Banks qualify you on the income that shows on your tax return, and write-offs lower that number. If you earn well but deduct heavily, the bank may see a much smaller income than the one you live on. Other regulated lenders can read the same file differently, sometimes adding certain expenses back or using bank statements, so a decline from one bank is not the final word.
Why Do Write-Offs Make My Income Look Smaller?
Write-offs are legal and smart. They reduce the income the Canada Revenue Agency taxes you on, which keeps more money in your pocket. A bank looks at the very same tax return and sees the reduced number as your income.
Picture a hairstylist who rents a chair in Barrie and does well. Say she brings in about $90,000 a year, then deducts supplies, a vehicle, a home office and training. Her return shows closer to $45,000 of net income. She lives comfortably and pays every bill on time. Her bank qualifies her on $45,000, and the mortgage she wanted does not fit. Her business did not shrink. The paper simply tells a smaller story than her bank deposits do.
What Do Lenders Actually Look At on My Tax Return?
Most lenders start with the net income line on your T1 General, which is your personal tax return, and the Notice of Assessment, which is the CRA’s confirmation of what you filed. Many use an average of the last two years. If one year was strong and one was weak, the average can land below what you earn in a good year.
If you are incorporated, lenders may also look at how you pay yourself. Salary, dividends and money left inside the company can each be treated differently. That is one reason two self-employed people with the same revenue can get very different answers.
What Is an Add-Back?
An add-back is an expense a lender agrees to count as income again. The thinking is that some deductions do not reduce your real ability to pay. Examples lenders sometimes consider include depreciation on equipment, which is a paper deduction with no cash leaving your account, and a portion of home office costs.
Which expenses qualify depends on the lender. Some allow several add-backs, and some allow none. Your agent knows which lenders are more flexible and can match your file to them.
Should I Stop Writing Off Expenses Before I Apply?
That is a question for your accountant, and the answer is rarely a simple yes. Writing off less means paying more tax, and the trade can make sense when a large purchase is coming. Timing matters here. Talk to your accountant and your mortgage agent together, ideally before your next return is filed, so you can see how the numbers will read to a lender.
Please avoid changing past returns or reporting income that is not real. Lenders verify through the CRA, and accurate paperwork protects you.
Bank said no? See all your options.
What If the Bank Already Said No?
One bank’s decline is one answer from one set of rules. A mortgage agent can approach many lenders, including alternative lenders. An alternative lender is a regulated lender with more flexible rules than a bank. Some of them use bank statements to show your deposits, or look at a wider picture of your income than the last line of your return.
Alternative lending usually costs more than a bank mortgage, and terms are often shorter. It can work well as a bridge. The plan is often to file a couple of returns that show your income more fully and then move back to a bank rate at renewal. A good agent talks through that exit plan before you sign anything. Woohoo for options.
Frequently asked questions
Why did my bank decline me when I make good money?
Banks usually qualify you on the net income shown on your tax return. Heavy write-offs lower that number, so the bank may see less income than you actually earn.
Can I get a mortgage in Ontario if I deduct most of my income?
Often there are options. Some regulated lenders allow add-backs or use bank statements instead. Your agent can explain which approaches fit your file.
Do add-backs mean the lender ignores my write-offs?
No lender ignores your tax return. An add-back lets them count certain deductions as income again, and each lender decides which ones.
Should I file my taxes differently before applying for a mortgage?
Speak with your accountant and your mortgage agent first. File accurately, because lenders confirm your numbers with the CRA.
Can I move to a bank mortgage later?
Often yes, once your returns reflect the income you earn and your file has strengthened. Ask your agent to map the timeline up front.
Ready to Talk Through Your Numbers?
If your write-offs are getting in the way of a mortgage, I would love to hear your goals and what the bank told you. Book a free 15-minute chat and we will look for another path together. You can also grab the free guide at lorafenn.ca/free-bank-said-no-guide/.
About the author
Lora Fenn, Mortgage Agent L1, DLC Yellow Brick Mortgages (Brokerage Licence #13854), a Barrie mortgage agent who helps Ontario homeowners and buyers find another path when the bank says no, serving Barrie, Innisfil, Orillia and all of Ontario.
*Any figures are illustrative only and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent L1, DLC Yellow Brick Mortgages (Brokerage Licence #13854).*
