DO I NEED TO KEEP EVERY RECEIPT FOR MY BOOKKEEPER?
You might not know this, but receipt keeping isn’t for your bookkeeper. It’s for you, and for the CRA. Receipts help you to manage your business and its progress. Records will help you to understand how your business is running, and what changes you need to make to ensure efficiency and maximize your profitability. Receipt and record keeping can teach you the strengths and weaknesses, and ultimately be the breakthrough you need to achieve your business goals. Understanding the ins and outs of your business and being able to pinpoint its strengths and weaknesses will give you the confidence to succeed and do more for your business than you ever could have imagined.
PROOF OF PURCHASE & PROOF OF PAYMENT
You might think that your credit card and bank statements are sufficient for your records, but unfortunately they’re not.
Simply having an expense from a gas station doesn’t necessarily mean that you purchased fuel for your vehicle for your business trip. The CRA needs to see that this purchase was a business expense, and not you purchasing a snack or lottery tickets.
During an audit, the CRA will request to see two things;
First is your proof of purchase, these are your receipts. These include the details of the transaction, the amount, quantity or the value of any money or goods exchanged, the date of the transaction, and a signature of authorization. This helps the CRA to verify that these individual receipts are tied to valid business expenses.
Second is your proof of payment, these are your credit card or bank statements. These show things like your name or your company’s name, and corresponding account numbers. These are third party source documents, and they provide the auditor with verification of the transaction from an outside third party, which helps to curate an excellent audit trail.
In Canada and the United States, neither are considered legitimate business receipts individually, for the purpose of tax deduction. It’s necessary for the auditor to verify your individual receipts with the transactions of your statements, and verify that that the expenses on your statements were for the business by matching with a corresponding itemized receipt.
SUBMITTING RECEIPTS TO YOUR BOOKKEEPER
Dropping off the last 6 months worth of receipts to your bookkeeper in a plastic shopping bag is a sure fire catalyst for your bookkeeper’s next mental breakdown. We understand that receipt and record keeping can seem tedious and unnecessary, even on the best of days, but we’re here to help your business succeed. Help us, help you. So let’s go over the many different ways to store and organize your receipts and statements, to help you succeed in your record keeping in a way that works seamlessly in your day to day.
One of my newer clients came to be after being chosen by CRA for an audit. He was previously with a large accounting firm and under the illusion that this offered him some peace of mind and protection as well as guidance. Unfortunately, paying more with a larger firm does not audit proof you at all. As a matter of fact, smaller bookkeepers and firms value your business more and as such will offer you guidance and advice to keep you out of the magnifying glass of CRA more often than larger firms.
My client's issue, as an owner of a rental property, was Capital versus Current expenses in the eyes of CRA. So how is a building owner supposed to know what to expense as a current expense and what to capitalize under a depreciation schedule? CCA has written another helpful guide (notice that comment dripping in sarcasm?) to show you how to figure it out.
A current expense is one that generally reoccurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.
A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense.
Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. However, an increase in a property's market value because of an expense is not a major factor in deciding whether the expense is capital or current. To decide whether an amount is a current expense or a capital expense, consider your answers to the questions in the following chart.
Criteria for determining if a capital expense or a current expense
Does the expense provide a lasting benefit?
A Capital expense would be: a lasting benefit or advantage. For example, putting vinyl siding on the exterior walls of a wooden property
A Current Expense would be: reoccur after a short period of time. For example, painting the exterior of a wooden house.
Does the expense maintain or improve the property.Generally, they repair and improve a property beyond its original condition. For example, if you replace wooden steps with concrete steps 1 .Generally, they restore a property to its original condition. For example, repairing wooden steps.
Is the expense for a part of the property or for a separate asset?
A Capital Expense would be a new dryer in the laundry room. It's not attached to the building and improves the income source.
A Current Expense is replacing the wiring in the laundry room. It's attached to the building and is only replacing the existing.....now a new panel is a whole new story-That's a Capital Expense.
What is the value of the expense? Here comes the Grey Area from CRA!
A Capital Expense could be a roof repair if the proportion of the expense is very high in comparison to a new roof. (IE: $14,000 on a roof repair vs $40,000 on a new roof)
A Current Expense could be the same roof repair if the amount spent is low in comparison to a new roof. (IE: $4,000 on a roof repair vs $40,000 on a new roof)
and just when you thought you had it all figured out and were allotting expenses into the proper categories.....then came the special circumstances. So you bought an old building, and are renovating it so it's rent worthy? All those expenses which are current expenses - they just became Capital Expenses!
The moral of the story is have a knowledgeable accountant and bookkeeper in your corner that has experience with CCA and rental properties. It could be the difference between a clean audit and a reassessment!
Starting up your new business can be exciting and rewarding. There is nothing better than seeing your dream come to fruition and getting the overwhelming feeling of finally being in charge of your own destiny. Be cautious though, there are many complicated steps and situations that will challenge your sanity, financial freedom and knowledge base in ways that you had never dreamed! Too many start ups fail because of these 6 common issues.
Many small businesses that fail do so because of lack of cash and a failure to plan for the financial drain a new business makes on your personal finances as well. Many small business failures begin with starting out with simply too little money, others fail because the owner simply was too optimistic about profitability and the timelines involved for it. Without adequate cash flow a new business is stymied with marketing and resources and simple slow sales or a downturn in the market can end the business before it has a chance to even gain momentum. Ensure that you have planned to adequately cover your personal expenses for a minimum of 12 months outside of the start up cash you have allotted for your new endeavor including personally making payments on the business financing in case the start up is not capable of covering them.
New business start-ups often make the error of rushing into going to print on advertisements and marketing materials before doing their due diligence. Print marketing and advertising is an extremely expensive venture to make a costly error on. Make sure to do adequate research on your target market, competition, hours, and pricing....you may find the market you thought you would be selling to are not the ones actually buying! Also make sure to get the website up and running and keep it fresh. A website has the potential to give more return if kept fresh and constantly being updated than print marketing will at a much lower cost.
Keeping Work and Home Separate
The stress of starting a new business can be overwhelming on relationships. You don't want to miss that call from a potential client because it could mean that you won't have to drag more money from your savings to cover the business, so you interrupt that romantic meal your spouse had planned. It's okay to step away and still keep your focus on your business. Let your voicemail take that call but make a mental note to ensure you call them back as soon as you can. Taking time for family and friends will enable you to adequately handle the stresses your new business will place on your shoulders.
Going it Alone
Most entrepreneurs is the belief that they can handle all of the start-up’s operations by themselves. It may be a cost-effective way to run the business, but operating the entire business on your own may not be a wise decision or the best use of your time. Many small-business start-ups may not require full-time employees but it's a good idea to have at least two teammates, a lawyer and an accountant, ready to help. With experienced, reliable assistance, you can avoid other common business mistakes. When it is time to hire staff, be careful in your choices. Employees are a crucial component in the success of your business, I like to call them your front line. The employee who does not reflect the values you are trying to achieve can tear down a business much faster than you can build it.
You are the Tax Collector, NOT the Tax Man
So many start ups forget that they are supposed to collect the sales tax from the customers, then remit it to the government agency. When the time comes to file the sales tax reports, they find that they have used that money to fund the day to day operations of the business. The tax man has some pretty far reaching hands and all too often, a start up and the entrepreneur ends up losing assets to the government for failure to remit or even worse, facing a litany of criminal charges. Starting with a good bookkeeper and proper record keeping your start up off on the right foot. Choosing someone with experience and knowledge that you trust is paramount to business building.
Under or Over Pricing
Although you may be competing with the big box stores, you will most likely not be able to price like these stores. The nationwide and international companies obtain products at rock-bottom prices because of the sheer quantity of goods they orders and thanks to exclusive supplier contracts. Pricing your goods and services too low can delay the process of turning a profit. Instead of erring in this way, list fair retail prices, and make sure your start-up excels in customer service. Set yourself apart by raising the bar that your competition serves by. Many consumers are trying to keep their money in their local community so make sure your print advertising reflects "Shop Local" and show your support after a few years by supporting local community organizations and events. You also should have a convenient location and hours.
I received an email this morning through the Efile portal:
Employment expenses review
Each year, the Canada Revenue Agency reviews a number of returns to ensure that taxpayers are entitled to the claims that they have made, and that amounts claimed have been correctly calculated. These reviews are an important part of our compliance activities to maintain the integrity of, and Canadians' confidence in, Canada’s tax system.
In the fall of 2017, the CRA began reviewing a small percentage of individual tax returns when we detected a trend in the normal course of our regular reviews. The review focused on “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. Based on the feedback we received from industry stakeholders in recent weeks, it became clear that there was confusion among taxpayers, who were the subject of these reviews, as to how they should be claiming “other employment expenses”.
The Canadian tax system is based on self-assessment, which is in turn supported by clear guidelines for taxpayers and their representatives. In this case, the Agency agrees with our industry stakeholders that additional consultation and new guidance products are necessary.
Effective immediately, the Agency will stop reviewing and disallowing “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. We will also reverse those reassessments specific to line 229 already issued during the review period September 1, 2017 to February 10, 2018. Specifically, taxpayers who were major shareholder and owners of a corporation and received a letter from the Special Assessment Program of the Canada Revenue Agency dated between September 1, 2017 and February 10, 2018 indicating that they were reviewed for “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return.
Taxpayers involved in these reviews will be contacted by letter to inform them of this decision.
Consultation will be undertaken with stakeholders in the tax professional community to clarify the requirement of employer certification under Subsection 8(10) of the Income Tax Act as it relates to shareholder-employees. It is expected that clarification will be issued to take effect in the 2019 tax year.
The Agency will issue guidance products on this issue well in advance of any future reviews to allow taxpayers, and their representatives, reasonable time to adjust to their tax filing requirements.
Please call 1-800-959-8281 for more information.
What this means to the shareholder-employee is that specific guidance will be issued regarding the employment related expenses and how they will apply to that specific situation. CRA will likely take the hit for these self assessed claims and allow them for the taxpayers under review currently from the time period stated, but will clarify the rules going forward for stakeholder-employees regarding the allowable expenses, if any, and non-allowable expenses. This could mean changes to your tax liabilities for the coming and possibly the past tax year, so be sure to follow this blog for further updates. Regular employees, whom are non-stakeholders, are not affected by this bulletin.
As a small business owner, you now feel like you have the control to be successful. Many small businesses fail not because of a bad idea or mismanagement, but rather they get themselves into hot water with Canada Revenue Agency and then do not have the funds or the knowledge to dig their way out.
You may be tempted to write off 100% of your vehicle costs or deduct that family vacation under travel costs for your business, but CRA is always watching and analyzing business trends, costs and profitability. Don't expect CRA to ignore the fact that you are living in a $650,000.00 house but only showing $30,000 in annual income. That is you, the small business owner, waving your wings at CRA is begging for an audit.
A construction company centered in the Ottawa Valley would be hard pressed to justify a Jamaican holiday for two adults and two children for a week. It's not enough to say "I worked while I was there," just ask the many that have tried. A reversal of a deduction on your income tax forms will almost always trigger an HST audit, which is often more in depth AND more costly and that is because CRA knows if you wrote it off in your business expenses, you probably also deducted the Input Tax Credit from your HST filing as well.
So now you ask yourself, how can I stay out of the auditors magnifying glass. The best business practice is to be honest. Don't try and write off your entire basement square footage, when all you use is the 8 x 8 room in the corner. If you only use your car occasionally for business, keep good records including mileage/purpose/people records to justify the expenses you do write off. When in doubt, ask a professional if the expense would survive an audit. Most importantly, keep good records! 7 year cycling out of records is the best practice. When CRA comes calling, you will be ready with proper record keeping and be able to answer all their questions and requests expeditiously.
Michelle Gibson, Author
Spending much of the last 35 years in business accounting and management, I have once again taken the entrepreneurial leap. My focus is on small business, especially start ups and has the direction and tenacity to teach newcomers to the business world how not to make mistakes.
After over 30 years in business management roles, I want to help other businesses grow and succeed. If I can keep one small business from making common mistakes, I will have helped them immensely!