I hear every now and then from business owners, who were told by someone else, they just need to keep the bank statements and credit card statements as form of documentation to prove the expenses claimed.
I am not sure who is providing this advice which is a bad one. If you do not have proof of purchase and proof of payment, what you claimed as expense will be added to your bottom line if you are audited.
I suggest that you document any money you put in the business and keep proof of where the money is coming from. If you lent money to your company and did not document this transaction as such, the amount you deposited in your bank account will be added to income. You do not want to pay tax on money that you got as a loan because of lack of proof.
Did you know that if you do not provide the proper receipt, the Bookkeeper is actually not claiming that expense? When asked for more documentation, make sure you know where it is. Otherwise, you will be paying more taxes due to non compliant documentation. A system for paper management is crucial.
Here are the guidelines issued by CRA for receipts to be considered legitimate. http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/bspsbch/itc-cti/nvc-eng.html
Why keep proof of payment?
You go to a gas station to purchase gas and only provide the Bookkeeper with your credit card slip. Even though it says Esso $33.90, it does not necessarily mean that you purchased gas or had an oil change.
You need to provide the receipt specifying what you really purchased (proof of purchase), the slip if paid by credit or debit card and the bank or credit card statement (proof of payment).
One common issue I come across constantly is meals and entertainment expenses. There are some restaurants that will only provide the debit or credit card slip. That alone is not sufficient. The proper proof of payment is the actual receipt with the description of what was purchased.
Remember papers lead to money. You need proof of what you purchased and proof of where the money came from to pay for it. Avoid cash transactions to make it easier to track your expenses.
The cost of this mistake it will depend on:
- How many receipts (proof of purchase) you are missing;
- How easily it will be to retrieve them (if possible);
- How many years you are being audited.
It could range from a few hundred dollars to a few thousand dollars plus the headaches and pressure to come up with a compliant set of books.
A knowledgeable professional can guide you on how to keep the proper receipts.
For a free consultation please contact me today.
“Reduce risks, pay on time, be efficient and save money and time” Renata Magalhaes