The Self-Employed Dilemma
Michael Hallett • July 7, 2015
You're likely asking yourself, what is the dilemma that self-employed workers face? Well, with more and more Canadians joining the ranks of the self-employment every year one has to ask themselves how they are going to tackle the age old question, how much does one write off vs how much income does one claimed on their taxes. We all want to earn as much money as possible and pay as little income tax as required.
This was my train of thought until the topic of 'paying taxes' was brought to my attention by a friend that's an accountant. As he said, paying income tax isn't such a horrible thing, in fact it's a necessity which provides for our infrastructure and without it the 'world' we know would be drastically different. Here was the response from him after I re-posted a reference to INCOME TAX RELIEF DAY that I saw on social media.
"I would actually look at it more positively and say that I/we spent this money to live in a great country, province and municipality and its worth every penny in taxes spent. I will guarantee you there are billions of people on this planet that would switch positions with us in a second and remember this so called date (INCOME TAX RELIEF DAY) is based on the average Canadian family income of $45,000 and is based on all taxes including not just income taxes, but property tax, sales taxes, health taxes, fuel taxes and much more. So technically not all of it is going to Canada Revenue Agency (CRA). Some of it is going to municipal and Metro Vancouver. For more information go to the Fraser Institute website https://www.fraserinstitute.org/research-news/display.aspx?id=22954."
After reading over this message, it got me thinking about how some self-employed people report their taxes and the effect that it has on their chances of qualifying for a mortgage. Besides the duty to provide to our country, we all have a personal desire to provide as much as possible for our family. It's a so-called 'tug-of-war' of who gets your money and how much of it. Here's where the dilemma get's complicated if you want to borrow money from a lender to purchase residential real estate.
The federal Government of Canada regulates the CRA as well as the lending criteria and policies followed by ALL the 'A' lenders. 'A' lenders are our chartered banks and non-bank or monoline/investment lender. We also have credit unions that are provincially regulated but follow the CMHC lending criteria, which is federal. Having more 'cash' in your pocket actually allows you to borrow less. Showing more income claimed which requires you to pay more tax allows you to borrow more money if desired. 'A' Lenders assess their risk management for lending money to borrowers on historical earning and in this case if one is self-employed then they require a 2 year average based on T1 Generals or in some cases Notice of Assessments (NOA).
It's a CATCH 22 and you (and your qualified accountant) need to decide which path you're going to follow; write off maximum expenses and claim 'little' income or claim a 'healthy' income and pay more income. Neither is right or wrong.
Upon getting the urge to buy residential real estate a detailed conversation on how 'your' is structured should be had with their Mortgage Expert and Certified General Accountant. Once you have chosen which style of accounting your business will adopt, you just have to be prepared to follow the lending guidelines. And plus, it's really not that bad either way.
Let's face it, everyone wants the lowest rate possible when it comes to their mortgage. As a Mortgage Expert, it's something that I seek for every client. But not all clients are eligible for the lowest rate for a number of different reasons, 2 main reason are because of credit blemishes and of course lack of income reported.
Business Case
The following is a fictitious scenario that represents a self-employed person that writes down ones expenses in order to minimize CRA income tax.
Jane is a business owner in Vancouver. She has a modest business that is experiencing growth year after year. Jane enjoys the many perks of being a business owner, especially the tax breaks that come along with it! Since Jane is able to work with her certified accountant, and considerably write down her income, she often saves thousands of dollars a year on taxes.
Jane would like to purchase a new home. She has a 20% down payment to place on a home, and knows that she grosses more than $100,000 per year in her business. However, since she currently writes down her income to $20,000 per year, her Mortgage Expert has just informed her that she will need to state her income with a 'Non-Prime' or 'B' lender for approval.
Now if Jane claimed $100,000 per year for the last 2 years, she may qualify for the best rate out there from an 'A' lender. However, let's look at what that really means:
Income claimed $100,000/year $20,000/year
Taxes paid $ 25,060/year $1,761/Year
Jane has saved $23,299 per year because of the tax laws the government has legislated for self-employed business owners. Now let's compare the interest on a 'typical' verified-income loan, and a 'non-prime' stated-income loan.
Loan Type 'A' 'B'
Mortgage $200,000 $200,000
Rate 2.69% 4.50%
Term 1 year 1 year
Interest per Term $5,281 $8,826
** For ease of comparison to BC yearly tax rate-- 1 year term has been used. Rates are approximations for example purposes.**
Jane is paying $3,545 more in interest per year, but with her income tax savings is $23,299 per year. She is actually saving $19,754 per year more than the typical 'verified-income' Employee that was able to receive a mortgage interest rate of 2.69%.
With all entrepreneurs there is one thing in common they are all savvy and driven to succeed, or fail, on their own terms.
It takes an extreme amount of hard work to get a business from the infancy stage to a self sufficient entity that produces a constant and steady flow of revenue. Business owners all want to save money while at the same time earning and establishing a presences in their chosen space. Business financials are all structured differently and depending on how one chooses to operate will dictate how they can proceed once it's time to seek residential real estate financing.
If you are self-employed, make sure to consult with your Mortgage Expert to find out how your mortgage can tailored. Every mortgage scenario is completely different from the next, so make sure your fits correctly and you are informed before you start the financing process.
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Playing in the forest today. Always fun exploring. #mountainbikingmortgagebroker
Mortgage Brokering meets mountain biking and craft beer. A couple months ago I set for a bike ride with the intention of answering few mortgage related questions, mission accomplished. Any good bike ride pairs nicely with a tasty beer which we enjoyed @parksidebrewery. Hope you see the passion I have for brokering, biking and beer. @torcabikes #mountainbikingmortgagebroker
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Spotted a ski-bunny today @kirstinjhallett so I trapped ‘er. 📸 credit @troy.hartley
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Extreme tubing, watch until the end. Aidan manages to hold on.
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This is a great start to the day!
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Wood to wood gap in Whistler.
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Saratoga Beach fire.
Canadian tuxedo.
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Raw and unedited. Old school skinny with a drop at the end.
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Zoa Peak, Coquihalla summit 1,500 vertical metres of skiing.
Distancing myself from the real world!
The dry land version of the @andrei_svechnikov37 lacrosse-style goal executed Aidan.
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Does anybody need or want any firewood? It’s free...you come pick it up.
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The Bank of Canada announced today that it is holding its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. This decision comes against a backdrop of significant global uncertainty — and for Canadian homeowners, buyers, and anyone with a mortgage coming up for renewal, here's what it means.
Why Work With an Independent Mortgage Professional? If you’re in the market for a mortgage, here’s the most important thing to know: Working with an independent mortgage professional can save you money and provide better options than dealing directly with a single bank. If that’s all you read—great! But if you’d like to understand why that statement is true, keep reading. The Best Mortgage Isn’t Just About the Lowest Rate It’s easy to fall for slick marketing that promotes ultra-low mortgage rates. But the lowest rate doesn’t always mean the lowest cost . The best mortgage is the one that costs you the least amount of money over time —not just the one with the flashiest headline rate. Things like: Prepayment penalties Portability Flexibility to refinance Amortization structure Fixed vs. variable terms …can all affect the true cost of your mortgage. An independent mortgage professional looks beyond the rate. They’ll help you find a product that fits your unique financial situation , long-term goals, and lifestyle—so you’re not hit with expensive surprises down the road. Save Time (and Your Sanity) Applying for a mortgage can be complicated. Every lender has different rules, documents, and policies—and trying to navigate them all on your own can be time-consuming and frustrating. When you work with an independent mortgage professional: You fill out one application They shop that application across multiple lenders You get expert advice tailored to your needs This means less paperwork , less stress , and more confidence in your options. Get Unbiased Advice That Puts You First Bank specialists work for the bank. Their job is to sell you that bank’s mortgage products—whether or not it’s the best deal for you. Independent mortgage professionals work for you. They’re provincially licensed, and their job is to help you: Compare multiple lenders Understand the fine print Make informed, long-term financial decisions And the best part? Their services are typically free to you . Mortgage professionals are paid a standardized fee by the lender when a mortgage is placed—so you get expert guidance without any out-of-pocket cost. Access More Mortgage Options When you go to your bank, you’re limited to that bank’s mortgage products. When you go to an independent mortgage professional, you get access to: Major banks Credit unions Monoline lenders (who only offer mortgages) Alternative and private lenders (if needed) That’s far more choice , and a much better chance of finding a mortgage that truly fits your needs and goals. The Bottom Line If you want to: Save money over the life of your mortgage Save time by avoiding unnecessary back-and-forth Access more lenders and products Get honest, client-first advice …then working with an independent mortgage professional is one of the smartest decisions you can make. Let’s Make a Plan That Works for You If you're ready to talk about mortgage financing—or just want to explore your options—I'm here to help. Let's connect and put together a strategy that makes sense for your goals and your future. Reach out anytime. I’d be happy to help.
