pay your personal mortgage. Then use borrowed funds to cover business or rental expenses. Over time, you turn non-deductible debt into deductible debt.
Do it right, and the numbers add up quickly. Over ten years, the savings can reach tens of thousands of dollars.
Do it wrong, and you’ll have a paperwork mess and CRA headaches.
If you have rental properties, side income, or a corporation, this is low-hanging fruit.
It’s not about avoiding tax — it’s about not paying more than you have to.
For more information, check out the CRA’s ‘Tax Folio’ Income Tax Folio S3-F6-C1, Interest Deductibility