Make your mortgage interest tax-deductible
The money set aside technique is a powerful tax strategy that allows self-employed workers and income property owners to transform their non-deductible mortgage interest into deductible interest.
$82,200
Potential Deductions
$36,990
After-Tax Savings
~2 years
Full Conversion
What is the Money Set Aside technique?
Typically, an unincorporated self-employed worker uses their gross income to pay operating expenses and finances major personal expenses, such as their home mortgage.
By using the "money set aside" technique, the same individual uses their business gross income to accelerate their personal mortgage payments and will henceforth finance 100% of their operating expenses through a dedicated loan. In doing so, they gradually transform non-deductible interest into deductible interest.
How It Works
Following a Supreme Court of Canada decision, unincorporated self-employed workers can use their gross income to make additional mortgage payments, then borrow via a home equity line of credit to finance their business expenses.
Since the amounts borrowed on the home equity line of credit were for business purposes, the interest becomes deductible from your income.
Real Example: Jean's Story
Jean is a self-employed worker living in Longueuil with $125,000 in professional expenses and a $250,000 mortgage on his new home.
With the money set aside technique, Jean uses income normally designated for professional expenses to make additional mortgage payments, then borrows through his home equity line of credit to pay his business expenses.
With annual professional expenses of $125,000, Jean completely converts his original mortgage in just 2 years, making the interest deductible for the remaining life of the debt.
Salaried Employees with Income Properties
A salaried employee who owns an income property — like many of my investor clients on the South Shore — can also benefit from an adapted version of the money set aside technique.
The principle: use rental income to make additional mortgage payments on the personal residence, then finance the building's expenses through a home equity line of credit. The interest then becomes deductible since it's used for business purposes.
Important Recommendations
There are other strategies to maximize tax benefits. Consult a professional who will consider the following:
- Rules regarding family patrimony sharing
- Personal and business expenses (e.g., automobile)
- GST and QST collected on your professional sales
- Situations where spouses are co-owners
FREQUENTLY ASKED QUESTIONS
Everything about the money set aside technique
Maximize Your Tax Benefits
As a RE/MAX broker on the South Shore, I collaborate with tax specialists to offer you the best acquisition strategies. Contact me to discuss.