For small businesses and businesses in general, maintaining organized books and records is essential to the business being able to withstand scrutiny on a thorough CRA tax audit. However, running a business can be time-consuming and exhausting and it is our firm’s experience that ensuring the availability of documentary proof for legitimately incurred business expenses can often take a back seat to other priorities of the business owner(s). Unfortunately, this can cause serious issues for businesses because CRA tax auditors have a nasty habit of denying any expense claimed by a business that is not coupled with proper supporting documentation. However, in tax law, the deductibility of business expenses is not dependent on the availability of a receipt and/or proof of payment. The Income Tax Act contains no statutory requirements with respect to the audit evidence that must be presented to claim business expenses and the internal CRA Audit Manual explicitly acknowledges this fact. While a proper receipt and proof of payment is obviously ideal in all circumstances, it simply does not follow from the lack of such documentation that the expense was never incurred. Our Canadian Tax lawyers are familiar with the burden of proof in tax law and can quickly identify assumptions made by CRA in order to quickly assess a taxpayer’s issues and chances of success.
Deduction of Business Expenses – Indirect Tax Audit Techniques
Absent a specific statutory provision to the contrary, expenses incurred for the purpose of earning income from business or property are deductible for tax purposes. The issue, more often than not, is convincing a CRA tax auditor that an expense was in fact incurred by the business. Although CRA understandably has internal policies that establish what documents a taxpayer should provide to support expenses, these internal policies are not law. In fact, the CRA AuditManual explicitly endorses the use of “indirect audit techniques” by tax auditors in order to determine the reasonableness of expenses that are not supported by documentation. Indirect techniques cover a wide range of approaches, including conducting analysis of a prior years’ books and records or reviewing the bank statements of the taxpayer. Our tax law firm also routinely advocates for indirect techniques with a common sense approach. For instance, if a taxpayer owns and rents out 6 residential properties, the fact that he or she cannot locate property tax statements to support that expense should not lead to the conclusion that they did not spend $20,000 on property tax. If CRA accepts that such a person is on title for the rental properties and earns income as a result, they should accept that the rental properties are each subject to property tax and that the taxpayer had to pay that expense. Likewise, a long haul truck driver should not be denied all unsupported fuel expenses simply because they are unable to provide receipts. While such a taxpayer may not get credit for 100% of the claimed fuel expenses, they should be allowed a reasonable amount of expenses that takes into account the nature of their business and the average gas mileage of the vehicle.