Mortgage deductibility for unincorporated self-Employed individuals
If you have an unincorporated business and a non-tax deductible mortgage or Line of Credit, this strategy will decrease your interest costs significantly
This strategy is based on the fact that money borrowed personally to invest in a business in order to generate income gives rise to deductible interest on that loan. The interest expense on a mortgage or personal LoC is not tax deductible. Also, nothing in the tax act says you have to pay company expenses with revenue generated by the unincorporated business.
Being unincorporated means that for tax purposes, you and your company are the same person. Your total company revenue less company expenses is your profit and is taxable.
The amount of cash available from the company to apply against your non tax deductible debt is an amount equal to the expenses of the company for the month. Capital expenses as well as operating expenses qualify for the tax-deductible interest treatment if this expense is paid with borrowed money.
It works like this:
1 – At the end of a payable period, tally all qualifying expenses in the company – make sure you have good records.
2 – Write a cheque against a separate investment line of credit (LoC) for the same amount, notate it “Company Expense” and make it payable to your company. Deposit in your Company bank account.
3 – Write a company cheque payable to yourself for the total amount of the expenses. Notate it as “Draw – re: expenses”.
4 – Deposit the cheque into your personal chequing account. You can then pay down any non-tax deductible LoE or mortgage with this cash.
What you just did is shift non-tax deductible debt to tax deductible debt. The investment LoC is carried as a loan to the business, the interest being tax deductible. You pay the interest from your business account – which of course becomes an expense.
Once all of your debt is tax deductible you would then begin paying down the business loan. What’s this worth to you? On a $100,000 debt at 5% you create an additional business expense of $5,000 which you would have been paying with after tax income. At the highest marginal tax bracket, this saves you about $2300 per year.
This strategy is thanks to Fraser Smith who wrote, “The Smith Manoeuvre” on how to make your mortgage tax deductible.