Pay Less Tax: Documentation Tools and Techniques

“Don’t make a mountain out of a molehill” – Unknown

In our last article, we discussed the importance of documentation and what good documentation is. In today’s article, we’ll discuss how to make organizing and recording your documentation easier.

Understand What is Required

The first step to good documentation is to understand what you need. Bookkeepers often get credit card transaction slips that provide no information beyond the date and amount. They don’t know what was bought or why, and they don’t know how much sales tax was charged. A good bookkeeper will not claim any ITC in this situation – it puts you at risk.

GST/HST ITCs

When you file your GST/HST return, you are required to remit to the government the amount of GST/HST you collected, less what you paid out. The credits against what you collect are called ITCs or Internal Tax Credits. When you don’t claim your ITCs correctly, you’re paying more tax than you deserve.

For instance, if you have a bill for $1,130 and there’s HST on it at 13%, by missing the ITC, you’re paying $130 more HST than you need to pay when you file your return. Although this is a very, very basic idea, it’s clear that counting your ITCs correctly will help you pay less tax.

Be sure not to claim ITCs that aren’t on the documentation. Some items don’t have any GST or HST. If CRA reviews your books and finds you’ve been making unsubstantiated claims, they’ll dig deeper, and a review can quickly become an audit.

Pay Attention to What is Received

Make sure your vendors are giving you good documentation. A bill or receipt should ideally be on company letterhead and have the following:

  • The name of the supplier
  • The invoice number (for bills) or transaction number (for receipts)
  • The date of the transaction
  • The Purchase Order (P.O.) number
  • The supplier’s address
  • The ship-to address, if appropriate
  • Their GST/HST number
  • The items purchased
  • The subtotal before tax
  • The sales tax rate and the amount charged
  • The total amount of the bill or receipt

Note that some of these items may vary depending on where you’re making your purchase, your purchasing process, and what you’re buying. For instance, if you’re purchasing a service from overseas, some companies don’t charge the appropriate sales tax. If a sales tax is not broken out on the bill or if the sales tax is not GST/HST, don’t claim it. Similarly, if you aren’t ordering products with a purchase order, there won’t be a purchase order number. It’s essential to make sure that your claims tie to the documentation – that’s what CRA will look at should they review your records.

Did you know many other countries have GST? You can’t claim Australian GST as an ITC in Canada.

If your vendors are not supplying you with the appropriate information, demand it. The best time to request proper documentation is before you pay them. No ticket, no ride. There are governing laws around what must be on an invoice or receipt, and you have the right to appropriate documentation. For further information about what CRA requires, click here.

Do, Delegate, Defer or Dispose

No matter what system you have, treat your documentation with the care it deserves. It is the record of what happened in your business.

When looking at the documentation, you need to interpret your next step. Do you need to do something with it immediately? Or can you deal with it later? Do you need to give it to someone else so they can do something with it? Or can you throw it away?

The best practice to get into is to do something with the paper right away. It could be as simple as snapping a photo with an app or putting the document in an accordion file to be filed with your other paper records. As a tech-savvy firm, we advocate using an app.

With paper, sometimes the document must be given to an admin assistant or the accounting department so it can be appropriately recorded and filed. Make sure to keep these records for seven years after the taxes are filed for that year. If your taxes are late, keep the records longer.

Some items you receive can be disposed of immediately. Sometimes, a bill is accompanied by marketing materials such as brochures or coupons. It’s up to you what you do with those promotional items, but they aren’t required for your bookkeeping.

Techniques that Can Help

The best thing you can do is implement a system. All systems should be on a regular, cyclical basis. We prefer monthly at the minimum, but quarterly is an option if you don’t care about real-time information. Ideally, you should have up-to-date information to make your business decisions. It doesn’t help to find out about a financial problem months or years after it happened – it’s too late to do anything about it.

Some systems we’ve seen include the following:

An Accordian File

This is a standard tool for small business owners just starting. Essentially, you keep an accordian file with you, and when you get a bill or receipt, you put it in the file. Then, you regularly input those receipts into your accounting system. If you maintain a regular cycle, this works and isn’t too bad. But, if you let it build up all year, it’s not a system; it’s a shoebox.

Wallet It

Many entrepreneurs put their receipts in their wallets and then deal with them when they get home. This can work for a little while at the beginning – as long as you deal with them – but it isn’t a scalable system. Also, if you leave the receipts too long, they can fade and become illegible. Also, the more receipts you get, the thicker your wallet gets.

Don’t throw your receipts on your dashboard. It’s almost sure something will get lost, and the printing will fade.

Use an App

This is what savvy entrepreneurs do, people who are serious about business. They use an Optical Character Recognition app that allows them to write notes on the document, take a picture, and either deal with it later, create rules so it can be automatically dealt with, or leave it to another team member or their bookkeeper to make sure everything is recorded appropriately. These apps usually come with an inbound email address option, so if you get a bill via email, you forward it to the App. You don’t need to print the paper just to put it in a drawer.

Did you know that CRA’s original documentation rule might mean an email is your original documentation?

Popular file keeping system

Tech Tools That Can Help

Optical Character Recognition is a fantastic technology that can read the items you submit and, sometimes, put them right into your accounting ecosystem. When selecting an app, please read the reviews, make sure it does what you need it to do, and make sure it integrates with your accounting system. It’s often a good idea to seek professional advice. Using a receipt capture app will save hundreds of hours a year and help keep your overall costs down.

Don’t necessarily go for the cheapest option. As in most things, you get what you pay for, and you want convenience, not a situation where you have to do a bunch of workarounds because the tool doesn’t work the way you need it to.

Our firm uses DEXT, a UK-based company known initially as Receipt Bank. We’ve been with them since the early years of KATA, and they’ve continually improved. DEXT has different service levels and can provide detailed information, even dealing with multiple currencies and returns.

Many of our customers prefer Hubdoc or QBO Receipt Capture (QBO is QuickBooks Online). These are much simpler tools that are good for businesses that operate in single currencies and prefer a slightly lower price point.

Some of our colleagues prefer Autoentry. This platform uses a credit-based system and can scale with your business up or down.

Regardless of what OCR technology you choose, leveraging the technology well can save you hundreds of hours and thousands of dollars. If you work your system right, these apps can help you become “Audit proof.”

What our Customers Tell Us

Lianne Krane, Entrepreneur

“It takes hours to go over questions and wrack your brain trying to figure out what happened months ago and where the documents are. Training yourself to get into the habit of taking a picture of the receipt or bill and uploading it to your software immediately only takes a few seconds, but it saves you hours of trying to figure it out after the fact.”

Dave Cook, Co-founder

“Keeping things organized and entering documentation as soon as possible gives peace of mind that I know where our business is financially. It helps me have confidence in our cash flow for the coming weeks and helps me ensure that all expenses are invoiced to the customer appropriately. It also helps me know, week to week, where projects are at, and adjust to ensure projects are delivered on time and budget.”

Akeem Gardner, CEO of Canurta Inc.

“It truly starts with the training I received from my accountants. The system set up for us and the importance of having and working with a good system has been the best teacher. And then, the real-world experience of our early days made it easy to understand that it’s way less stressful to stay on top of things than not. It makes me happy because I know when we get to year-end, there will be very little to clean up, and it makes me confident because I know any lender, investor or another party who requests information will find good books and records.”

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