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Claiming Business Expenses and Its Impact on Mortgage Approval

Posted on: 2025-09-05

Self-employment is booming across Canada, from freelance designers and consultants to small business owners. While being your own boss brings plenty of freedom, it also adds layers of complexity when it’s time to apply for a mortgage. One area that often causes confusion is how claiming business expenses can impact your chances of getting approved.

On one hand, writing off expenses helps lower your tax bill. On the other hand, it also reduces your net income. And that’s exactly what lenders look at when deciding how much they’ll let you borrow. In this guide, we’ll break down how your expense claims can affect your mortgage eligibility and share practical tips to help you strike the right balance between saving on taxes and qualifying for the home you want.

Want to dive deeper? Check out our guide on understanding the mortgage approval process.

What Are Business Expense Deductions?

If you’re self-employed, you’re allowed to deduct certain costs from your total income to reduce what you owe in taxes. These deductions are fully backed by the Canada Revenue Agency (CRA), and they’re a smart way to manage your business finances.

Here are some common expenses you can write off:

• Part of your rent or home bills (if you work from home)
• Car-related costs like gas, insurance, or repairs
• Travel and hotel stays for work
• Advertising, marketing, or software subscriptions
• Fees for lawyers, accountants, or industry memberships
• Tools, inventory, and other day-to-day supplies

While all of these can help reduce what you owe in taxes, they also reduce your reportable income, and that’s what mortgage lenders care about.

Planning to apply soon? Make sure you’ve reviewed your finances with our steps to take before applying for a mortgage.

The Mortgage Approval Process for Self-Employed Canadians

When you’re self-employed, mortgage lenders don’t just look at what you made last year, they want to see a stable income pattern. And instead of focusing on your gross income (before expenses), they zero in on your net income: what’s left after all those deductions.

Here’s what they pay attention to:

• Gross income: Your total earnings before expenses
• Net income: Your actual take-home (used by lenders)
• Two-year average: Most lenders average your last two years of net income

Let’s say you brought in $100,000 but claimed $40,000 in business expenses. Your net income is now $60,000, and that lower number could drastically reduce the mortgage amount you’re approved for.

Curious how this affects your buying power? Try our affordability calculator and don’t miss the impact of interest rates on mortgage payments.

The Double-Edged Sword: Lower Taxes, Lower Mortgage Eligibility

Deducting expenses is a smart move come tax season, but it’s a bit of a double-edged sword. The more you write off, the less you show as income, meaning you may qualify for a smaller mortgage.

For example, if a graphic designer deducts their rent, a new laptop, and monthly subscriptions. Sure, they save $10,000 in taxes, but they also lose out on potentially $100,000 in mortgage room.

The key is balance.

• Don’t go overboard with deductions if you’re planning to buy soon.
• Be aware of which write-offs reduce the income lenders use.
• Understand that a good tax strategy isn’t always a good mortgage strategy.

Here’s a self-employed mortgage approval tip: if homeownership is a goal in the near future, start shaping your finances in a way that makes sense to both the Canada Revenue Agency (CRA) and your mortgage lender.

Documentation That Lenders Want to See

Getting a mortgage when you’re self-employed means more paperwork, but being prepared can make all the difference. Here’s a list of what most lenders will want to see:

• Your last two T1 General tax returns
• CRA-issued Notices of Assessment (NOAs)
• Financial statements for your business
• Business bank statements (6 to 12 months)
• HST (harmonized sales tax) and GST (goods and services tax) registration, if applicable
• Invoices or contracts that show steady work and income

Need more details? Visit our article on understanding the mortgage approval process, or check out alternative lenders.

How Different Lenders Assess Business Expenses and Income

Not all lenders view your finances the same way. Here’s how they typically break down:

A-Lenders (Banks and Credit Unions):

• Stick to traditional rules
• Want full documentation
• Use your net income average over two years

B-Lenders (Alternative Lenders):

• More flexible with paperwork
• Might accept stated income backed by bank statements
• Offer options when big banks say no (but often at higher rates)

If you’ve claimed a lot of deductions and your net income looks low, a B-lender might be the bridge you need.

Learn more about alternative lenders or explore our guide on fixed vs. variable mortgages.

Strategies to Improve Your Mortgage Application

1. Think Ahead About Deductions: If buying a home is in the cards within the next two years, scale back on aggressive write-offs to help raise your reported income.
2. Keep Business and Personal Finances Separate: Dedicated accounts make it easier for lenders to evaluate your earnings and spending.
3. Strengthen Your Credit Score: Even if your income isn’t high, a solid credit profile can still work in your favour.
4. Consider a Co-Signer: A partner or family member with a salaried job can give your application a serious lift.

For more on how credit affects your rate, see the impact of credit score on mortgage rates.

Planning Ahead: When to Claim and When to Hold Back

If you’re thinking about buying in the near future, timing your deductions can make a huge difference. Talk to your accountant before making any big claims that could reduce your net income too much.

For example, the $15,000 equipment upgrade might be worth delaying until after your mortgage closes, especially if it brings your income below lender requirements.

For flexible borrowing options, explore home equity solutions (HELOC) and find mortgage refinancing explained.

Refinancing: A Second Chance to Leverage Business Expenses

If your deductions have already affected how much you can borrow, refinancing could be a smart move. Instead of buying a new place, you tap into the equity in your current home to:

• Pay off high-interest debt
• Fund business needs
• Consolidate loans or boost your credit

This can be a great option for self-employed folks who need funds without waiting years for their income profile to bounce back.

Find more details in the mortgage refinancing explained.

Common Mistakes to Avoid

• Claiming too many deductions right before applying.
  It might be tempting to maximize your deductions, but doing so right before a mortgage application can seriously reduce how much you qualify for. Lower reported income means less borrowing power.
• Mixing business and personal expenses.
  Mixing the two can make it tough for lenders to assess your income. It also raises red flags and could lead to parts of your income being excluded altogether.
• Skipping out on the documents lenders need.
  Lenders need clear, consistent documentation to approve your mortgage. Missing tax returns, assessments, or business statements can delay or derail your application.
• Working with brokers who don’t understand self-employment income.
  Not all brokers understand the unique challenges of self-employed borrowers. Make sure you’re working with someone who knows how to navigate income that isn’t straight off a pay stub.

Business deductions are a powerful financial tool, but when you’re also aiming to buy a home, they require careful planning. Since your reported income plays a major role in mortgage approval, knowing how your claims affect your borrowing potential is essential.

Work closely with both your accountant and a mortgage broker who understands the self-employed landscape. Together, you can build a strategy that supports both your business growth and your path to homeownership.