From 1976 to 2018, the number of self-employed Canadians went up from 1.2 million to 2.9 million respectively and account for roughly 15% of total employment. Whether you’re a sole proprietor or an incorporated business owner, there are different factors that lenders look at. Check out our two client stories below!
Sole Proprietorship
Pierre is a long-time contractor and sole proprietor who runs a business without a corporation. Pierre has a simple construction business where he gets sub-contracts, invoices for them, and gets paid weekly. The money in goes into his personal bank account so there’s no separation between his business and personal banking.
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure. If you are a sole proprietor, you pay personal income tax on the net income generated by your business. You may choose to register a business name, operate under your own name, or both.
Pierre came to us because he was looking to re-finance his triplex (that he’s owned for years) in order to use that equity and buy another property. As a sole proprietor, the bank will qualify Pierre on his reported income. Typically that would mean we’re looking at his total income for the year (e.g. Line 15000 — total income after deductions — on his tax return). We need to be careful because that’s ALL his income (business income, RRSP withdrawals, rental income, etc.) but it’s not all eligible.
Specifically for Pierre (as a sole proprietor), we will need to focus on Lines 13499 and 13500. For all intents and purposes, Pierre’s income is his net business income. The challenge is that his gross business income is high but his net business income is low. This is a common pattern among our sole proprietor clients. There’s nothing wrong here but a lower reported income makes purchasing more difficult.
In Pierre’s case, because he owns a property already and has plenty of equity (more than 20%), we can work with one of our alternative lenders. They will assess his re-payment ability based on monthly revenues (bank statements) instead of reported taxable income. Annualizing his bank statements show he makes more than enough to support his required mortgage and we were able to successfully broker a deal with one of our alternative lenders.
Incorporated Business, Salary, and Dividends
Alexis and Clara are a married couple in an interesting work environment. Clara owns a salon, which is her incorporated business, whereas Alexis is a salaried city employee. Alexis’ salary is very straightforward and simple because it’s full-time with guaranteed hours. Clara, on the other hand, is a bit more complicated income-wise.
Clara pays herself a salary from her corporation and her accountant prepares T4s along with regular weekly paycheques. She also takes additional money periodically and declares that as dividends. Again, there’s nothing wrong with this type of income structure but, from a financing perspective, the key to maximizing Clara’s income is to acquire a two-year history of salary and additional dividends with two years of tax returns.
In Clara’s case, we look at Line 10100 of her personal tax return (the T4 amount she pays herself) and Line 12000 (the dividends she claims). The challenge here was that, due to her industry, she was unable to operate her business for months with the pandemic. In her case, both her reported salary and dividends were lower than the previous year.
We couldn’t use a two-year average and had to go with the lower income from the recent year. Ultimately, a greater down payment and some debt restructuring helped offset the lower income. Alexis and Clara were approved by a standard A lender and we were able to help them get into their dream home!
Pro-tip: If you claim less of anything from one year to the next, lenders don’t use the average but the the lesser amount. So, if you want to buy a home, pay yourself the same or more and try not to pay yourself less!
There is no one-size-fits-all mortgage and your employment situation plays a huge part in what you can qualify for. Contact the Kyle Miller Mortgage Agent team if you’re self-employed or operate your own business. We’ll help you understand what’s best for your situation and help you navigate your options!
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