A sole proprietor invoices $190,000 in a year. After vehicle expenses, a home office, tools, insurance, professional fees and capital cost allowance, the net business income on line 15000 of the return is $71,000.
Both figures are honest. The accountant did the job properly and the tax bill is correct. But a bank reads line 15000, sees $71,000, and offers a mortgage sized for someone earning $71,000.
That is the whole problem, and it catches people who are genuinely doing well.
What lenders actually ask for
Two years of complete T1 General returns with all schedules, the matching Notices of Assessment, and confirmation that no tax is owing. That last item stops more files than people expect: outstanding tax debt can result in a lien against your property, and lenders will not proceed until it is cleared or a payment arrangement is documented.
They will also want proof the business exists and has been operating for at least two years: a business licence, GST registration, or articles of registration.
Most lenders average the two years. Some will use the more recent year alone where income is rising and there is a credible explanation. Almost none will use your best year in isolation.
Route one: prove more income than line 15000
Some deductions can be added back, because they are not really money leaving your pocket.
Capital cost allowance is the clearest case. It is depreciation, a paper entry, not cash spent, and many lenders will add it back in full. Business use of home is often partly added back, on the reasoning that you would be paying for the house regardless. One-off expenses that will not recur can sometimes be added back with an accountant's letter explaining them.
What will not be added back is anything representing real ongoing cost: materials, subcontractors, vehicle expenses if you genuinely need the vehicle, insurance, professional fees.
An accountant's letter is the tool here, setting out the nature of specific deductions and confirming the business is ongoing and profitable. It is a routine request and it regularly moves a file by tens of thousands of dollars of borrowing capacity.
Route two: stated income programs
Where line 15000 genuinely does not reflect what the business earns, some lenders offer business-for-self programs that assess a reasonable income for your industry and business size, rather than taking the reported figure literally.
You are not making a number up. You state an income and support it: bank statements showing deposits, invoices, contracts, GST returns showing gross revenue. The lender assesses whether the stated figure is reasonable for that business.
These programs generally require a stronger file elsewhere: better credit, often a larger down payment, and a clean history. Default insurers do offer self-employed programs with as little as ten percent down in some circumstances, though the criteria are tighter.
Expect a small rate premium against a fully documented salaried file. It is usually modest and far better than the alternative of borrowing far less than you can afford.
Route three: alternative lenders
Where the first two do not fit, alternative and B lenders assess self-employed files on a different basis, frequently working from bank deposits over a six or twelve month period rather than from tax returns at all.
Higher rate, usually a lender fee, shorter term. Treated as a two-year bridge with a plan to return to an A lender once there are two clean years of returns showing sufficient income, it works well. Treated as permanent, it is expensive. See alternative lending.
Planning ahead, if you can
The single most useful thing a self-employed person can do is decide two years before buying, and tell their accountant.
There is a real trade-off between minimising tax and maximising reported income, and it cannot be resolved retroactively. Reporting more income for two years costs tax and buys borrowing capacity. Whether that trade is worth it depends on how much house you want and what the tax cost is, and it is a conversation for you and your accountant together rather than a decision to stumble into.
Also keep the business and personal accounts genuinely separate. Commingled accounts make it far harder to demonstrate anything, and they make a down payment paper trail difficult.
If you are incorporated
This page is about sole proprietors and unincorporated businesses. If you operate through a corporation, the analysis is different: lenders can look at corporate financials, retained earnings and dividends as well as your personal return, and there are more levers available. See business owner mortgages.
If your income is variable but you are an employee rather than self-employed, the rules are different again. See variable income.
