Canuckbusiness

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What does CRA consider “acceptable” business records?

A friend of mine is just starting a small service business. He expects to have under $30,000 in sales in his first year. So he took me for lunch to pick my brain. That conjures up an image doesn’t it?

His first question was this: “Will CRA accept the Simply Accounting software for my books or do they only accept QuickBooks?”

I said both were fine in CRA’s view. Then I took out a pen and wrote on a paper napkin “Total Revenue” and “Total Expenses”, and handed it to him. “But you don’t need either. This is a perfectly legitimate set of books right here,” I said. “And if you run out of room, flip it over and write on the back.”

He thought I was joking.

But the truth is, you don’t need to have fancy software or nice ledger books with pretty columns. All you need is a way you can track what you’ve spent, what you’ve earned, and be able to back those numbers up with “source documents“. And what are “source documents”? Receipts, along with proof of payment.

In CRA’s own words:

Business records

You are required by law to keep records of all your
transactions to support your income and expense claims.
Keep a record of your daily income and expenses. We do
not issue record books or suggest any type of book or set of
books. There are many record books and bookkeeping
systems available. For example, you can use a book that has
columns and separate pages for income and expenses.
Keep your records, along with your duplicate deposit slips,
bank statements, and cancelled cheques. Keep separate
records for each business you run. If you want to keep
computerized records, make sure they are clear and easy to
read. “

I do have a “Magic Rule” though when it comes to keeping receipts or other source documents:

Magic Rule #4: Keep all receipts and other source documents in the original medium you received them.

This means if you have an electronic receipt sent to you in an email, do not simply print out the receipt and destroy that email. Feel free to print out the receipt to make adding up your expenses easier at year end, but keep that original email somewhere as well. Likewise, if you received a paper receipt from a dollar store, scan it if you like but do not destroy that original receipt.

Call me cautious, but a source document is like a Highlander immortal: “There can be only one!”

Oh, and one more thing when it comes to collecting receipts. If you go to a restaurant and pay with a credit card be sure to collect the receipt that lists what food you ate as well as the credit card receipt. One without the other is no good. An acceptable receipt is one that clearly shows when and how payment was made. So the little old-school cash register receipts that only show how much something costs, but says nothing about you actually having paid, are not acceptable in CRA’s view. Ask for a handwritten receipt. Likewise, don’t try picking up the receipt off a restaurant table when someone else put it on their card.

How long do I have to keep all these annoying bits of paper?

SEVEN YEARS. The same number of years in a bad luck sentence for breaking a mirror. The same number of years most relationships don’t get past. The same number of years that guy spent in Tibet.

Okay, I can hear the tax geeks pounding on my door (light tapping, really). CRA actually says:

“As a general rule, you must keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years from the end of the last tax year to which they relate.”

But some of us have trouble counting years, so I always tell my clients seven. Call me cautious. And it’s easy to remember.

August 12, 2011 - Posted by | Magic Rules, Running Your Business, Starting Your Business, Uncategorized | , , , , , , ,

8 Comments »

  1. I work at a franchise restaurant that has well over 80 workers. I am a server and up until now it was up to us to claim our tips of what we make. Now they are "requiring" us to claim at least 15% of our sales. Most nights us servers don’t even make 15% of our sales because (I believe) the location, atmosphere, and quality of our food do not make people tip what they usually would. It is very common to get $1-3 tips on $30-50 checks in our establishment.

    I used to work for one of the largest chain restaurants in the nation, and their computer system only required us to claim all credit tips and 8% of our gross sales. My question is: is forcing us to claim 15% legal? If we don’t make that in a night do they have to force us to claim 15% of our sales? I found on the IRS website it says 8% of gross sales must be claimed.

    Comment by phone credit card | August 29, 2011 | Reply

    • I work at a franchise restaurant that has well over 80 workers. I am a server and up until now it was up to us to claim our tips of what we make. Now they are “requiring” us to claim at least 15% of our sales.

      Here in Canada, a server’s employer cannot dictate how much a server must claim as tip income on their tax returns, unless the employer actually pays a set gratuity amount to their employee (as is the case with some bellhops, etc). The rule is that a server must report ALL the tips they receive, cash and credit cards. However, since most servers don’t keep track of these so well, CRA will accept a reasonable estimation.

      This is how they come up with a reasonable estimation in an audit on a server or a restaurant: They gather all the credit card receipts for a restaurant over a specified time period (shift, week, month, year, etc.) and calculate what the average tip amount is as a percentage of gross sales. Fancy restaurants might be 20%, diners might be 5%. Once they have the percentage for your particular restaurant, they can calculate how much an average server at that restaurant should be claiming in tips for any given time period (based on the restaurant’s gross sales for that time period and how many servers were working).

      Interestingly enough, when one server in a restaurant gets audited, it seems that many of his/her fellow servers also get audited. If you are a server, my advice is to track your tips accurately for at least a week (a month is better) and divide that total by the total amount of your sales (deduct liquor tax and sales tax first if you can). You will then have a reasonable percentage of the tips you make and will have backup for why you use this number in case you are ever audited.

      Whatever you do, do not claim 15% of your gross pay (your T4 amount) at the end of the year as tip income. I have never met a server who gets paid $10/hour and only makes $1.50/hour in tips. And I guarantee no auditor working for CRA has either.

      Comment by jkswift | August 30, 2011 | Reply

  2. You speak of the receipt as the “source document”. I’m very ready to go paperless in many respects. Does the CRA accept a scanned copy of a receipt as being as good as the original? I’m thinking about those restaurant receipts and using something like the iPhone TurboScan app that takes 3 images of the receipt and stores is as a pdf….

    Comment by Jen | August 26, 2012 | Reply

    • Hi Jen,
      Yep, if you have confidence in your electronic system (and especially your backup system!) you can do away with those paper receipts. Here it is from the horse’s a.., er mouth:

      You have to keep all records that are in paper format, unless you keep them in an acceptable microfiche, microfilm, or electronic image format. Electronic imaging software is a popular method of keeping scanned images of paper documents, books, and records.

      Go here for the entire monotonous passage when you need some help sleeping!
      Thanks for taking the time to comment.
      jk

      Comment by jkswift | August 27, 2012 | Reply

      • After diving in to the documentation, this is exactly the same conclusion I came to.
        However, when going over everything to present to the client, this document came up:

        IC78-10R5 : Books and Records Retention/Destruction ( http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r5/ic78-10r5-10e.pdf )

        In this document is states that an “acceptable… electronic image format” is defined as follows:


        An acceptable imaging program as explained in the Canadian General Standards publications mentioned in paragraph 20 requires that:
        (a) a person in authority within the organization has confirmed in writing that the program will be part of the usual and ordinary activity of the organization’s business;
        (b) systems and procedures are established and documented;
        (c) a logbook is kept showing:
        • the date of the imaging;
        • the signatures of the persons authorizing and performing the imaging;
        • a description of the records imaged; and
        • whether source documents are destroyed or disposed of after imaging, and the date a source document was destroyed or disposed of;
        (d) the imaging software maintains an index to permit the immediate location of any record, and the software inscribes the imaging date and the name of the person who does the imaging;
        (e) the images are of commercial quality and are legible and readable when displayed on a computer screen or reproduced on paper;
        (f) a system of inspection and quality control is established to ensure that c), d), and e) above are maintained; and
        (g) after reasonable notification, equipment in good working order is available to view, or where feasible, to reproduce a hard copy of the image.
        22. Paper source documents that have been imaged in accordance with the latest national standard of Canada (see paragraph 20), may be disposed of and their images kept as permanent records.

        Do you have further insights on this?

        Comment by joshfindit | April 15, 2013

  3. My first article read on your blog… well done James! Question: I have lived in the USA since 1997. Returned home last year. A lot has changed in Canada since then especially small business taxation rules. I started a very small business (all R&D and pre-launch activities in 2012… no revenues yet… that will happen in 2013…) and I am trying to find out the “Petty Cash” receipt requirements rules for 2012. It used to be that in Canada, an SME did not have to keep paper receipts for “Petty Cash” transactions under $50.00 (in the USA, the rule is under $75.00 for the IRS). Has this changed at all?

    Comment by Jerry Lang | April 28, 2013 | Reply

    • I’m not sure without looking anything up, but I would think anything under $100 wouldn’t be unreasonable. Anyone else out there have an answer for Jerry?

      Comment by -- | April 29, 2013 | Reply

      • The “Old” rule used to be “No receipts needed for expenses under $50 – just keep a record of the expense, the business, the date and the amount” all that was needed and usually, it could be accounted right out of “Petty Cash”. Now, as I was reading Pub. RC4409(E ) Rev. 11 “Keeping Records” an ambiguous case could be made for that amount dropping to $30 but I am not sure. I know that the new rule for meals as an entertainment expense is (optionally) $17 per meal – 3 meals per day – maximum of $51/day no receipt needed. But the “Under $30 expense” is ambiguous… thanks for your reply James!

        Comment by -- Jerry | May 1, 2013


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