Three issues that the Canada Revenue Agency looks for during audits are the following:
- Home Office Expenses;
- Automobile Expenses and;
- Meals and Entertainment.
Most people would agree that proper planning and record keeping is an integral part of running a small business, however, many let that part of their operations slide. Knowing the rules will make tax filing less stressful and avoid future disappointment should the CRA require additional information during an audit.
The key issue for home based businesses is to ensure that the expenses incurred were to gain or produce income and are reasonable and not of a personal nature. The auditor must be able to verify the validity and accuracy of the expense claimed; this is why your record keeping is essential!
The type of Home Office Expenses that you can claim are clearly related to the space used. For example, if a space is used for both personal and business, calculate the business hours used in the day, divide by 24 and multiply by the business proportion of total home expenses. Some examples of home expenses would be heat, electricity and insurance.
Allowable Motor Vehicle Expenses are based on a percentage of business use, provided the expenses are reasonable and can be justified by supporting documentation such as a log book detailing the date, destination, reason and the number of kilometres travelled. If you do not maintain a mileage log, be prepared to lose the vehicle deduction from your income. Examples of eligible deductible expenses are license and registration fees, maintenance and repairs, insurance and fuel costs. The CRA also examines whether the vehicle used is reasonable for the stated business use; sports car expenses cannot be claimed as a delivery vehicle to construction sites.
Finally, Meals and Entertainment is an area which the CRA also closely examines. Only 50% of valid business meals and entertainment expenses may be claimed. A word of caution; credit card statements are not sufficient, nor is maintaining a receipt enough. The CRA will want to know who was taken out, the purpose of the meeting, and possibly a contact number for verification. A good tip is to write this information on the back of the receipt. Examples of business meals and entertainment that are eligible would be drinks, cover charges, taxes, tips and tickets for events, activities and entry charges.