The past year, I have noticed quite a few more requests from CRA to review medical expenses, donation receipts, and HST returns filed.
The best thing for a business owner being audited is that they have been honest with their tax affairs. The second best thing is for the business owner to have a competent professional Vancouver accountant to assist them through the process. If the records are complete and accurate and the professional accountant has experience dealing with CRA, then the audit is just an exercise in providing CRA with financial records to support the filings under question. An initial audit request from CRA is usually a request to see receipts for a filed item – for example medical receipts, donation receipts or vendor invoices to support an HST refund.
Most taxpayers are honest and willingly pay their share of taxes. However, even they can experience some of their expenses being denied during an audit due to poor documentation. It is important that taxpayers know which expenses are deductible and the documentation requirement to successfully write off an expense item should an audit occur down the road.
Business owners need to know the following to successfully navigate a CRA audit:
• An expense must be incurred for the purpose of generating business income for it to be deductible. For example, the cost of the nanny is not a deductible expense.
• Big ticket items such as car or computer are not an expense. These are assets that are depreciated over many years. So expensing a computer will be disallowed by CRA.
• An original invoice is required for all cash outlays of a business. In other words, a visa receipt or a cancelled cheque is not adequate to support an expense.
• In order for auto mileage to be deductible, a mileage log which includes date, distance travelled, destination, and purpose of trip is required.
• In order to meals and entertainment to be deductible, the name of your guest and the purpose of the meeting are required.
• Business related travel must be supported by a purpose, participants, and relevance to the business.
• Computers purchased must be for use in the business, not by your college son.
• The home office area of your home is a dedicated work area and not used for personal purpose at all.
Above are the most common reasons an expense is disallowed for Canadian small business owner. Do not become complacent just because you have never been selected for an audit. It can be costly.
Remember to work with a Vancouver Chartered Accountant that has many years of experience in tax and in dealing with CRA if an audit does occur. This will save you anxiety and money in the long run.
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