Reference
Rental Cash Damming & Smith Manoeuvre Glossary
Last updated: October 19, 2026
Plain-language definitions of the terms used across our articles on rental cash damming, the Smith Manoeuvre and debt swaps, from personal-use debt and rental-use borrowing to the sections of the Income Tax Act and the court decisions most often cited.
Advance Income Tax Ruling
A written statement from the Canada Revenue Agency (CRA) on how it will interpret the law for a specific proposed transaction by a specific taxpayer. A ruling applies only to the taxpayer who asked for it and the facts described in the request. It is not approval of a strategy or of anyone else's arrangement.
Amortization
The length of time it would take to repay a loan in full if every scheduled payment were made as agreed and the terms stayed the same. Each regular payment covers interest first and the rest reduces principal, so early payments are mostly interest.
Read more: How rental cash damming works
Bronfman Trust
A 1987 Supreme Court of Canada decision on interest deductibility. A trust borrowed money to make a capital distribution to a beneficiary instead of selling its income-producing investments, and claimed the interest. The court held the interest was not deductible because the direct use of the borrowed money was the distribution, and it declined to look at indirect uses such as keeping the investments.
Read more: Is rental cash damming legal?
Capital Expense vs Current Expense
Two kinds of spending on a rental property. A current expense, such as a routine repair, maintains the property and may be deductible in the year it is incurred. A capital expense, such as a renovation that improves the property beyond its original condition, is generally not deducted all at once; part of its cost may be claimed over several years as capital cost allowance (CCA).
Capitalized Interest
Interest paid with money borrowed from the same line of credit, so the balance grows by the interest each month. In rental cash damming, the interest on the rental line of credit is commonly paid this way through the rental expense account. Section 20(1)(d) of the Income Tax Act deals with interest on interest, and how it applies depends on your facts.
Read more: How rental cash damming works
Cash Damming (Rental Cash Damming)
A debt conversion strategy for landlords, also known as the Cash Flow Dam accelerator of the Smith Manoeuvre. Rental income is used as an additional prepayment on your home mortgage, and rental expenses are paid with funds borrowed from a separate line of credit used for nothing else. Over time, personal-use debt is replaced by rental-use borrowing, and interest on that borrowing may be deductible where the requirements of section 20(1)(c) of the Income Tax Act are met.
Read more: Rental cash damming in Canada · What is cash damming? · How it works
Commingling
Mixing money with different uses in one account or one borrowing, for example a line of credit that paid both rental bills and personal purchases. Once borrowed money is commingled, its use can be hard or impossible to trace, and interest on the portion that cannot be traced to an income-earning use may not be deductible. Past refinances and consolidations can commingle personal and rental borrowing in a single balance.
Read more: Why the records matter · Strategy Risk Review
Debt Conversion
Replacing personal-use debt with borrowing used for an income-earning purpose, one documented transaction at a time. Total debt may stay roughly the same; what changes is what the debt was used for. Rental cash damming, the Smith Manoeuvre and debt swaps are all forms of debt conversion.
Read more: What is cash damming?
Debt Swap
Using capital you already have, such as non-registered investments, an inheritance or the proceeds from selling a property or business, to pay down personal-use debt, then borrowing again to invest. Total debt may stay about where it started; what changes is what some of it was used for. Selling investments can have tax consequences, and investing with borrowed money carries market risk.
Read more: Debt swaps
Direct Use
The principle that interest deductibility generally turns on what borrowed money was directly used for, not on the borrower's indirect purpose or on the property that secures the loan. The Supreme Court of Canada applied it in Bronfman Trust (1987) and Singleton (2001). Under this approach, a line of credit secured on a home but used only for rental expenses is examined by what it paid for, not by what secures it.
Read more: Is rental cash damming legal?
HELOC (Home Equity Line of Credit)
A revolving line of credit secured against the equity in your home, which you can draw on and repay as needed. A HELOC can be a stand-alone product or one of the linked lines in a readvanceable product. For interest deductibility, what the borrowed money is used for generally matters, not the fact that the home secures it.
Read more: How rental cash damming works
Income Tax Folio S3-F6-C1
The Canada Revenue Agency's published guidance on interest deductibility. It explains how the CRA reads section 20(1)(c), says the use of borrowed funds must be traced to a specific eligible use (paragraph 1.29), discusses the direct-use test (paragraph 1.30) and discusses keeping borrowed money in separate accounts (paragraph 1.34). It is CRA's reading of the law, not approval of any person, plan or implementation.
Read more: Is rental cash damming legal?
Interest Deductibility
Whether interest can be deducted in computing income. For borrowed money, section 20(1)(c) of the Income Tax Act is the main provision, and courts generally look at the direct use of the borrowed money. Whether a particular amount of interest is deductible depends on the facts.
Read more: Is rental cash damming legal?
Investment-Use Borrowing
Borrowing used to buy investments held with a reasonable expectation of earning income, such as dividend-paying shares in a non-registered account. The Smith Manoeuvre and debt swaps create this kind of borrowing. Interest on it may be deductible where the requirements of section 20(1)(c) are met.
Read more: The Smith Manoeuvre · Debt swaps
Leveraged Investing
Investing with borrowed money. Gains and losses are both magnified, because the amount owed stays the same whatever the investments do. The Smith Manoeuvre and debt swaps are forms of leveraged investing.
Read more: The Smith Manoeuvre · Debt swaps
Ludco
A 2001 Supreme Court of Canada decision (Ludco Enterprises v. Canada) on the purpose test in section 20(1)(c). The taxpayers borrowed to buy shares that paid small dividends compared with the interest on the borrowing. The court held the interest was deductible: earning income need not be the main purpose of an investment as long as there is a reasonable expectation of income, and income means income, not net profit.
Read more: The Smith Manoeuvre · Is rental cash damming legal?
Non-Registered Account
An investment account held outside registered plans such as an RRSP, TFSA or FHSA. Income earned in it is generally taxable each year, and gains are generally taxable when realized. Interest on money borrowed to contribute to an RRSP or TFSA is generally not deductible, which is why the Smith Manoeuvre and debt swaps invest in non-registered accounts.
Read more: The Smith Manoeuvre
Personal-Use Debt
Debt used for personal purposes, such as borrowing to buy the home you live in, a car or a vacation. Interest on personal-use debt is generally not deductible, so it is paid with after-tax dollars. Debt conversion strategies are designed to pay it down and replace it with borrowing used to earn income.
Read more: What is cash damming?
Prepayment
A payment toward principal on top of the regular scheduled payment. In rental cash damming, rent is applied each month as an additional prepayment on your home mortgage. Loan agreements often limit how much can be prepaid in a year without a penalty.
Read more: How rental cash damming works
Readvanceable Product
A home borrowing product, often called a readvanceable mortgage, that combines a mortgage with one or more linked lines of credit. As principal is paid down, the same amount becomes available to borrow again on a linked line. Rental cash damming and the Smith Manoeuvre need this readvance feature; whoever handles your mortgage confirms whether a product has it.
Read more: How rental cash damming works · The Smith Manoeuvre
Rental Expense Account
A bank account used only to pay one rental property's bills in a rental cash damming setup. Funds borrowed from the rental line of credit move into it and it pays the property's expenses, so each borrowed dollar has a clear record from line to account to vendor. It sits alongside a rental income account that receives rent and does nothing else.
Read more: How rental cash damming works
Rental-Use Borrowing
Borrowing used to earn rental income, such as money borrowed to buy a rental property or a line of credit used only to pay a rental's property tax, insurance, repairs and other expenses. Interest on rental-use borrowing may be deductible where the requirements of the Income Tax Act are met. In rental cash damming, this balance grows as personal-use debt comes down.
Read more: Rental cash damming in Canada
Section 20(1)(c)
The provision of the Income Tax Act that deals with interest on borrowed money used for the purpose of earning income from a business or property. That interest may be deductible, subject to the conditions in the section. Whether it applies to a particular borrowing depends on the facts, including what the money was directly used for.
Read more: Is rental cash damming legal?
Section 20(3)
A provision of the Income Tax Act that applies when borrowed money is used to repay earlier borrowing. The new borrowing is treated as used for the same purpose as the borrowing it repaid. It can come up when rental-use borrowing is refinanced, consolidated or repaid with funds from a line of credit.
Read more: Is rental cash damming legal?
Singleton
A 2001 Supreme Court of Canada decision (Singleton v. Canada) on interest deductibility. A lawyer withdrew capital from his law firm to buy a house, then borrowed money the same day to replace that capital in the firm. The court held the interest was deductible because the direct use of the borrowed money was refinancing his capital in the firm, and it examined that direct use rather than the overall arrangement.
Read more: Is rental cash damming legal?
Smith Manoeuvre
A Canadian debt conversion strategy developed by Fraser Smith. Principal paid down on a readvanceable product is reborrowed from a linked line of credit and invested in income-producing investments in a non-registered account, so personal-use debt is gradually replaced by investment-use borrowing. It is leveraged investing and carries market risk.
Read more: The Smith Manoeuvre · Cash damming vs the Smith Manoeuvre
T776
The CRA form used to report rental income and expenses on a Canadian personal tax return, titled Statement of Real Estate Rentals. Rental expenses such as property tax, insurance, repairs and interest are reported on it.
Tracing (Interest Tracing)
Following borrowed money from the loan to what it was actually used for. The CRA's Income Tax Folio S3-F6-C1 says the use of borrowed funds must be traced to a specific eligible use. In practice, tracing relies on records: statements showing each draw on a line of credit and the invoices or receipts for what it paid.
Read more: Is rental cash damming legal? · Why the records matter
These definitions are general information, not tax, legal or financial advice, and how the rules apply depends on your facts. You should always seek independent tax advice if you are thinking about implementing these strategies.