Small businesses, defined as businesses with fewer than 500 employees make up a big part of Canada’s
economy. Many of these small businesses are CCPCs. Small businesses need to be agile and responsive
to changing local and international economic conditions to survive and thrive. The pandemic related
employment shrinkages mostly affected small businesses. Now, as Canadians try to move forward, CRA
is also moving forward with many audit letters.
CRA Audits – Documents Required
In the past month, many CCPCs have received a letter from the CRA to review expenses deducted during
the 2019 fiscal year. Unlike some other past audit expeditions, this current wave of audit letters is not limited to auto or meal expense only. It appears that any material operating expense is being reviewed
including advertising or travel to name some examples.
Regardless of the expense item being reviewed, the required documentations are generally the same.
The most important one is a detailed listing of the transactions with a total that agrees to the amount
deducted on the corporate tax return. If this report is not available, the review could turn into a drawn
out process. Worse, CRA could expand its review scope. If a taxpayer confesses to the CRA that this
report is not readily available or the one available does not agree to the reported amount, this indicates
that the taxpayer’s books are not in order which is an automatic review scope expansion.
CRA Audit – Proof of Payment
The next document CRA asks for is of course the receipts to show proof of payment. Generally, only the
top 10 biggest line items need to be supported with a receipt. Also, an explanation of why the expense
was incurred. Hence, a meal with a vendor or a trip overseas to meet a client need to be explained. Of
course, if relevant, logs for driving or travel would also be requested by the CRA as well.
Other factors to note is the visa receipt without an actual invoice is generally not accepted by the CRA.
Many CCPCs have one individual shareholder only or one family group owing all the shares. Proof of
payment for goods and services need to be in the name of the corporation. If a shareholder paid for it, a
proper expense reimbursement documentation should be prepared. An invoice billed to the
shareholder and paid out of corporate funds could also be denied by the CRA.
CRA Audits – Prevention Measures
In summary, small businesses are busy navigating the complex and fast changing business landscape and proper documentation for a CRA audit may be lacking. It is always a good practice to have the following:
- a proper accounting system
- dedicated credit card for the business only
- ensure all expenses, particularly the big ticket items are billed to the corporation
- keep logs for meals, driving, travel, phone calls, etc.
- invoices billed to the actual corporate taxpayer
If these documents are not available during a review, the taxpayer may consider involving the professional accountant to assist with the review to ensure the scope does not expand.
Best of luck.