Money Separating Technique
Technique of setting aside money
Putting money aside is a tax strategy to reduce your taxes. This strategy involves converting your personal loans whose interest is not deductible from your taxable income into a loan used to pay business expenses whose interest will be deductible.
Who is it for?
For unincorporated self-employed, unincorporated business owners or rental property owners who have business expenses.
How to do?
You use your income (business or rental) to pay for your personal expenses and personal loans. You borrow to pay your business expenses.
Here is an example:
Mr. Autonome has a gross annual income (before expenses) of $ 100,000. Each year, his business expenses rise to $ 50,000, and he has a $ 100,000 mortgage on his residence. Prior to the establishment of the MAPA, Mr. Autonome could not deduct the interest paid on his mortgage of $ 100,000. After one year of setting up the MAPA, Mr. Autonome can deduct the interest paid on his line of credit by $ 50,000 and can not deduct the interest paid on his mortgage by $ 50,000. After two years of setting up the MAPA, Mr. Autonome can deduct the interest paid on his line of credit of $ 100,000. In two years, Mr. Autonome transformed his mortgage – whose interest was not deductible from his income – into a loan whose interest is tax deductible.
What did Mr. Autonome do during these two years?
He has opened two bank accounts: the first one we will call “income account” and the second one linked to a line of credit that we will call “expense account”. Mr. Autonome deposited all his income in the “income account”. From this account, he paid for his personal expenses and repaid his mortgage. From the “expense account”, he paid exclusively for his business expenses. He did the same thing again in the second year. This technique is very tax-efficient because it saves a lot of taxes. The Canada Revenue Agency (CRA) has recognized the validity of this technique since 2002. All you have to do is use it and save money.