The client
A sole proprietor running a small equipment-repair business on Prince Edward Island, five years in operation, a steady client base. The most recent year’s Statement of Business Activities showed net income down sharply from the year before — not because the business slowed down, but because of one invoice that was never going to be paid.
Borrower
Sole proprietor, 5 years in business
Equipment-repair contractor, no employees
Reported income (recent year)
$38,000/yr — $3,167/mo
After deducting the write-off
Prior year (context only)
$54,000/yr
Not averaged into the qualifying figure
The write-off
$14,000 invoice, client's numbered company dissolved before paying
A completed, delivered job
Purchase
$180,000, Prince Edward Island
Property tax $150/mo; lender heat estimate $80/mo
Down payment
$18,000 — 10%
Under 20%, so the file must be default-insured
What the T2125's bottom line showed, versus what the business actually generated:
| Income view | Annual |
|---|---|
| Reported net income, most recent year | $38,000 |
| One-time bad-debt write-off, added back | +$14,000 |
| Adjusted net income | $52,000 |
The problem
A completed job, invoiced and delivered for $14,000 — and the client’s numbered company dissolved before a dollar of it was paid. A genuinely uncollectible receivable like this one is a legitimate business expense under CRA’s own rules, deducted the year it is written off. On the T2125’s bottom line, it is also indistinguishable from a business that simply earned less.
What the return alone showed
- ▸Reported net income, most recent year: $38,000/yr ($3,167/mo)
- ▸The prior year, for context only: $54,000/yr — the write-off, not a slowdown, is what moved the number
- ▸GDS on the reported figure alone: 42.2% — over the 39% cap. Declined.
Nothing about the underlying business had changed. The bank’s automated read treated the write-off as evidence of a business trending down, rather than as the one-time, fully documented loss it actually was.
The numbers
At 10% down this is an insured file, putting CMHC's ratio ceilings — GDS 39%, TDS 44% — in hard-number territory.
| Structuring the insured loan | Amount |
|---|---|
| Purchase price | $180,000 |
| Down payment (10%) | −$18,000 |
| Base mortgage (90% LTV) | $162,000 |
| CMHC premium — 3.10% in the 85.01–90% LTV band | +$5,022 |
| Total insured mortgage | $167,022 |
The minimum down payment on $180,000 is $9,000 (5% of the first $500,000 tier); $18,000 clears it comfortably.
| Rate & payments | Figure |
|---|---|
| Contract rate — 5-year fixed (illustrative, not a quote) | 4.39% |
| Minimum qualifying rate — greater of contract + 2% and 5.25% | 6.39% |
| Monthly P&I at the qualifying rate | $1,108 |
| Monthly P&I at the contract rate | $914 |
GDS on the reported figure versus the adjusted figure
| Ratio | Reported ($3,167/mo) | Adjusted ($4,333/mo) |
|---|---|---|
| Housing costs (P&I $1,108 + tax $150 + heat $80) | $1,338 | $1,338 |
| GDS vs. the 39% cap | 42.2% ✗ | 30.9% ✓ |
| TDS with a $70 card minimum added | — | 32.5% ✓ |
The gap between the two income figures is exactly the $14,000 write-off, spread over twelve months — not an estimate, the same figure the T2125 already deducted, simply added back once it was documented as a single, non-recurring event.
The solution
A mortgage broker rebuilt the file around the write-off’s own documentation, rather than accepting the bank’s single-year read.
First, confirmed the write-off was genuine and one-time. The original invoice, the completed contract, and correspondence showing collection attempts established the debt was real and pursued in good faith.
Second, confirmed the debtor's company had actually failed. A corporate registry search showed the numbered company dissolved before the invoice was ever paid — the write-off was not a favour to a client who simply hadn’t gotten around to paying.
Third, rebuilt net income with the write-off added back. $38,000 plus the documented $14,000 loss brought the figure to $52,000 a year, using the same add-back discipline self-employed files rely on elsewhere — a figure tied directly to the T2125 line it came off, not estimated.
Fourth, used the prior year as context, not as a ratio input. The $54,000 prior year showed the adjusted figure was consistent with how the business normally performs, without averaging two years together to get there. An accountant’s letter confirming the write-off was isolated closed out the file. The broader mechanics of turning a T1 and T2125 into a usable qualifying number are covered in more depth in our related walkthrough, and our self-employed income worksheet sets out the same add-back discipline step by step.
The outcome & the closing math
Approved insured at 90% LTV on a 25-year amortization, once the file reflected $52,000 a year rather than the bare $38,000 the write-off left on the return. Prince Edward Island has no dedicated mortgage-broker licensing regime — worth stating plainly — and its real property transfer tax rate remains under regulatory dispute, so this file cites no dollar figure for it at all; closing costs beyond the mortgage stay entirely qualitative.
Self-employment of this size and shape is common enough across Canada that the average new mortgage amount in Canada reflects plenty of borrowers whose net income looks exactly like this one’s — solid, but occasionally distorted by a single documented event.
What to take from this file
- 01A documented one-time bad debt is not a declining business. CRA treats a genuinely uncollectible receivable as a legitimate, isolated expense, and a lender can add it back once it is proven not to be a pattern.
- 02Get the proof, not just the number. The original invoice, collection attempts, and confirmation the debtor’s company actually failed turn a claim into a file an underwriter can approve.
- 03Use another year as context, not as an average. The prior year showed the write-off was the exception; it was never blended into the ratio itself.
- 04Prince Edward Island has no mortgage-broker licensing regime, and its transfer-tax rate is disputed. State the licensing gap plainly, and never quote a PEI transfer-tax dollar figure.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸CMHC — Purchase (Mortgage Loan Insurance) — default-insurance premium schedule by LTV band (25-year amortization).
- ▸CMHC — CMHC Home Start — minimum down payment tiers (5%/10%) and the $1.5M insured price cap.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸CMHC — CMHC Reviews Underwriting Criteria — GDS 39% / TDS 44% maximums and the 600 credit-score floor for insured files.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸the bad-debt add-back treatment — which non-recurring expense lines a lender will add back is policy, not a regulatory rule.
- ▸4.39% contract rate — illustrative, not a quote.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.