The Importance of Record-Keeping for Tax Purposes

written on behalf of Feigenbaum Law

As the calendar year draws to a close, many business owners are preparing to begin the process of filing their taxes. Since the outbreak of COVID-19, there has been an increase in the number of people working from home. This can lead to a greater need to organize receipts to show which expenses can be classified as business expenses and which are personal.

A recent decision from the Tax Court of Canada highlights mistakes made when incurring and reporting business expenses. The decision also shows how the failure to provide a detailed accounting can result in increased taxes and litigation.

Canada Revenue Agency challenged taxpayer’s large business expense claim

The case involved issues regarding business expenses claimed by the taxpayer in 2014. During that year, she started a business selling insurance out of her home. Her tax return stated she had business income totalling $62,075 and expenses totalling $60,509. The costs in question include meals and entertainment, salaries and benefits, supplies, and utility bills.

When her tax return was assessed, Canada Revenue Agency (“CRA”) reduced her allowed expenses to just $11,021. Many of the expenses questioned by the CRA are everyday expenses incurred by any business. However, it is critically important to keep proper records of expenses of any size and understand how much of a cost can be categorized as a business expense.

Food and entertainment expenses disqualified for lack of documentation, context

The first type of expense looked at by the court were those related to meals and entertainment. Upon Canada Revenue Agency’s request, the taxpayer provided 104 receipts for food totalling $3,170. Most of these expenses were from fast food restaurants close to where the taxpayer lived.

The issue with the receipts was that none of them had any notes to describe the purpose of the meals, who they were shared with, or their business purposes. The court stated that the taxpayer could have provided this information in another fashion, such as a daily or weekly planner, which would show who she was meeting with on any given day. By the time the trial rolled around, the taxpayer was unable to provide any information about the purpose of the meals. The court held that it could not allow the meal receipts to be claimed without any information from the taxpayer to support their purpose.

Cable TV expenses unrelated to business, other utilities accepted

The taxpayer told the court she worked with a “tax preparer” to provide her tax returns. Some of the expenses recorded on her tax return included $4,600 for “supplies.” The CRA reduced this amount to $41.52. When asked why such a higher amount was submitted, the taxpayer said the person she hired may have “rounded” up some numbers. She also told the court that some receipts had been lost, and some supplies had been paid for in cash without receipts provided. Similarly to her food expenses, the court would not allow any supplies to be claimed that were not supported by proof of purchase.

The taxpayer also included $4,228 for cable television, telephone, and internet expenses. She acknowledged there was no reason to include the $3,046 spent on cable TV but said her cell phone and internet were valid. The court was provided with the taxpayer’s utility bills and allowed her to claim 50% of what she spent on internet service and her phone.

Wages paid to taxpayer’s daughter lacked record of hours worked

The taxpayer told the Canada Revenue Agency that she had paid her teenage daughter a salary of $5,800 throughout 2014. She said her daughter helped her on weekends by cold-calling potential clients and assisting with paperwork. She told the court she paid the daughter $150 to $200 in cash every two weeks. However, there were no records provided that tracked how many hours the taxpayer’s daughter worked. The court also questioned how efficient cold-calling clients on the weekend was as a sales strategy. As the daughter was not called to testify, the court did not allow any salary or wage expenses.

Motor vehicle expenses unsupported by records

The final category of expenses looked at by the court was $27,213 in motor vehicle expenses. The CRA concluded that 25% of the taxpayer’s driving was done for business. While the taxpayer kept a log of when and how far she travelled for work, she did not provide receipts for $7,880 claimed for repairs and maintenance to her vehicles, again stating that some of the work was done for cash. Despite this, she included $1,500 for winter tires purchased from a big box store requiring membership. The court said she should have provided receipts for that purchase.

The final travel-associated cost examined was for lease payments paid by the taxpayer. Unfortunately, she did not provide receipts for these and later told the court the vehicle she said was leased was actually purchased.

The court agreed with the CRA’s assessment of the taxpayer’s travel expenses, allowing her to claim 25% of the costs with supporting documentation.

Contact Feigenbaum Consulting for Business Tax Guidance

Feigenbaum Consulting understands the importance of skilful tax planning for people who own businesses, large or small. Mark Feigenbaum’s unique background in law, tax, and cross-border matters makes him an excellent resource for comprehensive business tax planning. Call our office at 877-275-4792 or reach out online if you need help with tax planning on either side of the Canada-US border. We help businesses that operate in Canada, the United States, and internationally.