Small business owners know all too well that you are almost always burning the candle at both ends trying to manage everything for your business.
Sometimes I think my customers think I’m just trying to add a kink in their day when I’m nagging them for proper paperwork. However, I’m just doing my job to try and CYA (cover your @ss) in the event CRA (Canada Revenue Agency) opts to do an audit of your books.
CRA does audits for a number of different reasons. It can be that suddenly your income has gone way down or you are claiming back a high number of ITCS (input tax credits) for your GST isn’t normal. They could be auditing another business that you sell to or purchase from and your business name pops up. They also have a system of random compliance audits. They may audit your payroll account, your GST account, your income tax filing or possibly all of them.
For those that don’t know, here’s how GST works. A GST registrant must charge GST on their taxable sales - the tax applies to most things (but not all, and it’s your responsibility as a registrant to know what you should and should not be charging it on). The GST charged is done so on behalf of CRA. That money belongs to the government, not the business. However, the business is allowed to track the GST that they pay out on their ALLOWABLE business expenses they incur in the process of earning that income. The difference is then remitted to CRA.
They are very specific with regard to what is necessary to be able to provide to support those ITC’s you claim on your return. If you cannot provide that information, they will disallow those credits. They will also charge interest on them, if you’ve claimed them and it may cause them to delve deeper into your books when they find non-compliance. This isn’t just limited to claiming ITC"s on your GST returns, either. This information is also required to substantiate your expense claims and is necessary for your customers to claim what they need to on their end.
Something else that needs to be clarified is that CRA wants to see invoices - not just receipts. What’s the difference? An invoice shows the details of the sale while a receipt shows how that invoice was paid. Many business owners confuse a receipt as an expense invoice - especially for restaurant meals - and frankly, it’s not good enough. You MUST ask for a detailed invoice of your purchase. In the case of the aforementioned meals receipts, you should also note the person you met for the meal and the nature of the business discussed in order to justify it as a business expense. Just because you have a business doesn’t automatically make your meals out a justified meal expense - it has to be for a specific business purpose. ie. a partners meeting, meeting with your bookkeeper or accountant to specifically discuss business or a protentional customer or supplier - those types of things.
So what are the requirements needed on a proper invoice for audit purposes? Well, the details are available at this link: Records you need to support your claim
Here is a snippet from the link mentioned as to what is required on both your own sales invoices and those you receive from your suppliers.