self-employed woman finding industry code for her tax return

Record keeping is extremely important and failing to keep proper records costs small businesses millions of dollars each and every year.

According to the Canada Revenue Agency (CRA), you, the Canadian Taxpayer, is required by law to keep records of all your transactions to be able to support your income and expense claims.

What is a Record?

A record is defined to include an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other proof containing information, whether in writing or in any other form.

Keep a record of your daily income and expenses if you are not using a software program such as QuickBooks, which keeps track of everything for you.  It can be a separate book with columns or as basic as an online spreadsheet.

Keep your duplicate deposit slips, bank statements, and cancelled cheques for 6 years. If the CRA wants to verify something and you do not have record, they will deny the claim without sufficient proof.

It is also very important to keep separate records for each business you run, and to keep business records separate from personal expenses.  If you truly want to keep your business separate from your personal situation, then you must show the CRA proof – through records – that the two do not overlap.

If you want to keep computerized records, make sure;

  • When you scan them that they scanned clearly
  • That you keep the same file naming procedures for all business documents. Nothing can be more frustrating that having the CRA need only one document to complete and audit, and to find that document you have to search your entire computer or open every attachment because it was not named properly.
  • Make sure to put them into a folder that reflects what they are for
  • Back up that information or make several copies on different devices, such as a thumbnail drive.

Don’t Send CRA Records

Remember the good old days, when tax returns were done on paper and submitted to the CRA along with all of the receipts and supporting documentation?  Well it’s not the 80’s any longer, and the CRA does not want your stuff!

The CRA does not want you to submit these records with your electronic tax return, but they do expect that you will keep them available in case they are required at a later date to verify the claims you have made in the filing of your tax return.

It is also a good idea to keep your records together by year, and in a safe place.  All too often when seeking records, the CRA are told that they were “lost in a flood” so without proof the CRA is likely to just deny all the claims.

Types of Records

Income records

Keep track of the gross income your business earns. Gross income is your total income before you deduct any expenses, including those related to the goods sold. Your income records must include the date, amount, and source of the income.

Record the income whether you received cash, property, or services. Support all income entries with original documents.

Original documents include:

  • sales invoices
  • cash register tapes
  • receipts
  • bank deposit slips
  • fee statements
  • contracts

 Note for farmers – Original documents for farming include sales invoices, cash register tapes, receipts, cash purchase tickets from the sale of grain, and cheque stubs from marketing boards.

Note for fishers – Original documents for fishing include sales slips for each landing, trip settlement sheets, and slips or records of sale to the public, retailers, and restaurants.

Expense records

Always get receipts when you purchase something for your business that you wish to claim as a business expense with the CRA.

The receipts have to show the following:

  • the date of the purchase
  • the name and address of the seller or supplier
  • the name and address of the buyer
  • a full description of the goods or services
  • the vendor’s business number if they are a GST/HST registrant

If the receipt does not display the GST/HST number, that would likely mean that they are not registered for the GST/HST or that they are below the threshold for registering.  In this case, you do not have to pay the GST/HST amount to them unless they can confirm that they are registered and will be remitting that amount to the CRA.

Make sure the seller or supplier describes the goods or services on the receipt. However, sometimes that is not possible, as with a cash register tape. In such a case, you should write a description of the goods or services on the receipt or other voucher, in your expense journal, or in QuickBooks.

It is also possible that a seller or supplier may not provide you with a receipt. In such a case, write the name and address of the seller or supplier, the amount paid for the goods or services, the date you made the payment and the details of the transaction in your expense journal.

 Property records

If you sell or trade a property, make sure to write down as much detail as you can, such as the date you sold or traded it and the amount of the payment or credit you received from the sale or trade-in.

 Importance of Record Keeping

The best thing you can do for yourself is to establish a way to track your records.  Whether you decide to dump everything into a shoe box, or invest the time to enter everything into QuickBooks, make sure you keep absolutely everything.

There are some great apps available to track mileage, for example, such as the QuickBooks Self-Employed app.  Just ensure at the end of the year that your calendar and the business trips match up, otherwise the mileage claims will be denied in event of an audit.

At the end of the day, how you keep your records will impact whether claims made to the CRA are accepted or denied, and in event of an audit, will be the difference between a clean audit, and owing money to the CRA.