Tips on Audit Proofing your Business Part 5

I cannot stress how important notes are when it comes to your source documents and bookkeeping, this is why I’ve mentioned it a few times in this blog series.  Because audits always happen years after the fact of the transactions, you must be able to go back in history and know exactly what happened.  So if you are not on top of your paperwork regularly (daily-weekly-monthly) you should not expect things to go well if you are audited.  At the end of each day, look at your receipts and make notes on them.  Make notes in your bookkeeping, or for your accountant to do the bookkeeping.  The more notes the better.  For example if you are claiming meals and entertainment expenses then ensure you note who you took out for the meals and entertainment or your claim will most likely be denied in an audit.

For claiming home office expense, ensure to have proof of your office/business usage and the square footage that proves the percentage of expenses.  This is something that CRA looks at frequently in audits.  For example if you have a house that is 2000 square feet and you are using 200 square feet for business purpose, then you can deduct 10% of your home overhead costs.  These costs include rent or mortgage interest, insurance, property tax, utilities and other over head costs.  Ensure you can prove this in the case of an audit.

One more tip for you at this time, it is best not to pay for business expenses with cash as cash is not very traceable.  If you lose the receipt you don’t have any statement or anything else to back the claim. 

Typically in most audit situations the CRA auditor will reassess whatever they can and the onus is on you to substantiate your claim.  Many claims by CRA may not be correct, however it is up to you to appeal if you don’t agree.  If you are reassessed you have 90 days from the date of that reassessment to file a Notice of Objection (appeal).  If the appeal doesn’t go in your favor and they still disregard your claim, you can appeal further to the tax court within 90 days of their denial of your Notice of Objection.

As we now wrap up this blog series you can see that there is a lot to think about in the case of an audit.  Be detailed and be able to prove everything.  If you have questions or concerns in regards to any of my blogs, please don’t hesitate to contact me.

Tips on Audit Proofing your Business Part 4

We are now getting close to wrapping up this series and you can see the theme is “be able to prove every expenditure and deposit”  The fact of the matter is that if you can’t prove expenses or deposits, CRA can just deem what they want whether it is true or not!  So you must always keep good back up documentation for every transaction, not just statements but receipts as well!  Keep a good record of all deposits, using a deposit book as well!

In my last blog we began to talk about Employee vs. subcontractors.  Employees must go on payroll and T4’s must be issued for employees.  Subcontractors do not go on the payroll, however a T4A should be filed at the end of the year (due the following February) stating how much was paid to the subcontractor.  

Let’s look a little closer at payroll.  Getting in trouble with payroll can close your business down.  The penalties and interest on late payroll remitting can cripple a business as the rates are so high!  To ensure you stay out of payroll trouble you can simply not have any employees, just subcontractors, or if you do have employees then ensure you always have accurate payroll remittance numbers and make your remittance on time!  You can use the Software produced by CRA, go on their website, or use approved accounting software to calculate your payroll remittances.  Payroll remittances are made on the 15^th of the following month.  So for example September’s payroll remittance is made on the 15^th of October, unless you have other arrangements in writing with CRA.

Subcontractors will remit their own taxes as they have their own business just like you do.  As mentioned they should have a Corporation with a GST number and they should invoice you in exchange for payment.  The invoice is your source document for proof in case you get audited.  In my last blog we listed the main factors CRA looks at to ensure that you have hired a real subcontractor and they are not an employee under the guise of a subcontractor.  If you want to hire and you don’t want employees due to the extra headaches and costs, then speak to us.  Even if it doesn’t look like the subcontractor can meet the criteria, we can help you set things up to ensure they are legitimate contractors.  Go to www.jobworksinc.ca for more info.

Tips on Audit Proofing your Business Part 3

We’ve been discussing some great tips on helping audit proof your business.  In reality the majority of businesses in Canada get audited at some point, unless they are short term in nature. Even the short term businesses do sometimes get audited.  So the key is to not hope for an audit, but be prepared in the case you do get audited!

Being prepared for an audit means that you can prove all your transactions with back up documentation and that all flow of funds have good paper trail.  One of the things that CRA almost always looks at in an audit is to confirm deposits going into the Company are either reported as income or elsewhere.  If the deposits into the corporation do not match the income reported, you will have to prove where the other deposits came from.  If you cannot prove where these deposits came from CRA may just deem it as income to the company.  An example of this is shareholder loans.  If you loan funds to your company, keep a good paper trail for proof of the transaction(s).

Another major area that CRA audits is the Shareholder Loan Accounts of corporations.  This is the account that has both incoming and outgoing funds.  Every time you, as a shareholder or director, put funds into the Corporation this shows up in the shareholder loan account.  Every time you pull funds out of the corporation this typically shows up in the shareholder account, until the Corporation’s year end where it may be cleared to dividends, wages etc.  If you cannot document that the payments to you are payments of shareholder loan then CRA could deem it as personal income to you the shareholder.  This is especially the case if they find the shareholder balance to be negative, meaning that you owe the corporation.  You are typically not allowed to owe the corporation any funds for more than 6 months.  In the past many people have set up loans from their corps with interest which used to stand up, but today CRA will just deem it as income to the shareholder or director! 

Tips on Audit Proofing your Business Part 2

The next tip for business owners is to ensure the business pays for its own expenses and the owners pay for there own expenses. As soon as you cross that line it is up to CRA scrutiny as to what happened. Instead of paying for expenses for your company, simply write a cheque to the company and let the company pay its own expenses. Same thing on the other side, don’t let the company pay for the owner’s personal expenses.

The next tip is to always make notes on your transactions. This is imperative as audits always happen years after the fiscal year(s) being audited. For example you may get audited in 2012 for the year 2009 and if they find things in 2009 they may go back further and audit years prior to 2009. For many people it is hard to remember what happened a couple months ago, never mind years ago. Notes in your bookkeeping and on source documents always help. Better to make a note and not use it, instead of not having a note when you need it.

Another tip is to ensure that vehicles are owned and expensed by the correct entity. If you are a shareholder of the corporation and you own a vehicle that is used for the business then you should not just have the corporation pay for your vehicle expenses. If you own the vehicle personally then you should track your mileage used for business and have the company reimburse you based on that mileage.(Currently acceptable: 52cents per km for the first 5,000 km and 45 cents thereafter) The reimbursement is an expense for the company, but not income to you. If you do it any other way an audit could cause you reassessment for personal use of vehicle expenses or the denial of company vehicle expenses.

In the case where the corporation owns the vehicle, then it is best to own your own vehicle personally to separate the 2. Simply use the business vehicle for business and the personal vehicle for personal. Many business owners, however, only own 1 vehicle that is used both for the business and them personally. In this case a mileage log should be kept to determine business vs. personal usage. Another thing to remember about vehicle expense deductions is that whoever owns the vehicle, should pay for the expenses. If you own the vehicle, you will either want to get reimbursed for business mileage or you may want to sell the vehicle to the business so it can pay for the expenses. Either way, if you use the vehicle for both personal and business use, you should keep a mileage log to determine personal vs. business usage. Mileage logs do typically stand up in audits.

Tips on Audit Proofing your Business Part 1

I’ve been asked by people before if they could audit proof their business. That question is interesting as no business is audit proof in that there is always a great chance that CRA will audit your business. However, that being said, there are many things you can do to keep your business from being reassessed after an audit. The key here is that if CRA finds things wrong when you are first audited, then you may be audited again in future years. If they don’t find any issues the first time they audit the company, then they may never come back as they can see the company has proper backup documentation and paper trail and accurate reports.

Many business audits start with either a payroll or GST audit. Payroll audits may be simple trust examinations, where they just want to look at who the company is paying, and if all the remittances are being made to CRA. It could also be a full payroll audit that would look at much more, such as did any employees receive taxable benefits, did the owners receive benefits, are the shareholder loan accounts accurate and much more. GST audits on the other hand will look at all your income and expenses that incur GST and determine if you reported your GST accurately. Any of these audits can lead to a full audit if the auditor determines that one may be needed. In a full audit they may go through your entire business in great detail, not something any business would want!

As discussed in my prior blogs, you do not have to speak with CRA, you can request everything in writing and in the case of an audit you can authorize a representative, such as an accountant, to handle your audit. If you are ever going to send any documentation to CRA, do not send originals!!! Always send copies, because if they lose any of your documentation (hey have lost people’s documentation before!) then the onus is on you to still prove the numbers you reported on your tax returns. Now let’s get into some tips…

The first tip for audits is to never give CRA any of your printouts, handwritten papers, or any other personal documentation that may be mixed in with your business paperwork. Many people put notes and other things in their paperwork which can cause CRA to dig deeper to find more things to audit. Keep your notes and other documents to yourself. If you are audited, you should go through your documentation and pull out such documents.

More tips on my next blog! 

Tips when Dealing With CRA Part 6

In my previous blogs, I have discussed 9 tactics used by the CRA and how to deal with them.  There are a few more that you should know about. Read on . .

10. Notional Assessments – If you don’t file for  a period of time CRA may come up with an amount that you owe.  The amount that they come up with is typically much more than you would owe.  You must contest these amounts and get your filing up to date so CRA has accurate numbers and don’t go off of the ones they made up!

11. Corporate Director’s Liability – A shareholder of a corporation does not take the liability, but the director does.  By signing on as a director you are taking the responsibility of all CRA debts even if the corporation closes.  To avoid this, the director of the corporation can be someone who doesn’t own title to any assets that CRA can lien, nor have any income that CRA can garnish.

12. Loss of Documentation – Occasionally CRA loses documentation.  If you have given them originals it is too late at this point.  If you have to prove your case you now can’t because you don’t have original documents.  To solve this issue, never give CRA original documents instead give them copies when they request documentation from you.  Alternatively you could meet them somewhere with your documentation so they can review it on the spot, without taking it.  Even better, let them meet with your accountant!

CRA does have a lot of power and can access all kinds of information on you.  You must know your rights, which are found on the taxpayer bill of rights.  You must know how to deal with them.  You must also know that you can have an authorized representative that can deal with them on your behalf.  And again, do everything in writing with them!