Doing business in Canada means filing a lot of information with the CRA. Sometimes you will be called upon to prove your claims with records and supporting documentation. Keep the stress down and make life a lot easier by understanding what the CRA will look for and by keeping accurate records.
What the CRA is looking for are the details that prove what you own, what you owe, and that you’re not trying to shirk tax responsibilities.
It doesn’t matter if you use a good ol’ fashioned ledger book, an excel spreadsheet, or accounting software to track your spending and income. As long as you have the “supporting documents” to back up your records, the CRA will be happy.
Supporting documents can be anything from receipts and sales invoices, to work orders, delivery slips or even emails.
Responsible Record Keeping
How you record business transactions are up to you, but the CRA does have expectations for quality, accessibility and communication about your records.
First of all, everything has to be stored at your place of business, although you can get permission to store records somewhere else. You have to keep records for at least six years. There are situations when you might be having to keep records longer. Here’s a list of those situations.
Make sure your records are protected. You can hire a third party protector, but let the CRA know who it is. In fact, it’s your responsibility to communicate any third party changes that involve your records. An example would be if you’ve been bought out by a larger corporation and they take responsibility for recording business transactions.
When the CRA comes knocking, you’re obliged to be as accommodating as possible. Make your records available. Be there, or have an employee or third party record keeper be available to the CRA agent. Allow the agent to make copies (or make copies yourself) when needed.
Records have to be readable, reliable, and complete. It shouldn’t be a problem to calculate your taxes owing or credits from your records. There are many formats that the CRA will accept, but all of it should be supported by documentation.
You might use software to record the majority of your transactions. That’s OK. Make sure your system is accessible to the CRA and that all of your entries are backed up, preferably in a non-electronic form. You can even encrypt your files, as along as the CRA can easily decrypt them.
Recording HST Collections and Expenses
If your business has to charge HST, then you are responsible for keeping track of what you charge and how much HST you’ve paid on expenses so you can calculate your payment or refund.
Your records should be complete and detailed enough to figure out if HST applies to each transaction. If the CRA ever has questions about your HST returns, it should be easy to recalculate any return from the last 6 years at least. Supporting documentation for HST returns includes sales invoices or receipts for Input Tax Credits.
It must be noted that any claims for Input Tax Credits must be backed up by original vendor receipts that clearly indicate the vendor’s GST/HST registration number. A common error would be to only retain a credit card authorization slip without the detailed original invoice. Further, it must be emphasised that bank and credit card statements are NOT adequate proof of purchase for HST purposes.
Recording Payroll Deductions
Payroll can be a nightmare without proper record keeping. When you have employees, you’re in charge of tracking and withholding deductions, then sending those contributions to the CRA.
For each employee, you’ll want to record their hours worked, the amounts you withheld for CPP, EI and income Tax, and the TD1 Form that they’ve filled out.
Keep any letters of authority from the CRA that let you reduce deductions for specific employees, as well as all information slips your organization may need to issue and any registered pension information.
NOTE: Different types of organizations, like corporations or trusts, have other records to keep that are unique to their business structure. Here’s more information on what’s required.
Easy to Track Audit Trails
Every business transaction creates a trail that should be traceable from the end to the beginning without interference.
Audit trails are recreated from supporting documents and summarized financial accounts. Anything from stock inventories and receipts, to emails and day-end printouts can be used to map out any transaction. Having business systems that make it easy to follow each transaction helps the CRA confirm that you’re honest in your filings.
Audits will come randomly most of the time however it is evident that certain audits are triggered by specific events. You will have a bit of warning, but that’s usually just a courtesy so you know when to make time for the CRA agent.
You want to have all your records kept in an easy to understand, protected system. When you get the call or letter that you will be audited, all you have to do is get the appropriate files together, or make them available to the agent in proper formats.
Scrambling around last minute to collect scattered records will only make the process more stressful for you and the agent.
If your records are overwhelming and unorganized, give us a call. We know what’s required of you by the CRA and how to organize your records to fit your business structure. We will help you set up easy to use systems to make sure you never get stressed out by chaotic records again.