The Importance of Canadian Income Documentation

If you want to borrow money from a lender you must read this article to understand what documentation will be asked of you to provide.  All lenders such as banks, credit unions and finance companies will request important income documentation to confirm your income. Many do not have direct access to the income documentation that is required and is why this article is so important, as I want to help you save valuable time and money when looking to borrow by having the necessary documentation available when needed.

I cannot stress the importance of being able to access your previous completed income tax forms such as T1 General and the corresponding Notice of Assessment (NOA.)  In most cases a 2 year average of income documentation is a standard request when borrowing money and many people do not have these documents readily available. These documents can take up to two weeks to receive via postal mail from Revenue Canada. I highly recommend setting up on line access with the Canadian Revenue Agency as you will be able to access your full income document history with the Agency at anytime.  Follow this link to get setup.

http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/gtnln/nfgrphc1-eng.html

Below is a list of documents that are required when you apply to borrow money from a financial institution. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process. Information is subject to change without notice.

Income Type's

Self-employed Income

For conventional mortgages, a minimum 2 year history of self-employed earnings is required.  Income must be verified by financial statements that were prepared by a professional, accredited accountant. T1 Generals and NOA’s should be used to verify the income on the financial statements.

Commission Income

An average of 2 years income is used to qualify. The following documents should be obtained to support your income:

• A letter from the employer that outlines the terms of the commission paid and the length of employment
• Year to date pay stub
• 2 year history including NOA's and T1 Generals

Small Businesses / Partnerships

Smaller businesses, one person or sole proprietorship operations, may not have complete or accountant prepared financial statements.  In these cases, 2 years NOA along with T1 Generals including all schedules should be used to confirm income.

Salaried Employees

Typically, 100% of the client’s salary is used as income with the following documents available to support this income:

• Employment letter - must be current within 30 days on company letter head (including full address, contact information phone, fax, e-mail) and be signed and dated confirming salary, employment tenure, and position, and when applicable, overtime, bonuses, pending increases or car allowances should be documented in the letter.
• 2 consecutive pay statements – must be current within 60 days and indicate the rate of pay, pay period, net and gross income, taxes and benefit deductions

For salaried borrowers where additional sources of income (above their employment salary) are used for the debt service assessment, a 2 year history will be requested.

Overtime

Overtime may be used to qualify the borrower provided there is a proven track record and the opportunity for continued overtime exists for the future. At least a 2 year history should be used for conventional deals to provide a comfort level that additional income is likely to continue from this source.

Hourly Employees:

For applicants paid on an hourly basis, 2 recent pay statements, job letter and last year's NOA are the preferred documents to confirm your client’s income.

The job letter must contain the following;

• The weekly average hours worked
• The hourly rate
• Year-to-date earnings
• Employment tenure
• Applicant’s position

Furthermore, the letter should be on company letterhead and signed by a person in authority. It also must have been issued within the previous 30 days.

Seasonal Employment

For Conventional and CMHC insured loans, if employment is seasonal (e.g., construction, fishing, farming, etc.), only earned income can be used as confirmed by tax returns for the past 2 years.

Employment Insurance (EI) payments are included only if they represent a typical cyclical income pattern that is likely to continue in the future.

Second or Part-time Job

If the borrower has two part-time jobs 100% of the income may be used provided the two part-time jobs reasonably equates to one full-time job. For example does it make sense for the type of employment (for example physiotherapy, fitness instructor, etc.)

If the borrower has a full-time job and also has a part-time job, the additional income can be included in debt service calculations if it has been consistent for at least 2 years and it is expected to continue.  In this case, 100% of the income may be used.

If permanent part-time employment is the borrower(s) primary employment, income can be used based on guaranteed hours. Where the applicant has had the job for 2 years or more, a 2 year average can be used.

It's evident that in most cases a 2 year history of income will be required to confirm your declared income, make sure you have access to these documents at all times.


T1 General Sample

Notice of Assessment Sample

Improving your credit score

If your credit score is not as high as you think it should be, make sure that the information in your credit report is correct. If it is correct, read your report carefully to find out which factors are most likely having a negative influence on your score, and then work to improve them.

Here are some tips, from the Financial Consumer Agency of Canada (FCAC), on how to improve your credit score:

• Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to thecredit-reporting agencies, which could affect your score.
• Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
• Try to pay your debts as quickly as possible.
• Don't go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
• Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
• Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card.

Are you thinking about hiring a company to repair your credit?

Beware of companies that promise to help you re-establish your credit for a fee. Their ability to change the information that appears in your credit file is no different than anyone else's. Only your creditors are able to alter this information; therefore you do not need to pay a third party to obtain, discuss, review or make changes to your credit report. You have the right to access your information and make changes to your file if there is an inaccuracy or if you want to include a comment.

If you are thinking of hiring someone to repair your credit, remember this:

• A credit bureau will not remove accurate negative information from your credit report before the legal time period has expired; therefore, do not believe anyone who claims they can get negative information removed from your credit report faster than is legally required.
• There are no "loopholes" or laws that credit repair companies can use to get correct information off your credit report.
• No credit repair company can do anything you can't do for yourself. It is impossible for a third party to make changes in your file if the facts have been correctly reported. There are individuals and companies that claim they can fix a bad credit file. This is not the case. If a file includes accurate, yet negative information about your credit history, this information cannot be changed. Information will only be changed when your file contains an inaccuracy.
• The only way to rectify a poor credit rating is to adopt sound credit practices for a period of time.

To learn more about your credit file and credit score, visit the Financial Consumer Agency of Canada (FCAC)'s publicationUnderstanding Your Credit Report and Credit Score.

Source: Government of Canada

CMHC's New Premium Table

How to cut your mortgage costs

Whatever type of mortgage you choose, try to pay it down as quickly as possible. That way, you'll pay less interest and cut your mortgage costs.

When you apply for a mortgage

• Make the largest down payment you can.
• Pick the shortest amortization period you can afford.
• Pick an accelerated bi-weekly payment option. This works out to 13 monthly payments each year.
• Shop around for the best deal you can get.

3 ways to pay down your mortgage more quickly

1. Increase the amount of your payments.
2. Make a lump-sum payment each year (prepayment) in addition to your regular payments. For example, apply any tax refund or bonus to your mortgage.
3. Keep your payment the same if you renew at a lower interest rate.

Use this calculator to figure out how much money and how many years you can save by making prepayments.

Consider penalties for leaving early: If you plan to exit your mortgage before the end of your term, find out the penalty you may pay. Learn how this penalty is calculated.

Special features

Only choose the special features you need, like:

• Mortgage insurance – Covers your mortgage payments if you lose your job.
• Portability – Carry your mortgage with you when you sell your home and buy another one.
• Prepayment options – Make extra lump sum payments.
• An assumable mortgage – The buyer of your home can take over your mortgage.

Don’t just compare rates and features when you go mortgage shopping. Also consider penalties and fees. For example, look at mortgage prepayment penalties. Lenders must calculate and disclose these in a standardized way.

Investment Properties: The Pros And Cons

There are a number of advantages and disadvantages to buying a property and then renting it out. Talk to an accountant, lawyer, mortgage professional or other financial expert about how it may affect your taxes and financial situation.

3 Key Advantages

1. You pay less tax

You can deduct certain expenses from your income – reducing the taxes you owe. The list includes:

    -mortgage interest
    -property taxes
    -insurance
    -maintenance/upgrades
    -property management
    -utility bills (if you include them in the rent)

2. You may be able to deduct losses for tax purposes

If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income you have. This could reduce your total tax bill.

3. You get a regular monthly income

Other kinds of investments may pay out less often or income may be less predictable.
As a landlord, you can deduct certain property expenses from your income – reducing the taxes you owe. If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income you have.

3 Key Disadvantages

1. You take on the responsibilities and challenges of a landlord

Rental units need repair – sometimes on an emergency basis. Dealing with tenants can be challenging, especially if they don’t pay their rent on time and cash flow is tight. If you hire a property manager to take care of these things for you, their salary is an added cost.

2. It may be difficult and costly to sell the property later

Real estate is not a liquid investment. That means it can take time to sell, depending on market conditions. It can also be costly to sell due to real estate and legal fees.

3. It may be difficult to finance the purchase

You must have a down payment of at least 20% when you buy a second property. You may need a mortgage. And, you will have high monthly expenses to cover when you own a building. Of course, you hope the income you receive from your tenants will cover this.

Remember there are always pros and cons of purchasing and owning investment property. Do your research and find out if investing in property is right for you.

Click here more information on investment properties.

Fixed or Variable? Why not both!

Here’s the situation: you’re in the market for a mortgage. Your timing is perfect because rates have never been so low.  Your colleagues at work took a variable and can’t believe the unbelievably low effective rate they are paying. Your parents are conservative old school and think it would be foolish to pass up on locking in a fixed 5 year for less than 3.50%. What are you to do?

Take the best of both worlds!

At the time of writing the effective rate for a 5 year variable rate mortgage is 2.55%* with very little probability that the Bank of Canada prime rate will change in the near to mid-term. A fixed 5 year is at 3.49%*.  The spread between the two options is only 0.94%.  If you are a consumer trying to decide fixed vs variable, it would be difficult to determine which option will out perform the other. We are really in uncharted territory… both have pros and inherent drawbacks.

Here’s how you can protect yourself: take a 50/50 mortgage. The 50/50 mortgage allows you to lock half of your balance as a fixed rate and the remaining half as a variable rate mortgage.  In doing so you are benefiting from the positives of each and spreading the risk over your entire mortgage.

Most people would agree that investment diversification is the key to a solid investment portfolio. The same holds true for your mortgage: Rate diversification.

There are only a handful of lenders who offer these great 50/50 mortgage products. One of my favorites is CIBC who are currently offering their Home Power Plan.

 

Ontario Land Transfer Tax Refunds For First-Time Home Buyers

Are you a first-time home buyer? Do you know you can save up to $2,000 on land transfer tax in Ontario. It occurred to me that not every first-time homebuyer considers land transfer tax when they are budgeting for their purchase or applying for their mortgage and as far as closing costs go, this is a big one to overlook, particularly if the purchaser does not qualify for any rebates.  The purpose of this article is to shed some light on how land transfer tax is calculated and the criteria for rebates that are currently available for first-time homebuyers.

How to Calculate Land Transfer Tax

In Ontario, the provincial government collects land transfer tax on the disposition of land or a beneficial interest in land pursuant to the Land Transfer Tax Act (Ontario).  On February 1, 2008, the City of Toronto instituted its own land transfer tax which mirrors, and is paid in addition to, the Ontario land transfer tax. There are various transfers that are exempt from both taxes, such as a transfer between spouses pursuant to a written separation agreement or a transfer between a trustee and beneficial owner of land.  For the purposes of this article, I will focus on land transfer tax that is payable upon the sale of residential real estate in the City of Toronto, assuming that no exemptions apply.

Ontario and Toronto land transfer taxes are payable on the consideration that passes from the transferee to the transferor of property and the amount, if any, of a mortgage or debt being assumed by the transferee as part of the transfer.  The current formulas for determining land transfer taxes are as follows:

Ontario land transfer tax:

• 0.5% – on the first $55,000
• 1.0% – on portion between $55,000 – $250,0001.
• 5% – on balance over $250,000
• 2.0% – on anything over $400,000

Toronto land transfer tax:

• 0.5% – on the first $55,000
• 1.0% – on portion between $55,000 – $400,000
• 2.0% – on anything over $400,000

Land Transfer Tax Rebates for First-Time Homebuyers

For first-time homebuyers, the Ontario government offers a land transfer tax rebate of up to $2,000.00 and the City of Toronto offers a land transfer tax rebate of up to $3,725.00.  To qualify for these rebates, the homebuyer must meet the following criteria:

1. they must be at least 18 years of age;
2. they must occupy the home as their principal residence within 9 months of the date of transfer;
3. they cannot have owned a home, or an interest in a home, anywhere in the world at any time;
4. if they have a spouse, their spouse cannot have owned a home, or an interest in a home, anywhere in the world while being their spouse;
5. in the case of a newly constructed home, they must be entitled to a Tarion New Home Warranty; and
6. they cannot have previously received an Ontario Home Ownership Savings Plan-based refund of land transfer tax.

If there is more than one homebuyer and only one of them is a first-time homebuyer, that first-time homebuyer will only be able to claim a fraction of the rebates equal to their interest in the property (so if they only acquire a 50% interest in the property, they will only be able to claim 50% of the rebates).  As well, if a first-time homebuyer has a spouse who owned a home or an interest in a home anywhere in the world while being their spouse, neither one of them will qualify for the rebates; if, however, the first-time homebuyer’s spouse sold his or her home or interest in a home prior to becoming their spouse, then the first-time homebuyer can claim their 50% share of the rebates and their spouse’s 50% share of the rebates (for a total of 100% of the rebates) even though the spouse is not, by definition, a first-time homebuyer.

Confused yet?  Here’s an example to help clarify how the rebates work:
Consider a couple, Jack and Jill, who are not spouses but are purchasing a home together for $400,000.  Jill is a first-time homebuyer and Jack is not.  The land transfer tax that would be payable by Jack and Jill is as follows:

• Provincial land transfer tax:  $4,475.00
• Municipal land transfer tax:  $3,725.00
• Total land transfer tax:  $8,200.00

Assuming that all of the criteria for the rebates are met and Jack and Jill are each acquiring a 50% interest in the home, Jill can claim up to 50% of the rebates for a total savings of $2,862.50 (50% of $2,000 and 50% of $3,725).   If Jill acquired a 75% interest in the home, she would get a corresponding increase in the amount of rebates she could claim – in that case, Jill could claim up to 75% of the rebates for a total savings of $4,293.73 (75% of $2,000 and 75% of $3725).

If Jack and Jill were spouses of one another, the outcome would depend on whether Jack sold his home before becoming Jill’s spouse.  If Jack did not sell his home before becoming Jill’s spouse, then neither one of them would qualify for the rebates; if, however, Jack sold his home prior to becoming Jill’s spouse, then Jill could claim her 50% share of the rebates and Jack’s 50% of the rebates (for a total of 100% of the rebates).

At the end of the day, it is important to consider land transfer tax and available rebates when budgeting for your first home purchase.

Source: Baker Lawyers,Ontario LTTR