Self-Employed but Your Taxable Income Looks Low? How a Car Loan Works

Because the net income on your tax return is what is left after business expenses. The Canada Revenue Agency says that, as a rule, you can deduct any reasonable current expense you incur to earn income. For a sole proprietorship or a partnership, the CRA encourages you to use Form T2125 to report business income and expenses. The form helps you work out your gross income and your net income, and both are needed to complete your tax return.

After the CRA processes your return it sends you a Notice of Assessment, a summary of your tax return. Its tax summary lists total income, net income and taxable income. The CRA also notes that you may be asked to give a copy to a financial institution to prove what your income was in the previous year.

Deducting what the tax rules allow is normal. This page is only about how a lower number looks on a loan application, and what else you can put next to it.

Lenders commonly ask self-employed applicants for tax documents. The lender pages we read name the Notice of Assessment, the T1 General (your tax return) and sometimes the T2125. One bank’s loan checklist asks for your last two Notices of Assessment. Another asks for the last two years of T1 General with the matching Notice of Assessment.

Which line of the Notice of Assessment a lender uses, and how it treats your write-offs, is not published. None of the lender pages we read gives a formula, and we will not guess at one. Several of them add that more documents may be asked for, depending on the type of income.

So the honest answer is that it depends on the lender. Tell us what your Notice of Assessment shows and what your business brings in, and we will say what to bring.

It depends on the lender. One bank’s checklist asks for your last two Notices of Assessment, and another bank for the last two years of T1 General. A third asks for a recent Notice of Assessment with the T1 General summary, and one credit union asks for three years of T1 General and T2125. Every lender sets its own rule, so ask before you pull everything.

A lower tax number does not leave you with nothing to show. These are the documents lenders list alongside it.

• Your T2125. It reports your business income and your expenses, not only the final figure. A credit union lists it with the T1 General.
• Bank statements. One Alberta lender lists them among its proof of income, next to tax returns. They show deposits as they land. How many months a lender wants varies, so ask before you pull them.
• A proof of income statement from the CRA. The CRA says you might need to give proof of income to a bank when you apply for a loan, and you can print a proof of income statement in My Account. One bank lists a recent CRA My Account assessment among its self-employment documents.
• Financial statements, if you are incorporated or in a partnership. One credit union asks for financial statements for the last three years.
• Another route some lenders offer. One Canadian non-prime auto lender lets self-employed borrowers send income documents in one of three categories, because some self-employed borrowers may not fit the conventional income verification process.

Which of these a lender accepts, and how much weight it gives each one, is up to that lender.

When your business is incorporated, its profits and losses are not automatically passed along to you. You can pay yourself a salary as an employee of your business, or you can pay yourself in dividends.

A salary is employment income, usually shown in box 14 of your T4 slip. Dividends are profits you receive from your shares in a corporation, and they are usually reported on an information slip such as the T5. Either way, what you take out is reported on your personal tax return.

The company’s own financial statements are a separate document. One credit union asks incorporated owners for them for the last three years. How much of the money still inside the company a lender counts is the lender’s call. None of the pages we read says.

The CRA sends you a Notice of Assessment for every tax return you file. If a return has not been filed, there is no Notice of Assessment to show. If you are behind, getting your returns filed with your accountant’s help comes first. We do not give tax advice.

If your business is new, tell us your start date and what you have, and we will say what to bring. Some lenders offer more than one way to document income, so ask what is on offer before you decide your file will not work.

At $3,300 a month, the income on this example buyer’s tax return, the payment is about 19% of income. If a lender counted $5,000 a month instead, the same payment would be about 12%. Which figure a lender uses, and whether it looks beyond the tax return at all, is up to that lender. Lenders also look at more than one ratio, and every lender decides each file.

To try your own numbers, use the payment calculator. For how your score sets the rate, see car loan rates in Alberta, and for how pay and score work together, read good income, bad credit car loans.

• Government photo ID.
• Your Notice of Assessment and T1 General for the last two years. If you are incorporated, your company’s financial statements too.
• Your T2125, if you file one.
• Recent bank statements, personal and business.
• A void cheque or direct deposit slip, and proof of address.

You can print a proof of income statement from your CRA My Account, and your Notice of Assessment is available there once your return is processed. For pay stubs, employer letters and T4s, read what car lenders verify when you work. If your income comes from an app or follows the seasons, see gig worker car financing and seasonal worker car financing. The quickest start is the online application. We review every application and call you back. Or call us at (825) 736-4438.