Updated: Jan 17, 2021
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Keeping Records the Law
Subsection 230(1) of the ITA requires taxpayers to keep records and books of account. Section248(1)of the ITA defines "record" as including "an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice,a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and another other thing containing information, whether in writing or any other form.
" Subsection 230(1)is sometimes cited as the justification for disallowing expenses where the auditor is dissatisfied with the taxpayer’s records.
A lack of adequate books and records does not, by itself, allow an auditor to disallow an expense
The rule is set out clearly by the SCC in Hickman Motors Ltd. v. R.55
where the ITA does not require supporting documentation, credible oral evidence from a taxpayer is sufficient notwithstanding the absence of records.
The CRA acknowledges that the ITA provides no specific requirement to keep records.
Chapter10 of the CRA Audit Manual,"ConductingtheAudit" states as follows.
There are no specific statutory requirements as to the precise nature of the books and records that a taxpayer/registrant must keep. The auditor, together with the advice and assistance of the team leader, has to make this determination using professional judgment and after taking into account the facts and circumstances of the particular situation. Factors to be taken into account when determining the adequacy of the records include the size of the business, the accounting abilities of the employees, the type of industry and the industry’s accounting practices.
The record-keeping requirements of other organizations with which the taxpayer/registrant deals such as banks, landlords, other creditors, and statutory or regulatory bodies can also be considered when determining the adequacy of the books and records.
On occasion, I have encountered audits where the auditor makes suggestions to the taxpayer about how an expense might be proved.
Clients appreciate an auditor who can explain the rules the auditor has to follow, while at the same time suggesting ways to prove an expense.
My own view is that Tax Court judges often become exasperated with both parties in expense cases. Where the documents are confusing and incomplete a judge may disallow an appeal or allow an appeal completely.
Often a judge will recognize that a business must have had expenses.
Despite the poor documentary support for those expenses the judge will allow some expenses based on the evidence presented in court that day.
Former Chief Justice Bowman summarized the state of the law in Benjamin v. The Queen,
Whatever may be the policy of the CRA to require documentation to support an expense, a payment, or a deduction, it is not the policy of this court, unless the taxing statute specifically requires it (as for example, in the case of charitable donations).
If a taxpayer in court can demonstrate through credible oral testimony that a payment was made or an expense incurred, the court must make a finding based on that evidence and give effect to it.
The court cannot avoid its responsibility to base its conclusions on the evidence adduced by saying in effect "It doesn't matter how credible your testimony is, if you don't have a piece of paper you must necessarily lose."
The cases referred to by the respondent do not support the proposition advanced by the respondent. They say merely that if an appellant lacks documentary evidence he or she has a more difficult task in meeting the onus of proof. If the appellant has made out a prima facie case by credible oral testimony and it is unrefuted, the appellant should win. The cases in which an appellant has lost were ones in which both paper and credibility were lacking.