In this article, we talk about the importance of being current with your Income Tax, as it determines whether qualifying for a mortgage in Canada, especially a self-employed mortgage, will be easy or hard for you.
What the heck is Super-Priority and why should I care? If you want to get a mortgage and income tax isn't you favourite topic, time to learn.
It is very important to understand the term Superpriority Claim, which simply means Canada Revenue Agency (or CRA) can put a claim on all your assets if you don't pay your taxes, including seizing and selling your house! Mortgage lenders don't like that as it puts them second in line to get paid back and there might not be enough money left over for that.
Note that neither the CRA nor the bank will care about you if this happens - they are just going to squabble over who gets the house and the CRA is going to win. So mainstream lenders (the banks) will likely not lend you money if you cannot prove you are current with your personal income taxes! (This applies to all secured-loans, including vehicles.)
Self Employed Taxes Canada
- Your Notice of Assessment (NOA) is an important document that you get back from the CRA after you file your taxes - it says the CRA agrees (or not) with your tax filing.
- Mortgage lenders are focusing on if you owe CRA money and will require you to prove your taxes have been paid before lending.
- Also important for a self-employed borrower is that you can use your NOAs (average of last 2 years) to prove what income you earn for mortgage qualifying (see Line 150 - Total Income).
- If you are current with your income taxes, but didn't claim much personal income, there is a mortgage solution called Stated Income Mortgage where you are mortgage qualified based on other documentation besides your NOA average. Contact us for a free-consultation if this is you.
- TIP: when you get your NOA back, immediately file it with your other tax documents. If you don't have a filing system, you can get an accordion filing folder for as little as $10 at Wal-Mart. If you have misplaced a NOA, call the CRA at 1.800.959.8281 and request a replacement or an "Income & Deduction Summary," or go online to MyCRA instead. (Click to see NOA example)
Newly Self-Employed Train Wrecks
- For new business-for-self (or "BFS" as we call you), please be very aware of income proof and income tax train-wrecks.
- Here's what happens: you start your business, the coin starts rolling in, but you don't set any aside for taxes because CRA does not yet require you to make monthly or quarterly tax payment installments. So the money disappears until at some point you try to get a loan and discover you can't prove via a current NOA that 1) you are current with your personal taxes, or 2) that you actually earn income (line 150)!
- Guess what? The Government wants you to pay taxes and they have it all figured out. So you finally do your taxes to discover not only do you have back-taxes owing, you also have future tax installment payments to start making, and your down payment savings and cash flow just dried up! Unless you have a huge down payment, the prospect of easily getting a mortgage any time soon just got harder :/ Don't go there - contact me if you need an accountant referral.
- An alternative to mainstream mortgage lenders are "private lenders" who have different lending criteria, but typically at much higher interest rates (to compensate for the CRA risk).
- They will require you have a much larger equity / down payment stake in the property (say 35% or more) before they put their capital direct into your mortgage.
- If CRA seizes and forces a sale on your home for unpaid taxes, the private mortgage lender's hope is there is enough cash from the sale to pay the CRA and them first, and any left overs to you.
- If you are concerned about house prices rising before you can get caught up on your personal taxes and your down payment saved, consider renting from a landlord who will give you the right to purchase his or her property within a year or two at a price you agree on today, called a lease with a purchase option.
Your Accountant Doesn't Know Everything
- A final word on BFS. While your accountant might suggest that you maximize business expense deductions to minimize the taxes you owe, this can be a double-edged sword if you also want a mortgage any time soon.
- Low personal income (per Line 150 of your NOA) usually means you limit how much of a mortgage you can qualify for or forces you into private lending instead.
- A a better BFS tax-reduction strategy might be to contribute to an RRSP with after-tax dollars, then - if you are eligible - use the First Time Home Buyer Plan to take the money out for down payment tax-free. We can do the analysis for you.
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