The client
An incorporated professional in the Victoria market whose first home purchase, some years earlier, was placed by a submortgage broker using a retained-earnings gross-up with a specific lender — the corporation kept most of its earnings inside the company rather than paying them out as salary or dividends. Now buying a second property, the same borrower returns to the same approach.
Borrower
Incorporated professional, repeat client
First purchase used the same gross-up lender
Personal T4 salary
$42,000/year
$3,500/mo — a deliberately modest draw
Retained earnings, older year
$92,000
Kept inside the corporation
Retained earnings, recent year
$110,000
Kept inside the corporation
Second purchase
$700,000, Victoria
Property tax $300/mo; lender heat estimate $140/mo
Down payment
$140,000 — 20%
Conventional, uninsured financing
The gross-up that made both purchases work, side by side with the number the T4 alone would show:
| Income view | Monthly |
|---|---|
| T4 salary alone | $3,500 |
| Two-year average retained earnings (($92,000 + $110,000) ÷ 24) | $8,417 |
| Program income used to qualify | $11,917 |
The problem
On the T4 salary alone, GDS computes at an unworkable 125.5% — more than the household’s entire declared personal income would need to be, just to cover the housing cost. The corporation’s earnings, deliberately kept inside the company rather than drawn out, simply do not appear anywhere on a personal T1.
This is the same structural gap the borrower’s first purchase ran into: a business generating real income, reported correctly to the CRA, that a standard personal-income read cannot see at all. The difference this time is that the approach for solving it was already proven — the question was whether the same lender would apply it again on a larger purchase.
The numbers
At 20% down this is a conventional, uninsured purchase — no CMHC premium, and the 39%/44% figures below reflect the widely used GDS/TDS ceiling most conventional lenders apply.
| The conventional loan structure | Amount |
|---|---|
| Second purchase price | $700,000 |
| Down payment (20%) | −$140,000 |
| Conventional mortgage (80% LTV) | $560,000 |
| Rate & payments | Figure |
|---|---|
| Contract rate — 5-year fixed (illustrative, not a quote) | 5.09% |
| Minimum qualifying rate — greater of contract + 2% and 5.25% | 7.09% |
| Monthly P&I at the qualifying rate — the ratios run on this | $3,953 |
| Monthly P&I at the contract rate | $3,286 |
GDS and TDS, salary alone vs. the gross-up
| Ratio | Salary alone ($3,500/mo) | Gross-up program income ($11,917/mo) |
|---|---|---|
| Housing costs (P&I $3,953 + tax $300 + heat $140) | $4,393 | $4,393 |
| GDS vs. the 39% ceiling | 125.5% ✗ | 36.9% ✓ |
| TDS with the $420 vehicle loan added | — | 40.4% ✓ |
The two-year average of retained earnings — $8,417 a month — added to the modest $3,500 salary is what turns an unworkable ratio into a comfortable pass. Nothing here inflates the corporation’s numbers; it simply recognizes income the corporation actually earned and reported, just not as personal salary.
The solution
The file went back to the same lender that had approved the first purchase on this exact approach.
First, confirmed the lender’s gross-up methodology still applied. Each lender sets its own approach to retained corporate earnings, and methodologies can change between files — the first step was reconfirming this lender’s current policy before assuming continuity.
Second, rebuilt the two-year average from current financials. Two years of corporate financial statements and matching Notices of Assessment established the $8,417 monthly average, using the identical calculation method the first file had used.
Third, reused the proven documentation package. An accountant letter confirming the retained-earnings position, structured the same way as the first file’s, meant the underwriter was reviewing a familiar package rather than a new methodology — the full mechanics of building a file like this are covered in our walkthrough of an incorporated borrower using retained earnings.
This kind of income treatment sits alongside other add-back conventions self-employed and incorporated borrowers rely on — different mechanism, same underlying principle: qualifying income should reflect what the business actually generates, properly documented.
The outcome & the closing math
Approved conventional at 80% LTV, on the strength of the same gross-up approach the borrower’s first purchase had already proven out. As a repeat buyer on a second purchase, this file does not qualify for BC’s first-time-buyer Property Transfer Tax exemption, so the full amount is due in cash at closing:
| BC Property Transfer Tax on $700,000 | Amount |
|---|---|
| General rates — 1% / 2% marginal brackets, no first-time-buyer exemption available | $12,000 |
| Legal fees, appraisal & adjustments | varies |
Two-file relationships like this one are common in the incorporated-borrower segment — consistent with what the average new mortgage amount in Canada suggests about how often move-up purchases follow an established approval pattern rather than starting from zero.
What to take from this file
- 01A proven gross-up approach is worth reconfirming, not assuming, on a second file. Lender methodology for retained corporate earnings can change between purchases — verify current policy before rebuilding the file around it.
- 02Retained earnings can lift qualifying income far beyond what a T4 alone shows. Here the gap was the difference between a 125.5% GDS and a 36.9% one.
- 03A repeat buyer loses first-time-buyer transfer-tax relief. This borrower's first purchase may have benefited from an exemption; the second purchase owes the full BC Property Transfer Tax.
- 04Consistent documentation across files builds underwriter confidence. Reusing the same calculation method and letter format the first approval used gave this file a smoother path than starting from a new methodology would have.
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.
- ▸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.
- ▸Property Transfer Tax Act, RSBC 1996, c. 378, ss. 3(1) and 3.01(4) — BC's property transfer tax: 1% / 2% / 3% marginal brackets.
- ▸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:
- ▸retained-earnings gross-up treatment — each lender sets its own gross-up methodology for retained corporate earnings; this file reused the same lender and approach as the borrower's first purchase.
- ▸5.09% 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.