Financial documents you need to hold on to
The records you keep for tax purposes are really a reflection of
your personality. Ms. Exceedingly Cautious keeps every last document,
amassing a mountain of paper to stave the fear that she may have
Mr. Cavalier, on the other hand, scoffs at the notion
of "records," puts off dealing with his taxes until the
last day and shows up to his accountant's office every year clutching
a bouquet of crinkled forms and receipts. Most tax-filers fall somewhere
in between, neither obsessive nor careless. Tax "records"
are any documents that identify income sources, deductible costs,
donations or retirement contributions and that factor into the preparation
of your tax return.
In terms of what you should keep and what you should discard, it
can never hurt to be vigilant. But you don't need to have a filing
system worthy of the National Archives.
"The best advice is, 'Keep adequate, proper records,'"
says Douglas Strype, a partner at Strype Riley Chartered Accountants
in Toronto. "It doesn't have to be an accounting system. It
just has to be something that's easy to follow."
The Canada Revenue Agency (CRA) recommends that income-tax
filers keep their records for six years. Most people file their
tax returns in April and get their Notice of Assessment in May or
June. Self-employed people are allowed to file later in the year,
and thus often don't receive their Notice of Assessment until August
Unless you're a freelancer, your employer will issue you a T4 form,
which states how much the company paid you during the past year,
as well as any costs deducted from your salary (such as Employment
Insurance and benefits). Other crucial, can't-lose documents include
the T4A (which registers other business earnings), the T5 (investment
income) and forms from financial institutions stipulating your Registered
Retirement Savings Plan (RRSP) contributions.
The most obvious motive for keeping tax forms is the potential
for an audit. Another reason is that you may decide to carry forward,
i.e. claim a specific deduction the following year. Holding back
claims of RRSPs or charitable donations, for example, might reduce
your tax load.
Expensing the home
We don't condone shredding documents related to your home, but
there's little reason to keep them for tax purposes.
"There are no tax deductions available on your principal residence
if you are not working there," says Sam Papadopolos, a manager
of communications at the CRA. If, however, it is your de facto office,
hang on to all bills - from gas to water to your Internet service
provider - as well as rental receipts or mortgage statements that
specify how much you pay, on a monthly basis, for your accommodations.
By operating your business out of your principal residence, you
are allowed to claim a percentage of the square footage of your
home as a business expense. Say you use two-fifths (or 40 percent)
of your dwelling for your business. If your rent or mortgage is
$1,000 a month and your hydro bill $100 a month, you'll be able
to claim as much as $400 a month for the mortgage and $40 a month
"You can claim the space that is reasonable and actually used
for the home office," says Papadopolos. He cautions that should
you be deemed worthy of an audit, you'll have to "show that
you actually use that much space in the operation of your business."
Being your own boss
In running your own business, you're expected to abide by the honour
system. Because they're allowed to claim all manner of expenses,
some self-employed people tend to want to write off all disbursements,
including some that are suspiciously personal. The rule is: only
claim costs that are directly linked to the operation of your business.
Keep receipts of legitimate expenditures like stationery, computer
equipment and car-related costs. Haircuts and new golf clubs do
not count - unless you're in one of those respective industries.
(Although even then, it's hard to justify expensing a trim.)
Self-employed Canadians who earn more than $30,000 must charge
their clients the Goods and Services Tax (GST). The GST is a seven-percent
surcharge on services rendered. This added charge is remitted by
the freelancer to the federal government, usually in installments
over the course of the year. Make sure you keep your GST/HST (Harmonized
Sales Tax) Remittance Form. It is a record of how much GST you've
paid, and it figures into the calculation of your general tax return.
A final reminder to freelancers: don't lose the receipt from your
accountant validating the previous year's tax preparation. It can
be claimed under "legal, accounting and other professional
fees" this year.
All is not lost
It's impossible to recoup expense receipts once you've
lost them, but many tax forms can be replaced. If you should lose
the Notice of Assessment (the government sends you one every year
upon completion of your tax return), simply call the CRA or visit
their web site
to order a copy of your tax statement, free of charge. It takes
four or five days to arrive.
Should you receive notice of a tax audit, don't panic. Provided
you're honest and forthcoming, an audit is nothing to fear. You'll
either have a "desk audit," in which you put all your
papers in a box and bring it to your local CRA branch, or else they'll
conduct a review in your home office. The process is simple: the
auditor will look to see that the various expenses and other claims
you made on your tax return correspond with your documentation.
"If you have that, you'll have very few problems with an audit,"
says Strype. "You only get into nasty situations when you claim
$400 of office expenses and there's no receipt, there's no invoice,
there's no supporting document."
Andre Mayer is a freelance journalist based in Toronto, Ontario.