How to become audit-proof
Audits can be a terrifying experience with real financial consequences to your business.
There are simple strategies you can follow to ensure your business is protected from audits.
You need a receipt for every expense you claim on your tax return, business and non-business! The CRA has a strict view that they do not accept credit card statements as sufficient documentation for expenses when a receipt is normally issued.
For business-related expenses, the receipt needs to have:
what did you purchase
when was it purchased
who was it purchased from
If you are using the regular method of HST:
HST charged
supplier's HST number
Make sure to get an itemized receipt and the credit card/debit slip
There are still small businesses around that hand out receipts that don’t have anything on them except the date and the dollar amount. When this is the case, immediately write down the relevant information so you do not forget what expense category or who the service/item was purchased from or request a complete receipt from the person or business you purchased it from.
Keep your records for a minimum of six years after the end of the taxation year to which they relate. CRA has the right to audit up to 6 years prior.
Special Considerations
Cost of Goods Sold:
You need to track both your purchases and your year-end inventory. the best audit-proof strategy is to do a year-end inventory count, stating how many of each product you have and their cost.
Remember, you cannot deduct the cost of inventory until you sell it!
Meals & Entertainment:
In order to be full audit proof, write down the name of your client who the meal or entertainment relates to. You should also get both the itemized till receipt and the debit receipt to claim the tip.
Bad Debts:
If you have a client who does not pay, keep any correspondence and the original invoice to prove that they did not pay.
Interest and bank charges:
If you accept credit card payments and pay a processing fee, make sure that you download and save the monthly statement to prove that you did pay these fees.
If you accept credit card payment, the transaction fee is a bank charge, NOT a decrease in income.
If you sell a service for $100 and have a 3% fee, you will have $97 deposited to your account, the correct bookkeeping is $100 sale and $3 bank fee.
Professional fees:
This includes both legal and accounting fees.
Remember to follow the accrual method of accounting, if you pay for your 2021 tax return in 2022 you can still deduct it on your 2021 return.
Your lawyer may take a retainer fee when you first sign, this cannot be deducted until they have actually performed work for you.
Repairs and maintenance:
This deduction specifically relates to your practice space, anything over $500 is a capital asset addition but any purchase less than this threshold amount can be expensed in the year you purchase.
Travel expenses:
You can expense up to 4 trips per year relating to attending conferences or continuing education. Best practice is to group your receipts together for each trip and deduct them as one “expense” for the month it relates to. Remember that meals & entertainment are not a part of travel expenses, they continue to be deducted under the meals & entertainment section at 50%.
Vehicle Expenses:
Make sure to track 100% of your receipts for the year and keep a mileage log.
RESOURCES:
Use this link to book a 1-hour strategy call to learn more about becoming audit-proof and get tailored advice.
