One of the Canada Revenue Agency’s (CRA) best decisions a couple of years ago was to get rid of combined tax audits, in which they would examine a taxpayer’s compliance with Income Tax, Payroll Tax and HST all at the same time. These audits were a nightmare for business owners, and had little impact on the CRA’s goal to collect additional tax revenues. What the CRA found was that in effect, the risk of tax non-compliance was generally focused in one area of taxation, depending on the type of business. What does this mean for incorporated small business owners? For the most part, a much greater emphasis by the CRA on HST audits, and relatively little activity in income tax audits.
Compared to income tax audits, HST audits are very document driven. Many clients will tell me; Let them audit – I have nothing to hide! Unfortunately, with HST audits it has much more to do with what you have to show rather than what you may or may not be hiding. In income tax audits, quite often where evidence is lacking an expense may still be allowed based on it being reasonable under the circumstances. This concept simply does not exist in HST audits. And don’t think you will get lucky and the auditor will miss any of these – the CRA’s auditors are well aware that these are among the biggest areas of non-compliance, so they will be the first items they look for.
So without further ado, her is my list of the top 5 issues that get small business owners in trouble on HST audits:
1. The supplier invoice is not made out to the correct name:
For Income Tax, if you can reasonably show that the business taking the expense deduction is the beneficiary of the goods or services in question, more often than not the CRA will allow you an expense deduction – not so for HST. I have seen countless cases where invoices have been made out to a sister corporation, to a predecessor corporation or to the shareholder’s personal name – all getting refused for HST credits. Make sure that any invoice paid by your business is properly made out! If the supplier gives you any pushback, tell them your accountant said not to pay any invoices that were not made out to the proper name.
2. Expenses being posted from credit card statements:
This is a very common problem – especially with companies that pay out a lot of expenses on a salesperson’s or shareholder’s credit card. Credit card statements alone (even for corporate cards) are not considered valid receipts by the CRA. If you can’t come up with the original receipts for all of these expenses, then 100% of the HST ITC’s will be denied.
3. No HST number given on invoice:
Many smaller suppliers are not aware of the information that must be included on an invoice. Make sure that any vendor you buy from that is charging you HST has their HST number printed clearly on their invoice. Other information that must be included on the invoice is the vendor’s name, the invoice date, the total amount, and the HST rate being charged.
4. HST credit on meals and entertainment taken at 100%:
The same rules apply to HST as apply to income tax with respect to meals and entertainment – only 50% of the HST charged is allowed as a credit. This can be done as a year-end adjustment, however since the calculation is relatively easy to set up in most accounting software, it is better to properly account for it at each filing period. Also keep in mind that for meals and entertainment expenses, you are required to note on the invoice the names of people in attendance, and the reason for the expense.
5. HST credit taken at 100% on expenses that have a personal component:
The most common culprits here are automobile and cell phone expenses. Typically these are entered into the books of the company at 100%, and while a proration may be made at year-end for income tax purposes for the personal use portion, often the required adjustment for HST is missed.