If the CRA were to review your expense claims, would you be ready?
Every year, the Canada Revenue Agency regularly reviews returns after sending out a notice of assessment. This year, in particular, many people are undergoing reviews of their home office expense claims. Would you be ready to justify your deductions, if you were in that position?
During a review or an audit, the CRA may ask to see receipts and invoices from years back, which can cause major anxiety if you don’t have the proper documentation to support your claims. This is why UpSide always sets up a basic Tech Stack for new clients. Making use of app integrations and automation streamlines a business’s financial processes, and makes it easy to work smarter, not harder.
The home office expense deduction
This year, many Canadians are undergoing expense reviews because they claimed home office expenses on their tax return due to a work-from-home office during the COVID-19 pandemic. Under the Income Tax Act, an employee who is required to pay for employment expenses for which they are not reimbursed by their employer, including expenses for a home office, may be able to claim a deduction on their return for such expenses.
The law states that employees working from home more than 50% of the time are eligible to deduct part of the costs related to their workspaces — like electricity, heating, supplies, and maintenance — as work-space-in-the-home expenses. The rules allow employees to claim a portion of their housing expenses if they calculate their workspace area relative to the rest of their home and then deduct that percentage of the rent. This is where it gets messy. You said your home office was 10 percent of your home’s square footage? Be ready to prove it. The CRA may ask for a floor plan to substantiate your claim.
With a home office expense review, the CRA will ask for a Statement of Employment Expenses for Working at Home Due to COVID-19, complete with receipts and documents to support the expenses claimed for office supplies and other expenses such as employment use of a cell phone. Do you use that cell phone for non-employment uses? The CRA will want a copy of the mobile phone contract, proof of payment, copies of monthly account summaries and a detailed breakdown of employment and non-employment uses for minutes and data.
Keep all supporting documents
Review and audit-proofing your books start with knowing the rules and building good habits. There’s no pleading ignorance with the CRA. In the event of a review, you will need to provide a detailed breakdown of the amount claimed and the supporting documents. It can get expensive if you have to ask the bank for copies. For example, a copy of one mortgage statement could set you back $100. Many financial institutions only keep statements for 24 months before moving to archives. If you don’t have proof of every dollar you claimed on a tax return, the agency will deny the expenses you deducted and you’ll owe interest and will have to pay up. Have a bad track record up until now? Plug the hole and do better from here on out.
It’s important to note that credit card statements and bank statements cannot make up for proper receipts and invoices, as they do not give enough information to support a claim. For every amount you are writing off, you must have the documentation to back it up. A true receipt has the shop’s name, date of purchase, description, amount, and taxes. But how do you keep every receipt organized for years and years? Not by keeping all of your records in a messy desk drawer or boxes in your basement. Embrace the benefits of living in the 2020s by downloading a receipt scanner app.
Receipt management apps
Receipt scanning apps, like Dext Prepare, take pictures and generate digital versions of your receipts from when you’re out and about. The app’s OCR (Optical Character Recognition) technology digitizes all of the information on receipts and stores digital versions of them in a filing system. The CRA accepts these “smart receipts” as they are “an accessible and readable electronic format”. You can feel free to throw away that paper copy.
You or your accountant can connect the receipt app with an accounting platform like QuickBooks Online for automated publishing and transaction matching, so you can scan receipts and upload them instantly. An image of the document and its associated data will be kept on file for a minimum of 10 years. Dext Prepare can connect with more than 1,400 suppliers, from Amazon to Hydro One to Rogers Communications.
Use a “Fetch” to automatically collect your bills and invoices from supplier websites so you don’t have to spend any more time logging into websites, finding your documents and downloading them. Instead, the app will automatically check each of your authorized suppliers once a week and add any new documentation. Your accountant or bookkeeper may try to set up a Fetch connection for you and will send you an email request. You’ll just need to click on the Connect Supplier button in the email and log in to accept the request.
Work smarter, not harder
If the CRA ever does want to review your expense claims, having the right documents available and organized can speed up the process. If you don’t have your receipts, invoices, and other supporting documents, this will become an expensive and extended situation. By law, you are required to keep accurate records going back at least six years.
Having professional support can help you get through a CRA review or an audit, a more formal process in which the CRA analyzes a tax return in detail. When the CRA finds one mistake they often assume there are more and keep on looking. Minimize the risk of a CRA auditor suspecting any potential issues with good receipt keeping habits and by partnering with an accountant. Contact us today to find out if we’re a match.