A bookkeeping system, such as QuickBooks, is not the entirety of a business’ books and records. Your bookkeeping needs to be supported by appropriate documentation in order to stand up to a CRA review.

In today’s article, we’ll outline a handful of what constitutes your books and records (we can’t cover everything), what appropriate documentation is to support your bookkeeping records, and what can happen if you don’t have appropriate books and records.

What are Books & Records?

Books and records cover all facets of your business. Beyond your bookkeeping system, this can include:

• The Corporate Record Book (see our blogs about this subject for more information)
• Lease agreements
• Loan agreements
• Employment agreements
• Shareholder agreements
• Promissory notes
• Consent documentation
• Contracts
• Invoices, bills, and receipts
• Much, much more…

The complete books and records will be different for each business. Some are all paper, and others are almost entirely electronic.  Most are a blend of the two.

Bookkeeping Documentation

Anyone who has ever worked with a bookkeeper has experienced documentation requests.  These are requests by the bookkeeper for the documentation that supports the transactions.  

Simply informing your bookkeeper about an expense does not qualify as proper documentation—verbal explanations hold no weight with the CRA. Failing to provide the requested documentation can strain the relationship, as nobody appreciates being disregarded.

When you partner with a bookkeeper, a big part of their job is keeping you out of trouble with CRA. To do this effectively, they need appropriate documentation to support the transactions they’re recording. That’s why they make these requests. Please don’t ignore them.

Original Document

If you are selected for a CRA review, the agent will want to see copies of your original documents. In today’s era, that might be an invoice that was emailed to you, a paper copy you were given, or an invoice that was directly connected to your system (if you have such a connection.) It is important to keep the original document for 7 years to be safe.

What’s on an Invoice?

Surprisingly, this is one of the most common problems we see.  Invoices that do not contain all of the information that they’re supposed to contain.

For this article, we’re referring to both your sales invoices that go out to clients and the bills you receive from your vendors.

Documents for expenses should be bills or receipts, not quotes, estimates, or statements.  When CRA reviews books and records, they do not accept quotes, estimates, or statements.  Expenses may be disallowed if a bill or receipt is not available.

An invoice needs to have the following information:

It’s very important to review invoices when you receive them. It is quite common for businesses to accidentally invoice the customer in the individual’s name, not the business’ name. 

For instance, if you receive a bill in your name, have the seller reissue the bill in the business’s name before paying it. It’s always more difficult to have an invoice reissued after the fact.

Checking GST Numbers

It is the business’s responsibility to check the GST numbers on their vendors’ invoices. There is an online site where you can look up GST numbers to ensure that you’re paying tax to a registrant. Collecting GST without being registered is fraud.

Key Expenses

Meals & Entertainment Expenses

Meals & Entertainment expenses occur when you meet with someone about furthering your business goals such as generating revenue or establishing key supplier relationships. CRA Administrative Requirements state receipts must indicate who you met with and the purpose of the meeting. Meals for yourself or your staff are generally considered personal expenses and should be recorded as such.

CRA often chooses to review this category and typically disallows any expense where the person you met with and the reason for the meeting are not listed on the receipt. Further, they may disallow expenses if they feel they are overly aggressive, inappropriate, or unnecessary to further business interests.

Gifts

All Gift receipts must indicate who the gift was given to and have their contact information. A schedule is acceptable if you bulk-purchase items, but it needs to be tracked. CRA especially likes to review and disallow gift cards if there isn’t a good schedule or documentation about whom the gift was given.

Less ethical business people have been known to buy large quantities of gift cards, say they are gifts to the bookkeeper, and then keep them for themselves.

Note that if you’re giving gifts to your team members, there may be a taxable benefit for them that would need to be reflected on their T4. Be sure to speak to a professional about this if you feel it could be an issue for your business.

Vehicle Expenses

All Gas receipts should be related to vehicles owned by the corporation. Gas for personal vehicles is not deductible, but by keeping a mileage log, there can be a chargeback to the corporation.

Often, this chargeback will exceed actual costs and result in a small untaxed repayment to the vehicle owner. Please make sure you keep your mileage log up to date. The mileage log must include:

• The opening odometer reading and ending odometer reading for the year
• The date of travel
• The departure address
• The destination address
• The number of kilometers traveled
• The purpose of the trip

There are some benefits to keeping a paper-based mileage log such as tracking maintenance services. However, if you have trouble maintaining a mileage log on paper, Mile IQ and Everlance are 2 apps that can help with this. If you have the Quickbooks Online app on your phone, it also contains a mileage tracker.

Taxis and Ride-share Programs

Uber, Lyft, and taxi expenses are often flagged by CRA, so you need a good method of indicating when they are personal (to be charged back to shareholders) or for the business. 

It’s a good idea to indicate on the receipts, or on the entry when they go into your accounting system, why the trip should be considered a business expense.

Charitable Donations

Charitable donations result in a tax receipt being provided to the business at the end of the year.  Often, if no tax receipt is received, these can be considered promotional expenses if the business is getting some kind of publicly acknowledged boost or benefit. Lists of Canadian registered charities are available online.

What Happens When…?

I’ll Deal with it if it Happens

We often hear from business owners that they’ll “Take care of the documentation if they get reviewed.” This never turns out well. When you get a review, you get 30 days to respond with the documentation. If you aren’t organized, this can result in a severe disruption to your operations as you go searching for receipts or bills in boxes, filing cabinets, and emails.

Optical Character Recognition Software

We strongly recommend the use of Optical Character Recognition Software (OCR Software) to capture your bills and receipts immediately when you receive them.These are powerful tools that, if you can build the habit, will make your bookkeeping a breeze and help audit-proof your business. They are applications that live on your smartphone and online. You write the pertinent information down on the document and take a picture.

Make sure the picture is clear, and complete the form in the app and submit it. Now, your bookkeeper can have a picture of the original document attached directly to the transaction in your accounting system. A bonus of using this tech is that you don’t have to worry about your receipts fading and becoming illegible.

Possible Penalties or Fines

If an individual is reviewed and found to be improperly claiming ineligible expenses, failing to report revenue, or engaging in other inappropriate practices, the CRA may impose penalties or fines on the business

In severe cases, individuals can face imprisonment for tax evasion. The CRA frequently shares examples of tax evaders who have faced stiff consequences for their actions.

Denied ITCs

The most common way CRA finds businesses aren’t keeping up with documentation is through a GST review. During these reviews, the CRA requests supporting documentation for what you’ve charged customers and for what you’ve paid to vendors. When you file your GST, you have to pay the difference between what you collected in GST and what you paid to vendors.  It’s during these reviews that they can find ways to increase the scope of their examination and dig deeper into the records.

If you’re claiming a GST refund, it’s best to get your documentation in order ahead of time. This can save you time, fees, headaches, and a deeper dive by CRA.

Definitely Interest

When you’re levied a penalty or fine, or when your ITCs are denied, you end up paying interest on the amounts owed.

Non-deductible Expenses

It’s important to note that penalties, fines, and interest levied by CRA are not tax deductible.  This means that you need to pay the expense, but cannot claim it against your income – effectively resulting in the business paying tax on these penalties, fines, or interest.

Paying More Taxes

In the end, failure to appropriately document transactions can result in paying more tax in the form of non-deductible fines, penalties, and interest. Don’t pay more tax than you need to.  Keep your records buttoned down and pay only the amount of tax you deserve to pay.