The Importance of Paper in Bookkeeping

The importance of paper

Members of WNBC have been told time and again that if you really want to save money on your taxes you have to work hard at it.  This not about working hard at running your business or at your job it is all about keeping detailed receipts and proper books and records.  No one can make you do this, you can hire people to help keep your books and receipts in order but no one can make sure the detailed receipts and documents are complete except you.  The Best Bookkeeping System (BKS) is an exceptional tool but only if you use it and keep with it your receipts (with the stories on the back) and the documents used to support your tax deduction claims. 

Nowhere is this more evident than in actual real life cases that I, as counsel for WNBC, defended against the Canada Revenue Agency.

CASE #1

Our member had just gone through a vigorous audit.  The CRA had a great deal of difficulty with some of his expenses considering he was employed by a company.  The CRA just could not understand how someone who was working for a company could properly incur these expenses and list them as employment expenses.  They denied a large part of his Motor Vehicle expenses (no proof of lease agreement or cost of use after lease return), no expenses for cost of installation of product and complete denial of home workspace. 

We objected and the appeals officer focused on the areas of that the auditor had said that proof was missing so denied.  I contacted the member he attended the office with his papers and immediately produced the lease agreement, a letter from his company explaining the need of the employee to buy his own parts for installation, and lastly he produced rent receipts.  These items were faxed to the appeals officer and the next day she called back and allowed the motor vehicle expense of $3838.00, the parts expenses for $4754.00, and the home workspace for $1800.00 for a total increase of $10,392.00.  Simple with no arguing or bickering back and forth,…Case closed.

CASE #2

Our member had a long and protracted bout with the CRA and had exhausted all objections and the only route to go was to the Tax Court of Canada.  We helped them put their case together and launched their appeal.  The most significant issue here was the denial of interest on $80,000.00 of a mortgage because it was not used to make an investment.  Our member insisted that it was used for stocks and margin and so the interest should be deductible.  The member did not however, have the paperwork to support the flow of monies from the mortgage to investment.  At the time of audit and appeal he did show enough paperwork to have CRA allow interest on $130,000, but the 80K was denied.  They had kept meticulous records on other expenses such as phone (which was allowed at appeal for the full 100%), the cost of a computer (the capital cost allowance was allowed to be deducted), and business training and meetings which again was allowed for the full cost.  There was nothing to support his $80,000.00.

Our member testified at the Tax Court of Canada hearing about this money and how it was used for stock purchases and he actually did quite well on the stand and withstood the cross examination of the Department of Justice counsel.  I certainly believed him as to how the money was spent but we could not produce any documents to support his claim as they had either been misplaced or destroyed by a basement flood.  The court rendered its decision and denied the full amount of 80K claimed in the appeal.  The court noted that it could not rely solely on the “self serving” of the taxpayer and needed some documents to show the flow of money from mortgage to investment and since that was not produced and we had the burden of proof she ruled against us.  That amounted to a significant amount of expense and despite the small victories in the other areas appealed the member walked away unsatisfied with the result of the appeal.

So you have been presented with two stories with significantly different results and all because of the proper use of documentation.  I am convinced  that if our member in the tax case had all the documents beforehand and we could have produced them to the DOJ lawyer we would have settled the matter thus avoiding the need for a full day hearing.  When you have a strong case to present there is no need to fight about it.  The other party usually sees that your case is a good one and it is not worth putting up a fight and so they settle. 

Preparation is key when dealing with the CRA and it starts with your bookkeeping to support the tax return you initially filed.  It is here that the preparation for objection and appeal starts.  Simply put, if you are ready at the beginning you will be ready right up until the end and nobody likes to fight a losing battle,…not even the CRA. 

Patrick Mlot

Legal Counsel to WNBC

This entry was posted on August 21, 2007 at 10:18 pm and is filed under Tax Tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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