COVID-19 RESPONSE: The health and well being of our employees, clients and community remain our top priority. We are working remotely and remain open for business. Read how we’ve adapted to the current situation. Learn More

Some recent Tax Court of Canada rulings serve as a reminder of the importance of maintaining adequate books and records when it comes to your business.  These rulings may seem onerous and sometimes arbitrary, but they are a reminder that the onus is on the taxpayer to substantiate their position and not the Canada Revenue Agency (CRA).

Some examples of these rulings:

  •  The CRA had assessed a taxpayer for $90,000 in unreported income relating to various deposits made to his bank account.  The taxpayer maintained that these amounts were actually loans from his father.  The court ruled that there was insufficient reliable documentation regarding the loans, and therefore the original CRA assessment was maintained
  • The CRA had disallowed business expenses claimed by the taxpayer relating to meals and entertainment, automobile use and travel since the taxpayer was unable to substantiate that these expenses were for business rather than personal use.  The court agreed that although receipts did exist, there was not adequate evidence to substantiate business use.
  • A taxpayer appealed a ruling that had denied several hundred thousand dollars of expenses.  The taxpayer claimed that the supporting documents had been destroyed in a flood, and he could not be held responsible.  The appeal was denied.

Now while it is true that in many of these cases, the credibility of the taxpayer’s claim may have also played a factor in addition to their inability to produce documentation, the truth is that the lack of documentation to begin with undermines their credibility.

According to the CRA’s website, these are the requirements that all records must satisfy:

  1. they must be reliable and complete
  2. they must include all information required to support your tax return
  3. they must be supported by documents

 

How would these requirements relate to the tax court rulings mentioned above?

1.   Be certain that you can substantiate any significant deposits to your bank account:

If the CRA for any reason doubts the reliability of your accounting records, one of the first things they are likely to do is request copies of your bank statements.  Under this scenario, any deposits that you cannot substantiate, are susceptible to being assessed as income.  Avoid at all costs making large cash deposits to your account that are not being declared as income as it is very difficult to provide evidence that would stand up in court relating to these amounts.  This advice applies to personal as well as business accounts.

2.   Provide clear documentation of what expenses are for:

Meals and entertainment expense is a favorite audit area for the CRA.  They have had significant success challenging these expenses, since few businesses follow the basic rules regarding substantiation of these deductions, which would include indicating the following on each receipt:

  • who attended the event
  • contact details of attendees if not otherwise readily available
  • the business reason for the event

3.   Ensure your documents are safely stored:

You are responsible for the safety of your accounting records – even when you entrust them to a third party.  The CRA will usually be lenient when it come to documents destroyed by disaster as long as you have taken reasonable measures to safeguard them and they believe your figures are credible.   If you don’t meet both of these conditions, you are giving the CRA carte blanche to throw the book at you.  I would suggest that electronic storage of all financial documents (with remote backup) will soon be standard, and should be seriously considered by any business looking to upgrade their document storage.  There are several online services that can help you achieve this at reasonable rates.