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Tax Return Record Keeping

Published: 13 July 2006

A client recently endured the dreaded tax audit and the outcome was unpleasant as payments to the Canada Revenue Agency had to be made. The reason he “lost” was due to poor record keeping. When you prepare your tax return, be you an employee, an investor or self-employed, the most important thing is to make sure you have proper records and back-up for the items you are deducting from your tax return.

As an employee, you may be eligible to deduct certain expenses like automobile costs. The Canada Revenue Agency will not ask you how much did you spend on automobile gas in July versus February, but rather, if the amount claimed for gas was $1,234.56 they want to see the receipts that make up that total. Hence the use of a hand held calculator should be avoided and a calculator with a tape should be used instead. Once the tape of all the same type of expense is made, put the receipts and the tape in an envelope, write the total from the tape on the outside of the envelope along with the description of the expense category, ie automobile gas $1,234.56 and then file all the receipt envelopes in one big envelope and keep it with your copy of the return.

By taking the above steps, when an auditor comes to call and says, let me see the receipts that support your claim for automobile expenses of $3,456.78, you can give them the envelope for automobile gas, insurance, repairs and maintenance etc that, when combined, will give them the amount claimed.

As an investor, the same procedures should be followed when you make a claim for rental expenses, investment carrying charges or other investment related costs.

As a self-employed person, whether you are reporting income from a proprietorship or a partnership, again the tax department does not want to know how much you spent on office supplies for the month of April versus October, but rather how did you get to the total that you reported on your income tax return. If you use an accountant to assist you with the preparation of your return, you are either providing him or her with the totals by category or the original receipts that are then again tallied to get the totals on the tax return. Knowing how the totals are derived is very important so if you see a number on your tax return, make sure it makes sense and you understand when it comes from.

A new client recently came to me because the tax department was making enquiries about some prior year’s returns and when he looked at them he did not understand how the accountant came up with the amounts on his return as the records he gave him showed very different numbers. After much hassle, it was found that an unlicensed “accountant” had prepared the return, had not kept proper records nor given summaries back to the client and accordingly, the tax department made adjustments to the returns filed. $5,000 in back taxes, penalties and interest later, the client had learned the hard lesson of making sure you know what you sign when you file your return and now knows that one has to look at your return and understand it before the return is filed. In this case, had he done so, he might have noticed that $17,000 in advertising costs with only $20,000 in income was probably an error or at least warranted further questioning.

In the above case, the client may have been able to recover some of his costs from the person who prepared the return, but his would have involved a lawsuit, more of his time and energy, which just wasn’t worth it to him. As a professional accountant I feel very sorry that this person had this bad experience with his tax preparer and can only stress that you all ensure you hire an accountant with experience and credentials to prepare your tax returns. After all, the preparer will not pay the taxman when he calls, but you will!

About the Author

This article was written by Gabrielle Loren -- a partner with Loren & Company, CGA's located in North Vancouver, BC and can be reached at gabrielle@loren.bc.ca, at 604-904-3807 or check out their website at www.loren.bc.ca

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