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