How do lenders count self-employed income?

In Canada, most banks, credit unions and monoline lenders count self-employed income from your last two years of personal tax returns. Lenders usually average the two years and confirm the figures with your Notices of Assessment. If write-offs lower the income a bank sees, some lenders and insurers look at the business more broadly, and alternative lenders may use other evidence at a higher cost.

The standard approach to self-employed income

A lender wants income it can verify and expect to continue. For an employee, the proof is a pay stub and a letter. If you are self-employed, the proof is usually:

• Two years of personal tax returns (T1 Generals), showing your business or professional income.
• Notices of Assessment for the same years, confirming the Canada Revenue Agency has processed them and that no tax is owing.
• Proof the business exists, such as a business licence, articles of incorporation or a GST/HST registration.
• For an incorporated business, sometimes financial statements for the company.

Many lenders average the two years. If your income fell in the latest year, lenders may use the lower figure. If your income rose sharply, lenders may still average, because one strong year is less certain than two.

The write-off problem

Self-employed borrowers often reduce their taxable income with legitimate business expenses. Write-offs lower your tax, but they also lower the income a lender sees on your return. Your business may gross a healthy amount but show modest income after expenses, and you may qualify for less than you expect.

Some lenders and insurers have programs that look more broadly at the business, such as gross revenue, the type of expenses, or income left in a corporation. Each lender has its own rules, and some of these programs are only available with a larger down payment. We compare those options side by side.

How the income is tested

Whatever income the lender accepts goes into the usual affordability test. For an insured mortgage, one with less than 20% down, CMHC's limits are 39% of gross income for housing costs (GDS) and 44% for all debts (TDS). Both are calculated at the qualifying rate: the greater of the contract rate plus 2 percentage points, or 5.25%.

When the bank route does not fit

If you have been self-employed for less than two years, have a recent large drop in income, or have tax owing, a bank may decline. Alternative lenders, sometimes called B lenders, can consider bank statements or a shorter history. B lenders usually charge a higher rate and may charge a fee, disclosed in writing before you commit. The usual plan is to use a B lender for a term while you file returns that show your full income, then move back to a bank lender.

What to do next

If you are self-employed and want to know how lenders would see your income, use our call-me-back form. You can also read more about self-employed mortgages.