For the most part, the Canada Revenue Agency knows what Canadians are making. Banks and employers often submit T4s (income from an employer), T4As (income from a pension) and T5s (income from investments) to the CRA right around the time you’re getting your hands on them.
But there’s a whole score of other documents the CRA is willing to take the word of T4-less entrepreneurs, freelancers and small business owners as being filed away somewhere. That is, until you inadvertently raise a red flag or are just plain unfortunate enough to be on the receiving end of a CRA audit.
“Even though it can seem tedious, you’ve got to keep the records… keep everything for six years,” says Rita Zelikman, a Toronto-based chartered accountant. “Especially when you’re self employed and the risk of an audit is there.”
Yahoo Canada Finance sat down with Zelikman to look at the three categories of documents you should never throw out and what to do if the documents get misplaced and the CRA comes knocking.
“Someone who’s self-employed and thinks that everything they spend goes on their credit card and those statements are good enough as supporting documentation is wrong,” says Zelikman. “The CRA actually want to see the receipts.”
Especially for HST audits where freelancers or business owners are claiming the HST they’ve collected versus the HST they’ve paid out – known as Input Tax Credits (ITCs).
“They want to see the HST broken down on different receipts in order to claim the ICTs against the HST that you collect,” she says.
Mind you, that doesn’t mean necessarily mean keeping hard copies. For those averse to stuffing receipts in envelopes or shoeboxes, the CRA has started to accept digital versions over the years.
“There are a whole bunch of different apps now that allow you to take a picture and store that receipt,” she says. “The CRA is not looking for originals, they’re fine with copies and fine with the apps.”
Any third party paperwork that can substantiate payment of items or services for your business should be kept.
“A lot of people tend to throw out bank statements and say: ‘oh, I can just download them,’ ” says Zelikman. “But the downloaded versions don’t have the cheques at the back so you can’t tell who payments were made to.”
This also includes payments for monthly bank statements, work phone bills, Internet services and rent receipts for those who work from home and claim a portion of their rent.
“Label a bunch of envelopes – one for gas, one for receipts, etc… – and at the end of the week put those receipts and paperwork in there,” she says.
Invoices in and out
Self-employed or small business owners who work with contractors, will want to hang on to any invoices for services delivered or received.
“They want proof you’ve paid,” says Zelikman adding that your receipts and business’ bank statements can substantiate that cash flow.
“Another reason they want to see invoices is for the HST component,” she adds. “The CRA won’t let you claim those ITCs unless you’ve got proof that you’ve paid them – that goes back to credit card statements not being good enough because they want to see the actual receipt showing the HST.”
What if you, er… lost them?
“Pray you have a good auditor,” says Zelikan. “I mean legally they’re supposed to deny (your claims), but some are more reasonable than others.”
She says that usually there’s a bit of a negotiation that happens when you’re audited.
“The auditors normally come in, they find everything they can find, they spend their time and then they’ve given you a proposal letter (outlining) what they’ve found and what they propose they’re going to do.”
If you don’t have proof of claims, they charge you the tax and any interest or penalties associated with that.
“It can get expensive,” says Zelikman. “If you’re claiming things that you shouldn’t have claimed sometimes there are gross negligence penalties – punitive type penalties that you pay on top of the tax owed.”
The moral is simple, she says: keep those records for six years.
“You never know when they might turn around and audit you,” says Zelikman. “If they do and you don’t have proof, then you’re out of luck.”
By Andrew Seale
In, Yahoo Finance