Fall is a popular time for the Canada Revenue Agency (“CRA”) to perform audits on income tax returns and it certainly can be challenging navigating through the requests from the tax auditor. Having a Chartered Professional Accountant there to guide you through the process is definitely an asset and can help you get a favourable outcome. If you are currently being audited it is recommended that you call me or another Chartered Professional Accountant in Burlington.
Record keeping
During the preparation of your tax return, your accountant prepared your tax return with information you provided, but it is likely that he did not ask to see every last receipt. If the CRA is conducting an audit on you or your business, it is likely that they will ask to see support and they may ask for every single receipt or invoice supporting the amount reported. The kind of documentation the CRA can ask for includes sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form, and more. They type of document requested will depend on the number being questioned by the CRA. When in doubt it is always better to keep more support than less.
Recently the CRA has started focusing more on the underground economy. The attention paid to this area of the economy is only going to increase with the advent of HST in Ontario and British Columbia. Due to the increase in sales tax, more and more people may be tempted to “go underground” to help reduce costs. As a result, the CRA is focusing more on invoices and not just payments to support expenses you may deduct. If you hire a sub-contractor to do work for you and you pay him with a cheque but he does not give you an invoice when it comes time to deduct that expense, the CRA can deny that expense. The net effect of this is that you end up paying close to 50% more for the service than you thought you would. To protect yourself from this nasty penalty, make sure you get a valid invoice from your sub-contractor and file a T5018 at the end of each year. If you require assistance with this please contact me at 1-866-721-1817, or email.
The best way to make the audit process as pain-free as possible is to maintain accurate and complete records. To do this, ensure your record keeping system is effective and efficient. Your accountant can help you with this.
As technology advances, people are getting more comfortable maintaining electronic records and that is certainly an option however there are a lot of extra things that should be considered such as backing up the data in a safe off-site location, the future readability of the information and the ability to access it when required. If you are interested in electronic record keeping, please contact me to discuss the benefits and challenges before you begin using an electronic record-keeping method.
Creating a Filing System
You can store the source documentation that supports the amounts reported on your income tax and HST returns developing an effective filing system. Here are some key steps in setting up an effective filing system:
1. Determine how you are going to organize your information.
Some people start a file folder called “Information for Accountant”. This is a very general file mane and may cause difficulties when you are looking for specific items. A better approach is to break down the “Information for Accountant” into smaller chunks. For example, have a folder for Meals and Entertainment Expenses, one for Office Supplies and so on. The advantage to this is that at the end of the period you can add up the items in each folder and provide that information to your accountant so when he asks how much you spent on meals and entertainment in the year you can tell him exactly. If you would like a detailed list of the types of income and expenses your accountant and the CRA will look for please e-mail me and I will get a copy sent off to you as soon as possible.
2. Determine where you are going to file your information
Now that you have decided how to organize your information it is time to decide where you are going to file it, and the best place for it given your filing strategy decided above. Depending on the volume of information you are storing you will have different requirements. Some businesses need entire filing cabinets for each category, other businesses only need a filing box for all their records. Make sure it is big enough to store all your information but small enough to manage.
3. Determine how long you need to keep your neatly filed information.
Under the Income Tax Act records are generally required to be kept for a minimum of six years from the end of the last tax year to which they relate (i.e. 7 years). The tax year is the fiscal period for corporations and the calendar year for all other taxpayers. For the specifics of your situation, contact me to discuss further.
For assistance in the CRA audit process and to help protect yourself in the event of an audit please contact me and I will be glad to help you implement strategies that will ensure a smooth stress free audit if you are ever unfortunate enough to be subject to one.