Psst. Here's the ugly truth

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Shall CMP break it to your BFS clients or should you? The ugly truth about B20 is that self-employed borrowers may actually have to report their full income.

The new OSFI lending guidelines, demanding an unprecedented level of scrutiny with regards to BFS borrowers. have caught many self-employeds flatfooted and scrambling to meet the document requirements.

The constraints have negative repercussions for many brokers who deal primarily with self-employed clients, says Rachele Raia, broker/partner at Your Mortgage Connection in Vaughan, Ontario.

“BFS borrowers make up 30 per cent of our client list,” according to Raia, representing the concerns of hundreds of brokers in the same boat. “More document requirements mean more back and forth and longer wait times.”

The focus at the moment is the identification and verification of a borrower’s source of income in order to assess that person’s ability to pay the mortgage.

“Several months ago, a stated income was enough,” Raia says. “Now lenders want to see a person’s stated income, T1, notice of assessment and bank statements.”

Prior to the mortgage rule changes, BFS borrowers could easily apply for mortgages with A lenders.

However, banks and A lenders have adopted stricter qualifying controls following the mortgage rule revamp and lately some B lenders appear to have “lost their appetite” for BFS borrowers as well, she tells CMP.

Under this new level of scrutiny, according to another seasoned broker, document preparation is not the only strategy.

“Brokers also need to coach BFS clients on issues such as when to file income taxes and  document authentication,” says Dustan Woodhouse, broker with Dominion Lending Centres Canadian Mortgage Experts on B.C.’s Lower Mainland.

For instance, borrowers should opt to pay more personal income tax this year, he says. The goal is to bump up a borrower’s income to a level that will qualify that individual for the mortgage he or she is hoping for.

“Advise your clients against starting a dividend income program this year,” he says. “It may be a good tax strategy, but not a good mortgage strategy.”

Brokers should also make sure of their clients have a 2012 business license.

“The number one reason I hear from various tradespeople is: ‘I work all over town,” says Woodhouse. “My answer is: Get one from the municipality in which you reside.”

BFS borrowers also need to have an accredited accountant prepare their business financials and file their tax returns.

“I think brokers should connect with their client’s accountant at tax time and make sure they are working on the same page regarding the borrower’s mortgage plans,” he adds.

Brokers can also advise their clients to incorporate their business, says Woodhouse. Apart from the liability and tax advantages, in the new lending regime, limited corporations will have an easier time compared to sole proprietors.

BFS borrowers also need to be reminded to report all rental income in the T1 General forms or via Hold CO Financials and made sure those financials are up to date and filed.

“Remember, your clients need to keep an impeccable record of their financial status,” Woodhouse says.

  • Chris Richards - Mortgage Intelligence on 2013-01-08 9:40:25 AM

    “Advise your clients against starting a dividend income program this year,” he says. “It may be a good tax strategy, but not a good mortgage strategy.”

    Did I miss something - why advise **against** dividends?? Whether T5 or T4 income, it all goes to line 150. The important thing is to manage line 150.

    Another important point for BFS is the concept of tax bracket layering. An individual should always declare enough income to use up his/her non refundable tax credits and then the lowest tax bracket level, then the next. Use or loose! Just because your company declares a dividend for personal tax purposes doesn't mean it has to pay it.

    Likewise, RRSPs can be used to reduce tax burden rather than maximizing business expenses. Works especially well if BFS can utilize the First Time Buyer program.

    Finally, knowing how to apply vendor-financing strategies for BFS buyers can often allow them time to get their income in order.

  • John on 2013-01-12 12:43:20 AM

    The true jist of this rule change is to maximize government revenue. They - governments around the world - have long wanted to tap into the 'grey' income of BFS. Supportive of the small business owner since they are the true job creators, governments cannot be seen as taxing small business owners more. This is the back door method to getting more taxes from them - force them to declare more income so they can get something else they want more.

    The biggest concern when dealing with BFS is the impact of delaying their purchase as we all know business cycles can change in a heartbeat. They may be able to qualify today for the mortgage but not next year. A longer term perspective is required when working with BFS clients, and regretfully not everyone in our industry has the patience to wait.

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