This article considers the records ...

This article considers the records that should be maintained from some employees, the self-- intrust with an agencyed and small business taxpayers in order to avoid an unnecessary denial of tax deductions owing to inadequate record-keeping. This topic was quicked by recent audit reassessment proposals issued by the agency of Canada Customs & Revenue Agency (CCRA) auditors denying deductions to be paid to a lack of befitting supporting documentation.

Inadequate records could debar a taxpayer's advisor from favorably challenging a proposed reassessment. many times the CCRA auditor denies deductions, deeming them to be personal expenditures, shareholder benefits, or non-deductible costs of a personal services business. smooth though the advisor may be able to exhibit that the Income Tax Act otherwise allows the claimed deduction, he or she may not be able to convince the auditor that reasonable supporting evidence exists.

Taxpayers may provide their accountants with summaries of their employ expenses, their revenue and costs from their self-employment activities, or an electronic file containing the business transactions they or their staff recorded using an accounting software program. repeatedly the accountant may not know what kinds of records the taxpayers maintain until a CCRA auditor asks for them during the course of an audit.

Many clients who are expressed to provide the requested documents answer with confusion:

* "I merely kept my credit card statements, isn't that enough?"

* "But I threw public my invoices after I matched them with the statement."

* Isn't a cancelled cheque sufficient?"

In these situations, a CCRA reassessment proposal may contain make comments [i]or[/i] remarkss similar to the following:

"It is not our policy to accept credit card statements or cancelled cheques for items where an invoice is normally issued."

"In order for us to substantiate costs as claimed, we require costs to be supported by source documents."

* "Actual invoices are required plus information regarding the design of the expense."

What are the recordkeeping requirements?

Section 230 of the Act requires that "every character carrying on business...shall keep records and main division s of account.. in such form and containing of that kind information as will enable the taxes payable... to be determined." Subsection 4 requires that as it is records and books of account be retained for six years after the taxation year (with longer holding periods for about prescribed records). "Record" is defined in Subsection 248(1) from means of an extensive list.

Although the Act doesn't specify what records and works of account Section 230 requires, CCRA stipulates in its Information Circular 78-IOR3 that "records and parts of account have to:

* permit the taxes payable or the taxes or other amounts to be garner uped withheld, or deducted by a living body to be determined; ... and

* be supported according to source documents that verify the information in the records and works of account."

According to CCRA, source documents include "sales invoices, purchase invoices, cash register receipts, formal written contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax replys and general correspondence."

In cases where charges can be of either a business or personal nature, CCRA will entreat an explanation of an expenditure's business senses along with supporting evidence. in the same state [i]or[/i] condition expenditures include travel, entertainment and promotion, and automobile outlays

What constitutes proper documentation?

One suggestion is that the taxpayers in question should maintain the same standard that private companies and the dominion require of their employees for outlay reports. This may include a description of the intention of, and persons participating in, meal and entertainment costs and a description of the business mileage and business intention of automobile trips.

Unfortunately, this means using automobile log or something similar to substantiate the business use of automobiles. It means using diaries to record business lunches, meals, and entertainment, or writing the sense of the event and the names of those attending in succession the credit card slip or invoice. It also means that the supporting records and invoices must be kept for the six-year retention period station out by the Act (note that if the taxpayer is enslave to BC taxes, such as sales tax, the records must be retained until permission to overthrow them is received from the provincial government)

Reminding clients to maintain special records will help them avoid having appropriate tax deductions denied because of insufficient supporting evidence. exact documentation can also prevent a CCRA auditor from assuming that unsupported expenditures are of a personal, rather than business, nature. suitable documentation also ensures both income tax deductibility and worthys and services tax input tax credit eligibility.

How to advise clients? Ensuring that annotations on record-keeping requirements are included in client communications as it is as covering letters for tax answers engagement letters, or requests -for information is a start.