Why TDMP?
When shopping for a mortgage, most Canadians ask one question, “What’s the rate?”
Of course, interest rate is important, but what if we asked a different question, “How soon can I pay off my mortgage?”. We call this “Mortgage Freedom Day” and for Canadians in the Tax Deductible Mortgage Plan (TDMP), this date comes many years sooner.
The key is extra payments. Many Canadians accelerate their mortgage by converting to bi-weekly payments or making an occasional extra payment, but the Tax Deductible Mortgage Plan forces extra payments every month!
By greatly accelerating the pay down of the mortgage with self funding extra monthly payments and annual Tax Refunds, Mortgage Freedom Day can arrive in nearly half the time, which translates into a future savings of tens or even hundreds of thousands of dollars.
TDMP uses CRA's Cash Damming technique to make this possible. Read on for more details...
Cash Damming
Cash damming is a term Canada Revenue Agency (CRA) first defined in an Interpretation Bulletin IT-533,
published on October 31, 2003 to help individual Taxpayers determine
under what circumstances interest would be tax deductible. Paragraph 16 of ITC-533 introduces Cash Damming as:
“Taxpayers
may segregate (typically in separate accounts) funds received from
borrowed money and funds received from other sources (e.g., funds
received from operations or other sources and that are otherwise not
linked to money previously borrowed). This technique, commonly referred
to as cash damming, readily allows taxpayers to trace borrowed money to
specific uses.”
The
Canadian Income Tax Act (ITA) Section 20 (1) (c) provides that interest
generated on money borrowed to invest for the purpose of generating
income is tax deductible.
Therefore,
if you borrow money to purchase an income generating investment (e.g.
mutual funds), the interest expense will be tax deductible regardles of
where the money was borrowed from or what security was used for the
loan (i.e. whether unsecured investment loan or mortgage money is
irrelevant to ITA).
TDMP Setup
The
Tax Deductible Mortgage Plan, follows a rigorous setup and
process for segregating tax deductible interest from non-tax deductible
interest in compliance with Cash Damming guidelines. This is achieved
in two ways:
Firstly,
it is critically important when Cash Damming your mortgage to structure
the secured debt in a re-advanceable, multi-component Home Equity Line
of Credit (HELOC). The re-advanceable HELOC is necessary to optimize
the financial benefits and maximize your annual tax refunds, and is the
foundation that makes the financial strategy viable. The
multi-component nature of the line of credit is the manner in which we
are able to segregate tax deductible debt from non-tax deductible debt
for the purposes of proving your entitlement [to CRA] to
mortgage-related tax refunds.
Note:
If you own you home free and clear, and take a mortgage to invest in
its entirety, then your mortgage interest is 100% tax deductible, Cash
Damming is not required, and the structure of the mortgage is
irrelevant.
Secondly,
in order to be absolutely certain of your entitlement to tax refunds
from a re-advanceable multi component HELOC used for Cash Damming, the
Taxpayer must separate the tax deductible cash flows from the
non-deductible cash flows using “separate accounts” as we are advised
to do in the ITC-533 Bulletin.
Creating an Audit Trail
Every TDMP customer is
required to open a new chequing account ("TDMP Clearing Account") which
is used exclusively for Cash Damming. Under TDMP, the cash flow process
is fully managed through automation -requiring no input from the
homeowner, but it is important to know that the monthly cash flows will
be structured such that non-tax deductible cash flows (e.g. mortgage
payments and extra pre-payments) are made from the homeowners regular
bank account and tax deductible cash flows (e.g. line of credit
re-advances, carrying charges and investments) are processed through
the TDMP Clearing Account, which only handles tax deductible cash flows.
This
provides a bullet proof audit trail for CRA and guarantees the
homeowner perpetual entitlement to their mortgage tax refunds -as long
as the investments qualify under ITA rules and funds are never
co-mingled by the homeowner.
TDMP Cash Management
The timing of cash flow movements on a
monthly cycle is critically important, especially if the bank accounts
are not appropriately “buffered” with enough cash to handle a missed
payment. Under TDMP, the monthly cash flow cycle is managed on behalf
of the client with their appropriate written pre-authorization - and
the mortgage lender will process the regular mortgage payments and
monthly prepayments/re-advances on a pre-determined schedule.
Homeowners who execute this financial
strategy themselves (i.e. not using TDMP or a similar professional
accounting service) typically find that setting up and processing the
monthly cash flows is a tedious and onerous monthly task. Therefore,
the most significant advantage of using a professional service like
TDMP, is that their principal business lies in processing thousands of
payments every month on behalf of homeowners for the purpose of Cash
Damming – and the combination of technology and volume processing
allows for highly efficient and effective cash flow management -usually
at a reasonable monthly fee (e.g. some Accountants charge approximately
$100 per month). TDMP offers full service at $39.95 per month.
