Comprehensive record-keeping is a major challenge for many entrepreneurs. After all, most business owners are so busy running their organizations that taking the time to document minutiae such as travel time to client meetings becomes a burden—and a task that many inevitably neglect.
But as one recent engagement with a KRP client proves, doing so could save you thousands of dollars in taxes each year.
In this case, the client was a commissioned salesperson who claimed various expenses related to the commission income earned over multiple years including, but not limited to, a car, advertising and promotion. Our client also reported expenses related to a contract with a spouse to provide business assistance throughout the year.
Canada Revenue Agency (CRA) asked for copies of all of the taxpayer’s receipts, as well as a copy of a travel log to verify mileage expenses. Most of the requested receipts were provided, except for a travel log.
We asked our client instead to provide the department with a list of customers (without revealing their full names) and the kilometers driven from the client’s home office to meet with those customers. Our client provided us with an estimate of the number of visits made to each customer during the year, and from this information we were able to provide proof of the employment use for the kilometers driven. CRA accepted the evidence.
In addition, the department questioned whether there was a T4 issued for the services provided by our client’s spouse. We pointed out (based on information we gathered from a published CRA Technical Interpretation) that as a commissioned employee, the taxpayer was not required to engage a spouse as an employer, but could instead hire a spouse on a contract basis. The department asked for a written contract between the spouse and the taxpayer. We pointed out again that there was no requirement for a written contract in the Income Tax Act. We stated there was a verbal agreement between the two and we provided a copy of a letter from the spouse indicating the duties performed, as well as a copy of all cancelled cheques.
The department originally proposed to disallow up to 80 per cent of the expenses claimed, meaning the client could have been reassessed for thousands of dollars in taxes over the two years. In the end, the CRA disallowed approximately 2 per cent of the total expenses previously claimed. Needless to say, the client was ecstatic with the outcome.
So, how did the client achieve such a positive result in the face of what could have been a costly and stressful CRA reassessment? We feel the favourable outcome was attributable to the fact that the client followed our earlier advice by:
• Maintaining copies of invoices and cancelled cheques
• Ensuring that, during the period, invoices were provided and cheques were written to the spouse for services rendered on a monthly basis
• Claiming a reasonable amount of expenditures for advertising, promotion and automobile usage
• Providing receipts to support claims for advertising, promotion and automobile expenses
Finally, we were able to successfully argue that various technical interpretations supported our position, which ultimately worked in the taxpayer’s favour.
The episode helps reinforce a few key lessons for entrepreneurs who may inadvertently neglect their financial record-keeping responsibilities:
1) Always maintain proper records, and keep copies of invoices and cancelled cheques
2) Maintain a travel log, or at least be able to substantiate employment or business use of kilometers driven
3) If you are hiring a spouse, either place the spouse on payroll and deduct taxes at source, or if your spouse is contracted to provide services, make sure you have an agreement or a signed letter of responsibilities—then PAY the spouse monthly. And remember that if you pay the spouse in excess of $30,000 per annum, he or she will have to charge HST
4) Make sure you only claim a reasonable amount for business meals and promotion, and remember that only 50 per cent of such expenditures are tax deductible
5) Whether or not you are a commissioned salesperson, make sure you have a signed T2200 form from your employer allowing you to claim employment expenses
6) Seek professional advice at the start to ensure you have all of the proper documentation in place when it comes time to file your personal tax return
Hartley Cohen, Partner