Sarah, a self-employed graphic designer operating as a sole proprietorship, is applying for a mortgage. She reports significant business expenses on her personal tax returns to minimize taxable income. Which of the following income figures would a lender most likely use to qualify her for a mortgage?

Question: Sarah, a self-employed graphic designer operating as a sole proprietorship, is applying for a mortgage. She reports significant business expenses on her personal tax returns to minimize taxable income. Which of the following income figures would a lender most likely use to qualify her for a mortgage?

Answer options:

• Her gross business revenue before any expenses.
• Her net income before tax, as reported on Line 15000 of her T1 General, for the most recent two years.
• A combination of her gross revenue and a portion of her personal expenses based on a formula. ✅ Her net income after tax, plus any non-cash expenses like depreciation, averaged over the last two years.

Correct answer: Her net income after tax, plus any non-cash expenses like depreciation, averaged over the last two years.

Explanation: For self-employed individuals, lenders typically use an 'add-back' approach, taking the net income reported on tax returns and adding back non-cash expenses such as depreciation, averaged over the most recent two years, to arrive at a more accurate assessable income for mortgage qualification. Option B is partially correct, but it must be adjusted for non-cash expenses.