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TAXFlash News from IncomeTaxCanada.net
:: Taxpayers obligated to maintain proper books and records to support tax deductions and employment expenses
:: Last week I reviewed the legal obligations of taxpayers to maintain proper books and records. Lo and behold, shortly after writing this article, a court case appeared highlighting the important role books and records can play in situations where taxpayers are required to defend themselves. Unfortunately, as is often the case, it was the poor books and records at issue and not a situation wherein impeccable record-keeping saved the day. The subject case, heard before the Tax Court of Canada, dealt with employment expenses claimed by an individual taxpayer. The individual taxpayer in this case controlled the corporate employer and was, therefore, in a position to “structure” his employment income and conditions of employment more so than, say, an employee at arm’s length from his employer. Judging from the facts of the case, I would hazard to guess that the taxpayer followed the “backward” approach to determining how much tax he should pay. In the case at hand, the taxpayer clearly thought that zero was about the most reasonable amount of tax he should burden himself with – how else could he explain reporting $35,000 of employment income offset by $26,490 of employment expenses? The difference between these two amounts is $8,510 – an amount that is, more or less, equal to the basic personal exemption available to all taxpayers (i.e., the amount all individual taxpayers can earn without paying income tax). Aside from the obvious question of how this guy managed to survive on so little income, the fact his employment expenses offset the lion’s share of his employment income was surely an invitation to audit. And audit CCRA did which is how the whole matter ended up in court. This leads me to rule number one – pigs get fat, hogs get slaughtered. If you’re going to be a hog you better make sure your books and records are impeccable. Wherever employment expenses are claimed the starting point in any investigation is the employee’s conditions of employment as evidenced on Form T2200. This form is a declaration of conditions of employment signed by the employer. Remember, in this case the employee was also the shareholder who controlled the employer so he was the individual required to sign his own declaration. Despite having claimed expenses available to commissioned employees, the taxpayer indicated on his conditions of employment that he was “not paid wholly or partly by commission”. Ouch, not a good start! Rule number two – make sure the records you keep support the filing position you take. The taxpayer trotted out the old “I was confused by the form” defence but the judge wasn’t buying. Much of the taxpayer’s testimony was devoted to proving he kept meticulous records of expenses he incurred fulfilling his employment duties. Such records consisted of receipts (that’s a good start!), VISA vouchers or handwritten notations. The taxpayer also kept what he referred to as “trip ticks” where he listed the costs incurred on his various business trips. Of course one person’s definition of “meticulous” will rarely agree with another person’s understanding of the term and, at times, the gulf can be very wide indeed. The judge in this case described the taxpayer’s expense records as “an ill-organized jumble of handwritten notes, cash register tapes, restaurant receipts, toll authority receipts and VISA drafts”. Relying heavily on your own written notes to support and defend expense claims is not a great idea – after all, if CCRA felt you were Joe Trustworthy, they wouldn’t be auditing you in the first place would they? Auditors are most interested in third-party evidence and not your assertion that everything’s hunky-dory. Rule number three – third-party evidence is worth keeping; the same can’t be said for your chicken scratch on a scrap piece of paper. Still on the subject of third-party evidence, receipts alone may not necessarily be good enough. Turning back to our court case, the judge commented “many of the receipts and vouchers were enigmatic, some indicating nothing more than the fact someone spent money”. Carrying on, the judge stated “any finding with respect to the quantum of the expense of the trips made by the Appellant and the purpose of those trips must rest on a finding that the Appellant’s testimony was true and complete”. Rule number four – purpose matters. Proving you spent money solves only part of the problem, answering the question “why” you spent money is an issue that should not be ignored. This is an issue that often arises where meals and entertainment expenses are concerned. For example, producing a restaurant receipt tells an auditor that you spent money eating out. The bigger question is why such expense should be considered deductible for income tax purposes. Did you and your spouse simply decide to go out for your anniversary dinner or did you dine with a business associate or client? How will the auditor know? True, you can assure the auditor the expense is legitimate after the fact but the smarter course of action is to record notes on your receipts at the time the expense is incurred. Every taxpayer has a right, some say an obligation, to minimize their taxable income by all legitimate means including claiming all eligible expenses. Proper books and records in support of a filing position will speak volumes should the need arise.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney