Annoying as it is for many individuals across the Great White North, every year the Canada Revenue Agency regularly reviews returns after sending out a notice of assessment. During the past couple of years, they’ve been concentrating their efforts on reviews of home office expense claims. In such a notice, the CRA confirms that they reviewed your return and made an adjustment based on the information that you or your authorized representative sent them.
Would you be ready to justify your deductions, if you were in that position?
Why would they review your return?
The CRA reviews returns for many reasons, including a targeted project on employment expenses, a business owner trying to claim employment expenses, someone calling a Tip Line, a first-time claim, or randomly, just because.
During a review, the CRA asks to see receipts and invoices, 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.
What are the steps?
First, you’ll receive a post-assessment review letter asking for proof of your claims. They will ask that “if you have any more information related to our changes, please use one of the following methods to send us your documents:” snail mail, fax, or your My Account. See the step-by-step walkthrough of signing up for a My Account, if you haven’t already.
After you have replied with the proof of your claims, the CRA will send a letter with the results. This could either be a) letter stating no adjustments are needed or b) a Notice of Reassessment, which means that you owe money because some or all of your claims were disallowed.
At the point of a Notice of Reassessment, what can you do?
File a Notice of Objection, if you choose to object.
You will have 90 days from the date of assessment to find the correct form, state your case, and submit it via My Account or snail mail and then wait for nine to twelve+ months.
Eventually, an Appeals Officer could send a letter stating they overturn the notice of reassessment or could set up a phone meeting to discuss the case. Once a decision is made, the notice of reassessment stands or a partial claim is allowed.
What if you decided to overturn your notice of reassessment?
If you are not satisfied with the CRA’s answer after talking to them, you have the right to make a formal Notice of Objection if you disagree with the amount of tax, interest, or penalties they have reassessed. You will have 90 days from the date of the notice of assessment, or reassessment, to file the objection.
At this point, you’ll be headed to Tax Court, so consult a tax lawyer. The process is so long, arduous, and expensive that you may wish that you had just paid your taxes owing. So, make sure you have a strong case/deal with a lot of money (usually not employment expenses).
What if I ignore them? Or
What if I don’t find the 2nd notice until it’s past the due date?
You can contact the person who wrote the letter to ask for an extension, as well as upload any copies of the needed documents, if slightly outside the original timeframe. They may look at it, they may not. You may hear back, you may not hear anything. You can file a Notice of Objection if you’re getting close to 90 days from the original Notice of Reassessment.
What will they ask for?
If you’re contacted for a review of your home office expenses, you’ll need a Form T2200 (for detailed method only) or the Form T2200S (simplified due to COVID) signed by your employer. If you worked from home due to the pandemic, you’ll need Form T777 Statement of Employment Expenses from your tax return software. You will, of course, need ALL the receipts, invoices, and documents to prove those amounts/claims.
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 proper documentation to back it up. A true receipt has the shop’s name, date of purchase, description, amount, and taxes. Does this thought bring upon hives? Do you have trouble keeping every receipt organized for years and years? Embrace the benefits of living in the 2020s by downloading a receipt scanner app.
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.
Most potential for adjustments
Home office amounts/claims
“You did not send us the calculation you used to determine the percentage of work-space-in-the-home expenses you can deduct.”
“You did not send us the number of square feet (or metres) used for employment purposes, the number used for personal purposes, and a copy of the floor plan of the residence with the home office.”
Tell the CRA if you have a dedicated room or shared? What’s the exact number of square footage? If the space is shared, it’s prorated by the number of hours you work there. You’ll need copies of the detailed monthly statements and proof of each payment.
Cell phone and internet use and percentages
“Not sending one or more of the following documents to support your cell phone expenses:
- – a copy of your contract;
- – copies of the detailed monthly account summaries or similar statements;
- – proof of payment;
- – a breakdown of the minutes and data used to earn employment income.
- You did not send us the following information for each motor vehicle used for employment purposes:
- date, destination (from and to), purpose, and number of kilometres of each trip you took to earn
- receipts and documents to support the expenses claimed
Expenses can be claimed for:
- – fuel (gasoline, propane, and oil);
- – maintenance and repairs;
- – insurance;
- – license and registration;
- – interest;
- – leasing;
- – other expenses.
If you have received a non-taxable vehicle allowance and can show that the employment-related vehicle expenses are in excess of the allowance and voluntarily include the amount of the allowance in income, you can deduct your motor vehicle expenses if you normally have to work away from the office, you have to pay upfront for your own expenses.
If you use that same vehicle for both employment and personal use, you can deduct only the percentage of expenses related to earning income. To support the amount you can deduct, you must keep a record of both the total kilometres you drove and the kilometres you drove to earn employment income. The CRA considers driving back and forth between home and work as personal use. Ideally, you want to be given an allowance, not be reimbursed. If you are to be reimbursed, most of the time you want reimbursement of CRA rates.
If the CRA ever does want to review your home office 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.