Tips on Preparing for Income Tax Returns

When it comes time to file your income tax return do you find yourself scrounging around to locate all your records?  If you do, you are not alone.  So let me share three tips that will help you keep things in order—and save you money!

Retain Your Original Receipts & Invoices

My first tip is to keep your source documents.  You would be surprised by how many people fail to pass muster on this point.  Transaction slips, such as the ones you get when you use a credit or debit card, are unacceptable to the CRA unless they also record sufficient detail, like what you bought or who you took to lunch and why.  Source documents are the invoices you give your customers and the receipts you get when you buy something.  You are also required to keep statements from your bank, merchant account, and credit card company.

You need to keep the original documents for six years from the date when you file the related tax return.  For example, let's say you file your 2007 return in June 2010 and you claim office supply expenses as part of that return.  That would mean you keep the related office supply purchase receipts for six years from June 2010, not six years out from 2007.

If you lack proper source documents, then Canada Revenue Agency is likely to disallow your expense claims.  In which case you will not only owe more tax (or be entitled to less refund), but there can also be penalties and interest added.

Keep Your Filing System Simple

Most small businesses do not deal with many transactions each month.  So, an easy way to keep these pieces of paper is in an envelope, one per month—and they do not need to be very big envelopes!  Envelopes help ensure things don't slip out and get lost.  Keeping your transaction records in this fashion makes retrieval relatively easy, especially if you make summaries, which is my next suggestion.

Make Summaries

My next tip is to create a summary of your income and outgo for each month.  If you use a simple spreadsheet format, then you can easily sort and create totals by expense category from a single list, rather than try to sort your expenses into separate columns by category (such as a column for vehicle repairs, another for office supplies, etc.).  I have a template you are welcome to have just for the asking—just send me an e-mail.

This summary spreadsheet will save you money in the short and long run.  In the short run it can help you manage cashflow.  In the long run it will help save time preparing your income tax return, because you won't have to pay your tax preparer for the hours it will take to tabulate all your expenses for a year.  Do it as you go...it's smart business and it saves you money.