Do you own a proprietorship (home-based business or rental property)?

When most small businesses get started, part of the excitement is going to the bank to open a business account. You order company chequebooks and deposit books. The money starts to flow in to your new bank account and at the end of the month you pay the company bills. If there is anything left, you write a cheque to yourself, call it a ‘draw’, and deposit it to your personal chequing account… okay, fair enough – nobody uses ‘cheques’ anymore – but the principle is the same…

If you don’t have a house mortgage this is a fine and efficient setup. But if you do have a mortgage (or other non-deductible debt), then there is a much better way to structure your banking. It is called the Cash Flow Dam and it is extremely powerful.

Say you own a proprietorship – a rental property – nothing too fancy, but a nice little place for which you have found good renters who pay on time every month and keep the house and garden tidy. You receive $2,000 in rent each month from your tenants and promptly use it to make the mortgage payment on your rental property which also happens to be $2,000 per month.

However, you, and likely thousands of other Canadians, have been making a very expensive mistake each and every month. You are receiving rental receipts each month and promptly redirecting them to cover the mortgage payment on your investment property. Money in, money out. While this seems the appropriate thing to do – after all, you have a mortgage on your rental and have promised your bank to make payments on it each month – it is not. You are missing out on thousands and thousands of dollars of benefit.

Proprietorship Versus Corporation

Being able to implement the Cash Flow Dam relies on you owning a proprietorship. A proprietorship is indeed a business but it is different than a corporation. A corporation is its own legal entity – you may own 100% of it but the corporation itself is as real as you are in the eyes of the law and is as distinct from you as you are from anyone else. A proprietorship, however, is you. It is an unincorporated business that you run and own as if it were yourself. In other words, any income from the business is treated just the same as any income you receive in wages or salary from your job. And you can do anything you want with this income. And a proprietorship is not necessarily just a rental property, it can be a home-based business you own, a hotdog cart, etc.

Make Your Money Work More Than Once

And so if the rental income you receive from your business – your rental property, in this case – is yours to do with as you see fit, let’s make it sweat. What you should have been doing all these years is applying these rental receipts of $2,000 per month as a prepayment against the non-deductible mortgage of your principal residence – the mortgage on the house in which you live. A monthly $2,000 prepayment of the mortgage? You will see that non-deductible mortgage eliminated in record time. Extremely powerful.

But what about making the mortgage payments on the rental property, you say? Well, if you have the appropriate financing in place on your principal residence, you will be able to get back at that $2,000 in order to service the rental property mortgage. You will have immediately converted $2,000 of non-deductible mortgage debt on your principal residence to deductible debt, thus generating a tax refund you otherwise would not have received (increased cash flow for yourself) while on your way to getting rid of that expensive mortgage in record time – and the sooner you are rid of that mortgage, the less you will pay in interest. And less is better. Much better.

The Cash Flow Dam requires no new money and no new resources of any kind from you. The benefits are free, and accrue as a result of reorganizing your finances, just like wealthy people do.