Last week, a major Canadian bank overhauled mortgage verification for those with foreign income. The surprisingly strict rules, left many wondering if other banks would follow with similar changes. No need to wonder, the Office of the Superintendent of Financial Institutions (OSFI) confirmed with us that more strict guidelines are being adopted at all banks they oversee. Guidelines are still just guidelines, so there’s flexibility in how they’re enforced. Despite the variance between banks however, all borrowers using foreign earned income to qualify for a mortgage, should expect more strict verification procedures going forward.
Income Verification Under Guideline B-20
The goals of B-20 Guidelines are to confirm details about the borrower, their finances, and the home’s value for uninsured mortgages. We’ve already discussed most of this in painful detail, quite a few times. Heck, we even crunched the numbers on how many people can still afford a typical mortgage, for Toronto and Vancouver real estate (time saver: not many). Today we’re going to focus on how verification will be done for those with foreign sources of income.
OSFI confirmed that borrowers with foreign income at Federally Regulated Financial Institutions (FRFIs), should be conducting similar checks to domestic borrowers. That is, they should confirm the following:
- Employment status; and
- Income history
I know. If you’re familiar with a Brampton Loan, you know that doesn’t mean anything. You just get a “letter of employment” from a friend, and continue to dodge taxes. You technically shouldn’t be able to get away with that scheme… anymore. OSFI further adds that the lender should confirm the following:
- The income is verified by an independent source;
- The source is difficult to forge;
- The source directly verifies the amount declared;
- The income does not contradict other details in the loan.
Banks Will Treat Foreign Income With “Rigorous” Policies
OSFI reminded us that they expect banks to develop “rigorous” policies. They further added “in cases where income cannot be verified adequately, institutions should have strong compensating controls in place.” If you don’t speak bureaucrat, that response is twice as ambiguous as you might have guessed. We’ll translate.
That statement tells banks to verify the income is in Canada legally here. A Notice of Assessment from the CRA, or a T1 showing foreign income would be enough for banks to verify. If they don’t, the bank needs a “compensating control.” That means another official way to verify regular income can reach here legally, that can’t be easily forged.
Last week we got the first bank’s interpretation of these rules. CIBC, a bank known for their substantial non-permanent resident client base, informed mortgage specialists of strict new rules. There’s a whole list of the changes, but they almost all result in foreign buyers notifying local tax authorities (a.k.a. the CRA) of overseas income. This sounds small, but there’s a huge number of people that haven’t been declaring foreign incomes locally. This was even briefly mentioned in the Government of British Columbia’s 2018 budget this week. Two other banks have confirmed they’re still ironing out the exact details, but similar procedures will be unveiled.
Have Foreign Income? No, You Won’t Be Double Taxed
Declaring foreign income in Canada? That’s ridiculous! We’ve been seeing posts on Chinese-language forums suggesting “loopholes.” Anonymous, and friendly strangers, have begun giving “helpful” suggestions on how they believe you can work around the new rules. Things like “networking,” and asking a friend to write you a job letter to qualify. It’s usually followed up by a Chinese-Canadian saying something that roughly translates to “just pay your damn taxes.”
Pouring through these forums, it appears the reason a lot of people are looking for loopholes is they fear being double taxed. That’s not the case. Canada has tax treaties with a lot of countries (China included), to prevent this issue. It’s not super obvious, since our tax system is overly complicated when contrasted to places like Hong Kong.
If you live in Canada, earn income in China, and pay taxes there – you would declare all of those things in Canada. Typically you would only owe the difference between Chinese and Canadian taxes. For example if you paid 30% taxes in China, and would owe 40% in Canada on the same income – you normally pay the difference. Hire an accountant if it’s still unclear, or call up the CRA.
When markets are in an upcycle, few people question the quality of mortgages. Afterall, if it turns bad during a boom – you can always sell the home to a long list of buyers. When buying starts to slow, as is anticipated this year, higher scrutiny of deals should be expected. This step seems like a small one, but it’s the first move in restoring sanity to the country’s real estate markets.
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