Its the time of the year again. Tax season is here and we are all busy wrapping our heads around preparing the tax returns.
However, with these few simple steps below, it should be easy enough to sort out your tax returns, so long as you are organized and pay attention to things.
One real estate investor’s clients asked me, “would we need to see all the receipts from her?” Some of them are softcopy and delivered to her via an email, such as a payment to kijiji to bump up the ad.
The answer is that your accountants would not need to see all the receipts from you.
But if you are unfortunate enough to be selected for an audit, more likely than not, you are required to provide all receipts to support your claims.
Here are the five tips on how to keep proper record.
- Digital copy versus physical copy of receiptsI hate paperwork. I hate having so much paper in my house that I dont know where to put.We have limited space and we have two kids. To keep things organized, I often found myself scanning all my receipts into the computer. For years, Canada Revenue Agency (CRA) did not accept the digital copies of receipts. Recently they changed their rules.Now they do allow taxpayers to keep all receipts in digital format within Canada, provided that the digital copies of the receipts are legible.Truthfully, some of my physical copies of receipts actually faded over half a year. Having a digital copy of these receipts are actually a lot more accurate than guessing what was written on the physical copies of the receipts.
- Credit card statements are NOT sufficientAs real estate investors, you are allowed to deduct expenses that you incur for the purpose of earning the property income, subject to a list of exception.One of the deductions is automobile expenses.To deduct automobile expenses in your personal tax returns, you are required to keep a log book, all the gas, maintenance and repairs, insurance policies, parking receipts, etc.Oh yes, this means you have to keep all of your gas receipts!And no credit card statements are not sufficient.You are more than welcome to summarize all your expenses using credit card statements. Lets face it. How often do you pay for your gas using cash?I pay for all my gas using a credit card.
Its handy to use them to summarize your expenses, but they are not proper record in the eyes of CRA.
- Remedies if you lost your receiptsWe are all human beings. We make mistakes and we misplace some receipts.In a perfect world, the answer is to go back to the vendor, and ask for a duplicate copy of the receipts.Unfortunately, this is not always feasible.Now what?Lets hope that you dont get selected for an audit.If you do, the next best thing you can provide to the auditors is your credit card statements or bank statements that you show the transactions.It sounds like I am contradicting myself here since I mentioned that credit card statements are not sufficient in tip#2 above.But because we are unable to find the receipts, having the back up credit card statements or bank statements are your best shot.
I am not saying CRA is going to agree on it. Depending on the nature of the audit, the amount of the deductions and the documentation youve provided for the other expenses, they may allow it as an exception.
If they still dont, at least youve given your best shot.
As for the misplaced receipts that you paid by cash, Im sorry, you may just have to lose the deductions.
- Keep it simple and stupidI always share this with my clients, “You gotta earn your deductions!”Since we were talking about interest deductibility in the last couple of weeks, lets use that as an example.Say you use a Chase home equity loan (HELOC) for the purpose of buying an investment property, you will have to prove the CRA that the home equity line of credit actually was used for that purpose.This means that you will have to keep:
Bank statement that shows the funds being issued from the HELOC to the lawyer for closing
A copy of the bank draft
Monthly HELOC statements showing that you are exclusively using HELOC for the purpose of investing
Annual statements showing the interest deductions that you are claimingMake sure that you follow the KISS principle, Keep It Simple and Stupid for CRA. The easier it is to follow your paper trail, the easier it is to get the deductions.
- Keep up your records on a regular basisBack to my investor’s client email I mentioned at the beginning “all the receipts are in your inbox anyway, do you really need to print them out?”You are not required to print them out. Like I mentioned, a digital copy is fine.But when you are summarizing everything for your accountants to work on your tax returns this year, use this as an opportunity to organize them.Yes, the kijiji receipts are available in your inbox anytime. But to find the particular receipts 5 years from now when you get audited, it is a lot harder than making sure that receipt is in place on an annual basis.Some of the free email service providers only provide storage service with a limited time period.We are required to keep our records for 7 years. Who knows whether you are still using the same email accounts 7 years from now?
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant