How lenders read self-employed income
A salaried applicant shows a pay stub. You show two years of tax returns, and the lender looks for the income you kept after expenses, averaged over the two years. If the second year is lower than the first, most lenders use the lower; if it is rising, they average.
Sole proprietor: the net business income on your T1 general, the full personal tax return. Incorporated: the salary and dividends you paid yourself, and with some lenders a share of what the company earned and kept. Certain expenses are added back because they are not cash out the door; the one most people miss is capital cost allowance, the depreciation on your truck or equipment.
Under two years in business is harder with the banks. A T4 history in the same trade before you went out on your own helps, and so does a contract in hand. We say what is realistic on the first call, before you spend an afternoon on paperwork.
What a self-employed application needs
Everything a salaried applicant brings, with the tax returns doing the work of the pay stub.
- Two years of full T1 general tax returns, every page, not just the summary
- Two years of notices of assessment, the CRA's summary of each year's return, showing nothing owing or proof the balance has been paid
- Incorporated: two years of company financial statements prepared by an accountant
- Incorporated: the articles of incorporation and a record of who owns the shares
- A business licence or GST registration, where your business has one
- Two pieces of ID, front and back
- Ninety days of statements on the down payment, with the source of any large deposit
- Recent business bank statements, if the lender asks
Bank programs for business owners
Banks and credit unions have programs for people who work for themselves, and they are not all the same. The usual shape: at least two years in business, tax returns that support the income you are claiming, and a clean credit history. Some will read your gross revenue rather than your net income when the write-offs are large. Some let an established business owner state an income above the tax return, with a larger down payment and a higher insurance premium in return.
Our job is to match the program to the way you report your income, not the other way round. A contractor who takes most of her income as dividends, a consultant with a quiet year, a tradesman whose truck and tools are written off: each fits a different program at a different lender, and the difference shows up in what you can borrow.
When the return tells a different story
Sometimes the tax return, honestly prepared, shows an income that would not support the mortgage, while the bank account shows a business that plainly would. Lenders beyond the big banks, who look at the whole picture rather than one line of the return, can read it that way. The usual method is twelve months of business bank statements, with the deposits added up to estimate real revenue and a share of it treated as income.
It costs more than a bank mortgage: a higher rate, usually a lender fee, often a shorter term and a larger down payment. A broker fee may apply too, and it is disclosed in writing before you commit to anything. It also comes with a plan: two years of returns that tell the same story as the bank account, then back to a bank at renewal.
Three red flags, fixed before submission
Each of these is innocent, and each one makes a lender hesitate; a week's work on your side avoids all three.
A pay stub with no deductions
A stub from your own company with no EI or CPP on it, the employment insurance and pension deductions every employee's stub shows, tells the lender you are the owner, not an employee, and the application has to say so. We present you as an owner, with the company's financials, rather than as an employee with a stub nobody believes.
A letter signed by family
An employment letter signed by someone who shares your surname is read as a letter you wrote yourself. If the business is a family one, the right signer, the ownership records and the company's bank statements do the job the letter cannot.
"Notice to reader" statements
Financial statements marked notice to reader are the old standard; lenders want a compilation engagement report, prepared by an accountant under the current rules. We tell you before the accountant starts, not after the statements come back.
I have only one year of returns. Is it worth calling?
Yes, some lenders will consider one year with a T4 history in the same field; others will not. Knowing which before you look saves time, and we can tell you what the second year needs to look like.
Do I need an accountant?
For a sole proprietor, no; a return you prepared yourself is fine if it is complete. For a company, lenders want statements prepared by an accountant, and the format matters, as above.
Does writing off expenses hurt me?
It lowers the income a bank will count, so there is a trade-off between the tax you save and the mortgage you can carry. How income is reported on your returns affects what a lender can count; that is a conversation for your accountant before filing.
I owe CRA. Can I still apply?
A balance owing has to be paid, with proof, before most lenders will approve. If it is large, a refinance to clear it is sometimes the route, and some lenders beyond the banks allow it.
Bring the last two years of returns and notices of assessment to the call if you have them to hand; if not, bring what you remember and we start from there. Book a 20-minute call →