Why are personal income tax documents required when qualifying for a mortgage?

In most cases, personal income tax documents are required particularly when qualifying self employed applicants. But over the past few years, the Canadian mortgage underwriting standards have increasingly expanded upon its qualification criteria. As a result, the request for personal income tax documents from mortgage qualification applicants has quickly become the norm for all employment types, rather than the exception.

Let's first identify the key personal income tax documents that lenders typically request:

T-SLIPS (generated by your employer)

The T4 is the most common of all T-slips and is also referred to as a "Statement of Remuneration". It is a tax form produced by a singular employer, you will receive a separate T4 from every employer that you were employed with in the calendar year. The T4 is useful for mortgage qualification purposes in that it confirms your total income for the year, your employer, your legal name and SIN number. They are also useful for verification when you earn income in excess of your base salary or hourly rate as it captures the total income earned.  

Other common T-Slips are T4A's and T5's. A T4A is typically generated for individuals who are 100% commissioned sales people, independent contractors, or self employed applicants (however, not all self employed individuals generate T4A slips...the way self employed applicants file/declare their income varies significantly), T4A's can also verify CPP or OAS.  A T5 is generated for every investment you earn an income from...this could be anything from an annual RRSP or non-registered investment redemption/withdrawal to a withdrawal of funds from your corporation in the form of a dividend.

T1 GENERAL (generated by you or your accountant/bookkeeper)

Once you receive your T-slips, the next progression to completing your taxes is to file your T1 General. Depending on how complex your income is, you can either complete the T1 General yourself, or hire an accountant or bookkeeper to complete it for you. The T1 General Income Tax and Benefit Return is the tax return used by individuals to calculate their annual tax liability and get federal or provincial benefits such as the GST Credit.  It summarizes the taxpayer's income, deductions and tax payable as computed on supporting forms and schedules and calculates the taxpayer's refund or balance due. There are five parts to your T1 form including identification, total income, net income, taxable income and a refund or balance owing. Your T1 form and any balances owing for each year are due by April 30 of the following year or June 15 for self-employed individuals or common-law partners. Basically, the T1 confirms how one declares an income...a lender can quickly determine how you earn your income by skimming through pages 1-4 of your T1 General. From here, the lender will typically request further documentation from additional schedules referenced within the T1 document (this could be anywhere from 4 to as high as ~40 pages).

NOTICE OF ASSESSMENT (generated by Canada Revenue Agency)

And lastly, once your T1 General has been filed-to and reviewed-by the CCRA, the heavy lifting has been completed. At this stage of the game, you simply wait for the review to be completed by the CCRA at which time you finally receive your Notice of Assessment. The Notice of Assessment is kind of like a receipt to confirm that you have filed your taxes for the prior year, it includes: 

• the date your T1 General was reviewed,
• the details about how much you may owe, OR how much you may receive as a refund or credit, and
• an updated RRSP deduction limit for the current tax year

For self employed applicants, a lender may require the most recent Notice of Assessment to confirm that the applicant is not in arrears with CRA.

CONCLUSION

If your income cannot be captured/verified from a pay stub and employment letter, then prepare to provide the most recent two years of one or all of the above (and in some cases, 3 years). Think of tax documents to lenders as x-rays are to doctors...without the former, it is difficult to assess and diagnose the client.

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