January 20, 2019 0 Comments Finance

Paying Tax to Borrow Money

Reporting High Income just to get Credit: Canada’s Flawed Banking System

A mortgage broker, one who seemingly worked for one of the Big 5, and had been a high-tax-paying employee for much of her life, echoed the mentality of the stereotypical banking employee:

I have tons of self employed clients and i do mortgages for them all the time. Its all on how you report your income. So many self employed work for cash…newsflash, if you are hiding income, we cant use it…. and just because yoh CAN write off all your income, doesnt mean you should. I pay about 40% of my income to taxes. Do i like it? No. But it is what it is. I have my salary, plus my self employed income. But if you write everything off to expenses and tell the govt you made 15k last year, you cant say to the bank, “ya, but i actually made more…” sorry but you told the govt you had no money left after bills, so that means no money left for a mortgage either.

Banks expect customers to forgo tax breaks in order to display high paper income government paperwork, for the sake of obtaining loan(s). This is only logical providing getting the debt earns a profit exceeding the extra tax, including the extra dollar value of the grief and legwork.

This most commonly occurs when lenders request the NOA (Notice of Assessment) issued by the CRA as proof of income. When one files his or her taxes, he or she would have to forgo tax deductions in order to display a sufficient Line 150 Net Income.

This also providing that the extra cost is to fund a lifestyle, not an avenue of potential profit.

What is often overlooked is the additional tax burden associated with funding the lifestyle, aside from just bank charges.

Given most tax brackets are over 20%, you’d need to make a return of at least that. Stupid business practice by the banks. This hence (most) who work at them are stuck being employees who don’t make much money, or anyone investing in one usually doesn’t see average yearly returns over a few % plus 3-5% dividends.

If someone is looking for funding to earn a profit, a traditional bank loan following traditional expectations does not make sense.

If I were a bank, I care what the customer’s actual net income is, not what an employment letter or tax return paper says.

If you have 2 options:

(A) pay close to $30,000 in combined tax and CPP, AND forgo the money you’d otherwise save or make if you had this $30,000, or

(B) pay 0 and even receive a tax refund,

Would you select (A) for the sake of borrowing money to only spend more money? This assumes that getting such mortgage does not produce a profit exceeding $30,000. If you dislike people who “use the system” to their benefit, then do not complain when others take the risk and pain to be ahead of you. Stay right in your banking employee position – where you’d be lucky to see something close to $100,000/year at the end of your career – and you probably are not even happy with your job.

If you truly believe in client service and profitable referrals and commissions, find a solution to the problem to make both parties benefit – instead of making your clients’ lives miserable because they do not pay as much tax as you’d like, or play the system by its mainstream rules.