Setting Up a Good Tax Recordkeeping System
Do you want to know the secret to making sure you claim every deduction you’re entitled to? To saving money when you have a tax preparer do your tax return? To surviving a CRA (Canada Revenue Agency) audit unscathed? Sure you do! Luckily, the answer is simple. Keep good records. That’s all there is to it, really.
When dealing with the CRA, the burden of proof is on you to support the deductions and credits you have claimed. The CRA is by law considered correct unless you can prove otherwise. Keeping good tax records is imperative so you can support your numbers.
If you are reporting rental or self-employment income and expenses you have a greater onus than the average Joe in keeping good and detailed records.
Setting up your recordkeeping system
The number-one reason why people end up paying more tax than they have to is that they keep lousy records. While taming the paper tiger is no mean feat, here are some helpful suggestions to make your tax organization and preparation tasks much easier.
Save all the tax slips, receipts, and records you think you might be able to use. It’s much more difficult to recover documents that have been thrown away than to toss out whatever unnecessary paper you have left after your tax return is complete.
A handy way to organize your tax information is in an accordion file — pick one up at any office supply store. You should have one accordion file for each tax year.
Label each section of the accordion file by tax category — say, the different types of income you earn and the various tax deductions and credits you will be claiming. Use the categories listed on the tax form you will be completing.
As you receive information throughout the year, sort them into the proper category and store them. When it comes time to file your tax return, all you have to do is take out the information and report the various types of income and claim the appropriate tax deductions and tax credits.
Keep a copy of the tax return you filed for that year in the accordion file, and when you receive your Notice of Assessment put it in the file as well. Everything will be organized and all in one place. You’ll sleep better!
Dealing with missing information slips and receipts
For many types of income you earn you will be sent information slips, commonly called T-slips, that document the income received and that must be reported on your income tax return. This includes slips such as T4s (reporting employment income), T5s (reporting investment income), and slips from the government (Old Age Security, Canada Pension Plan, and Employment Insurance). You should receive these slips by the end of February in the year following the year in which you received the income. However, T3 slips (reporting trust income, such as from mutual funds) are often not available until after the end of March.
If you are missing any slips, call the issuer for a new one. In the case of government-issued slips, you can request many of them online.
With respect to reporting income such as capital gains, rental income, and self-employment income, it’s up to you to calculate your income and report it on your tax return because no tax slips will be sent to you.
Giving the CRA your best estimate
If you are slipless, or perhaps did not receive a specific T3, T4, or T5 or other tax slip you were expecting, contact the CRA — they also receive a copy of the slip from your employer or financial institution. If it’s your T4 that’s missing, use your pay stubs to assist you in reporting your employment income and any tax credits or deductions for your CPP contributions, EI premiums, and union dues. Finally, don’t forget to report the income taxes withheld by your employer! Attach a note to your return stating you were unable to obtain your slip and have summarized the estimated amounts. Give the name and address of the person or organization that should have issued the slip.
Coping with missing receipts
Receipts for some deductions, such as RRSP contributions, charitable donations, and medical expenses, must be attached to your tax return when it is filed (assuming you’re paper filing your return). If these receipts are not included with your return, processing will be delayed and your deductions may be disallowed.
If a receipt is missing, call the person or organization responsible for issuing it to obtain another copy. Even if you cannot get another copy before the April 30 (or June 15) filing deadline, file your return on time. You can forward the receipt to the CRA when it does finally arrive. Alternatively, you can simply leave the deduction off your tax return and file an adjustment when you receive the receipt. (Form T1ADJ is used to request an adjustment to a personal tax return.)
Knowing what to do when the dog really did eat your tax records
Your worst nightmare has come to life — you’re being audited! And to top it off, Sparky has eaten some of your tax receipts. Does this mean you’ll lose out on all your legitimate tax deductions? Not necessarily. The CRA does understand that these situations can occur, and will give you the benefit of the doubt (sometimes) when you can show reasonable support for the income, deductions, and credits reported on your return.
If the CRA does come calling and you simply don’t have the records you need to support your tax deductions, you can still prove your claims were legitimate. It may take you some time to reconstruct records, but when you consider the alternatives (additional tax, interest, and penalties on disallowed deductions from an audit), the time you spend will be well worth it.
Reporting self-employment income and expenses
The CRA requires every person who is carrying on a business — meaning anyone who is self-employed — to keep books and records pertaining to the business and especially the calculation of the net income subject to tax each year. You have to keep the information in case the CRA asks to see it in the future.
Make sure you keep all source documents pertaining to your tax return. When deciding what type of document to keep, consider this: what will best verify your tax records? The stronger the evidence, the less likely it is that your tax records will be rejected by the CRA.
With respect to expenses, the original bill is best — the CRA will not always accept cancelled cheques and credit card statements as support for an expense.
Knowing how long to keep your tax records
One of the most frequently asked questions when it comes to doing taxes is, How long do I have to keep my records and receipts? The answer, according to the CRA, is six years. The books and records must be kept in Canada at your residence or place of business. These books and records must be made available to the CRA should it ask to see them.
If a particular tax year is under objection or appeal, keep your books and records on hand until the objection or appeal has been resolved and the time for filing a further appeal has expired. It would be a shame to throw out your books and records only to have legitimate tax deductions denied down the road.