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Evidence of Expenses
Disputes about the nature of an expense or whether it is reasonable in the circumstances might require evidence gathering to show that nature, or how the quantum of the expense compares with other amounts spent by other taxpayers.
This section is not concerned with that kind of evidence. Most tax advisors have been caught up in audits where the client’s business records resemble a Jackson Pollock painting -or worse, a blank canvas.
The audit result sometimes reflects the frustration of the CRA auditor and the reassessment will insinuate that the client magically generated revenue without incurring any expenses at all.
If the audit result is wholly unsatisfactory the next step is to file an objection. That is probably a good time to get a tax lawyer involved in the resolution of a dispute. The tax lawyer will probably approach this kind of file from an evidentiary basis.
What do we need to prove? How do we prove it?
The CRA Audit Manual - The value of providing evidence to prove expenses can be clearly seen in the instructions given to CRA auditors.
Part 13.9.22 of the Audit Manual makes it clear that unvouchered expenses are not acceptable.
Auditing Expenses Claimed without Supporting Vouchers.
Where expenditures are not supported with the appropriate documentation, the expense should be disallowed unless there is other satisfactory evidence to support the amount claimed. Indirect audit techniques may be used to determine the reasonableness of expenses without supporting documentation
Documents or vouchers required to support ITCs claimed are very specific. There are limited situations where ITCs can be claimed without supporting documentation.
Any missing voucher may be significant regardless of the fact that most other vouchers are available for verification. The nature of the transaction, the amount involved and the explanation provided by the taxpayer/registrant should be considered in determining whether to request the supporting documents or information from a third party.
4. Judgment should be used where minor items are concerned. Where there are numerous small items that are not supported by voucher or where the taxpayer/registrant has been advised in the past to retain supporting information, an adjustment may be warranted.
In cases where the taxpayer/registrant does not have a formalized system of filing purchase invoices, a list of invoices should be given to the taxpayer/registrant and time allowed to locate them for review.
6. A canceled cheque is not sufficient evidence to support the expense claimed nor does the canceled cheque provide the required information to support ITCs. Significant expenditures should include an examination of the source document. GST/HST audit procedures should include testing a sample of purchase source documents unless the audit scope is limited and excludes the expenses/ITCs.
The form of payment may indicate concern. Where expenses are normally paid by cheque, cash payments for significant expenses should be included in the sample selected for testing.