Financial documents you need to hold on to
By Andre Mayer • Bankrate.com

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 forgotten something.

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 or September.

Important forms

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 for electricity.

"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.