Unvouchered Expenses
You might have received notice that your business has been selected for an audit and you are concerned that your books and records may be insufficient to support all expenses claimed.
The Income Tax Act (the Act) requires an individual carrying on a business to maintain adequate records and books of account. Such records are not required to be maintained in any particular form, but must be sufficient to determine the amount income tax, if any, an individual owes under the Act.
The Act gives the CRA sweeping powers to inspect, audit, review, or examine the books and records of a taxpayer. Subject to solicitor-client or litigation privilege, CRA officials are authorized to request and receive any documents needed to conduct an audit. For a general discussion regarding what to expect from a CRA audit, see canada.ca/en/revenue-agency/services/forms-publications/publications/rc4188/what-you-should-know-about-audits.html.
Since the Canadian income tax system is self-monitoring, the onus is on a taxpayer to substantiate expenditures by preserving vouchers/maintaining adequate records (i.e. the burden of proof of deductions and other claims rests with the taxpayer). If the CRA requests supporting records in respect of a particular deduction claimed (or capital expenditure) and you are unable to provide sufficient and satisfactory records, the CRA will normally disallow the deduction. In the case of GST/HST, the CRA may deny input tax credit claims where adequate supporting documentation is not available. In Chapter 13 of its Audit Manual, the CRA states:
Auditing expenses claimed without supporting vouchers
If expenditures are not supported with the appropriate documents, disallow the expense unless there is other satisfactory audit evidence to support the amount claimed. Indirect audit techniques may be used to determine the reasonableness of expenses without supporting documents.
Any missing voucher may be significant regardless of the fact that most other vouchers are available for verification. Consider the nature of the transaction, the amount involved, and the taxpayer’s explanation to decide whether to ask for the supporting documents or information from a third party. Use judgement if minor items are concerned. If there are many small items that are not supported by voucher or if the taxpayer has been advised in the past to keep supporting information, an adjustment may be warranted.
If the taxpayer does not have a formalized system of filing purchase invoices, give a list of invoices to the taxpayer and time allowed to locate them for review.
A cancelled cheque is not sufficient audit evidence to support a claimed expense. A statement of account or credit card statement is also not sufficient audit evidence. Examine the source document to verify significant expenditures.
In tax court cases dealing with insufficient books and records, the CRA’s assessment is normally upheld to the extent possible, you should attempt to recover original supporting documents. If you are unable to retrieve a voucher/invoice, you should determine whether any other form of evidence is available. As indicated above, documentary evidence is not an absolute requirement, and CRA may be willing to accept non-traditional support for an expense claim provided the evidence is cogent, reasonable and plausible.
If expenses are disallowed or reduced because of the lack of vouchers, the CRA’s policy is not to levy penalties (even if the taxpayer was advised in prior years of the necessity of keeping books and records) unless there is audit evidence that the expenses were either grossly or deliberately overstated.
In the context of an audit where a lack of supporting documentation is an issue, it is critical to consult with an experienced professional who can help you deal with the CRA.
For more information, please contact info@gytdcpa.com or 1 844-GYTD-CPA
GYTDCPA.com-Unvouchered Expenses
.pdf
Download PDF • 62KB