Add-Backs

Add-backs are income adjustments lenders use in Canadian mortgage underwriting to better reflect a self-employed borrower’s actual, sustainable earning capacity by adding back certain eligible expenses that reduce taxable income but do not reflect ongoing cash outflows.

Add-Backs – Quick Facts

• Commonly used for self-employed and Business-for-Self (BFS) mortgage applications
• Adjust taxable income upward for qualifying non-cash or discretionary expenses
• Help lenders assess sustainable income rather than tax-minimized income
• Subject to lender-specific rules and caps
• Do not guarantee approval or higher borrowing amounts

What Are Add-Backs in Mortgage Underwriting?

In Canadian mortgage underwriting, add-backs allow lenders to restate a borrower’s reported income when tax filings understate actual cash flow. Many self-employed borrowers reduce taxable income through legitimate business expenses. While these strategies lower taxes, they can also make income appear insufficient under standard qualification rules.

Add-backs address this gap by allowing lenders to add back certain expenses to taxable income when those expenses do not represent ongoing cash costs that affect the borrower’s ability to make mortgage payments. The goal is to assess realistic repayment capacity, not to inflate income.

Why Do Add-Backs Matter for Mortgages?

Add-backs matter in mortgages because they can materially affect a self-employed borrower’s qualifying capacity. If add-backs are not used, lenders may rely only on net taxable income. That can understate a business owner’s true earning power, since many use tax strategies that reduce reported income.

By applying add-backs, mortgage lenders can more accurately assess cash-flow sustainability while maintaining prudent risk controls. This approach helps viable self-employed borrowers access mortgage financing without compromising underwriting standards.

Common Types of Add-Backs

Lenders review add-backs carefully and allow only expenses that meet the reasonableness and sustainability tests. Lenders allowing add-backs may not consider all expenses eligible. Each lender applies its own eligibility criteria and may cap the percentage of expenses that qualify.

Non-Cash Expenses: Expenses that reduce taxable income but do not involve actual cash outflows, such as depreciation and amortization.

Discretionary Business Expenses: Owner-controlled expenses that may not be required for ongoing operations, such as a portion of vehicle expenses, meals, travel, or entertainment, when supported by documentation.

One-Time or Non-Recurring Expenses: Extraordinary costs that do not reflect normal business operations, such as legal settlements or exceptional professional fees, when clearly isolated and documented.

How Lenders Apply Add-Backs in Practice

Add-backs follow a structured underwriting review rather than an automatic adjustment.

Step 1: Review personal and business tax filings.

Lenders analyze T1 Generals, Notices of Assessment, and, where applicable, corporate financial statements to identify reported income and expenses.

Step 2: Identify eligible expenses.

The underwriter determines which expenses qualify as add-backs based on lender policy, sustainability, and reasonability.

Step 3: Apply income normalization.

The lender adds back approved expenses to net income and may average income over 2 years to smooth volatility.

Step 4: Assess affordability using normalized income.

The lender calculates debt service ratios using the adjusted income, along with liabilities, downpayment, and property details.

Example Add-Back Calculation

A self-employed borrower reports $80,000 in net taxable income and claims $20,000 in depreciation and discretionary vehicle expenses.

• Reported taxable income: $80,000
• Eligible add-backs: $15,000
• Normalized qualifying income: $95,000

The lender uses $95,000, not $80,000, to assess mortgage affordability, subject to all other underwriting criteria.

Add-Backs Versus Stated Income

Add-backs rely on documented financial statements and tax filings. Stated-income programs rely on reasonability assessments with limited documentation. Add-backs apply within fully documented Business-for-Self (BFS) underwriting guidelines, while stated-income programs operate under different risk frameworks.

Common Mistakes and Misunderstandings About Add-Backs

• Assuming all business expenses qualify as add-backs
• Believing add-backs guarantee approval or higher loan amounts
• Confusing add-backs with income inflation
• Ignoring lender-specific caps and restrictions
• Assuming add-backs eliminate the need for strong credit and downpayment

Frequently Asked Questions (FAQ) About Add-Backs

Related Terms

• Business-for-Self (BFS) Mortgage
• Stated Income
• Underwriting
• Debt Service Ratios
• Self-Employed Mortgage