Proving Business Expenses
What is Income to an Auditor:
An auditor will take the position that "all bank deposits that you do not prove
to be something other than income", is considered taxable revenue to them
However an Expense
is not all withdrawals from that same account, expenses must be proven and
The extent and proof is usually at the discretion and whim of your chosen
I know not fair is it
Even when well documented a CRA Auditor can still decide expense is not
related to business or personal in nature.
What is a Business Expense?
Paragraph 18(1)(a) of the Income Tax Act (“ITA”) is the beginning of a long
list of limitations on potential expenses. It provides that no deduction shall be
18(1)(a) an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income
from the business or property.
Sometimes there is a business purpose to an expense; for example, a
restaurant business buying an oven, but the ITA restricts the deductibility of the expense (as capital
expenditure). The focus of a dispute may be on trying to get around a specific limitation in
In Symesv.R. the Supreme Court of Canada ("SCC") provided guidance on
how to determine the nature of an expense. That guidance is not easily
distilled into a test.
In fact, Iacobucci J., writing for the majority, provides a concise analysis of
the weaknesses of various “business purpose” tests posited in the
precedents and by the parties and concludes as follows.
Upon reflection, therefore, no test has been proposed which improves
upon or which substantially modifies a test derived directly from the
language of paragraph18(1)(a). The analytical trail leads back to its
source and I simply ask the following:
"did the appellant incur child care expenses for the purpose of
gaining or producing income from a business?"
A determination of the purpose of an expense is an examination of the
Iacobucci J. says that courts will “look for objective manifestations
As always, intentions are determined by actions. There is no fixed list of
questions whose answers will determine the nature of an expense.
The CRA Audit Manual:
Almost all business audits include a review of the expenses of the business.
The CRA instructs its auditors to look for specific items in expense claims.
The existence of these items may trigger a more detailed audit of
The following is from the audit manual when I was auditing:
When scanning purchases journal watch for the following:
1. Purchases from suppliers that do not carry goods that would
normally be used in the normal business activity
2. Purchases invoices made out to the taxpayer\registrant
personally or to another family member
3. The delivery address is the taxpayers residence (yes even
when working from home)
4. Personal purchases may be paid by credit card. Scan the credit
card statements to determine whether the purchases include
personal items. Ensure that the taxpayer/registrant has not
claimed personal travel as a business expense.
5. Where the business activity includes selling or purchasing
products that are general household items the risk of personal
use of products increases. Indirect methods of verifying the
amount may be required.