r v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or ev“In levying taxes and in shearing sheep, it is well to stop when you get down to the skin. ” – Austin O’Malley

For tax purposes a “receipt” is a document which confirms a payment to a third party. Whether the payment reflected in the receipt will be deductible will depend on the particular circumstances.

Income Tax

Generally a taxpayer’s income from a business or property will be the taxpayer’s “profit” for a tax year: Income Tax Act, §9(1). Conversely, taxpayers with employment income may only deduct such amounts as are expressly allowed: §8(1) ITA.

“Profit” is not a defined term and the Income Tax Act (“ITA”) provides no specific rules for its computation: Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147 per Iacobucci at §34 (referring to Friesen v. Canada, [1995] 3 S.C.R. 103 per Major at §41).

The determination of “profit” under s. 9(1) ITA is a question of law. It will be determined in accordance with "well-accepted principles of business (or accounting) practice" except where those principles conflict with the specific provisions of the ITA (Canderel, above.)

Books And Records

Every person who carries on a business shall be required to “keep records and books of account” at their place of business or residence “in such form and containing such information as will enable the taxes payable under this Act… to be determined”: §230(1) ITA.

Filing Returns

Individual taxpayers must file income tax returns, when they owes taxes in a tax year: §150(1) ITA; they have to estimate the amount of the taxes they: §151 ITA; remit those taxes:§156(1) ITA; and it will then be up to the Minister of National Revenue (“MNR” but in practice it means Canada Revenue Agency (“CRA”)) to assess the tax for the year.

Accordingly the taxpayer files their T1 return, by April 30: §150(1)(d) ITA; and they purport to deduct their business expenses.

Best Practices

The Guide for Canadian Small Business (RC4070E Rev. 01; chapter 6) suggest that taxpayers’ “should keep a day-to-day record of [their] receipts and expenses. A book with columns and separate pages for income and expenses is good for this. [They should k]eep this record along with [their] duplicate deposit slips, bank statements, cancelled cheques, and receipts. This will support [their] expenditure claims.”

Consequently, it is the best practice is for a taxpayer claiming a deduction to have third party receipts fully supporting all of their deductions; but, is it the only practice?

An Exception

Between 1990 to 1992 Anthony Merchant claimed a number of deductions, some of which were “without any supporting document-ation”: Merchant v. The Queen, [1998] 3 CTC 2505 per Bowman, J.T.C.C. §22.

“It is my view that there is no requirement in law that expenses be supported by receipts or other corroboration if such expenses can be supported by credible viva voce testimony and the amounts can be identified with a reasonable degree of specificity (Weinberger v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or eve§34 (referring to Friesen v. Canada, [1995] 3 S.C.R. 103 per Major at §41).

The determination of “profit” under s. 9(1) ITA is a question of law. It will be determined in accordance with "well-accepted principles of business (or accounting) practice" except where those principles conflict with the specific provisions of the ITA (Canderel, above.)

Books And Records

Every person who carries on a business shall be required to “keep records and books of account” at their place of business or residence “in such form and containing such information as will enable the taxes payable under this Act… to be determined”: §230(1) ITA.

Filing Returns

Individual taxpayers must file income tax returns, when they owes taxes in a tax year: §150(1) ITA; they have to estimate the amount of the taxes they: §151 ITA; remit those taxes:§156(1) ITA; and it will then be up to the Minister of National Revenue (“MNR” but in practice it means Canada Revenue Agency (“CRA”)) to assess the tax for the year.

Accordingly the taxpayer files their T1 return, by April 30: §150(1)(d) ITA; and they purport to deduct their business expenses.

Best Practices

The Guide for Canadian Small Business (RC4070E Rev. 01; chapter 6) suggest that taxpayers’ “should keep a day-to-day record of [their] receipts and expenses. A book with columns and separate pages for income and expenses is good for this. [They should k]eep this record along with [their] duplicate deposit slips, bank statements, cancelled cheques, and receipts. This will support [their] expenditure claims.”

Consequently, it is the best practice is for a taxpayer claiming a deduction to have third party receipts fully supporting all of their deductions; but, is it the only practice?

An Exception

Between 1990 to 1992 Anthony Merchant claimed a number of deductions, some of which were “without any supporting document-ation”: Merchant v. The Queen, [1998] 3 CTC 2505 per Bowman, J.T.C.C. §22.

“It is my view that there is no requirement in law that expenses be supported by receipts or other corroboration if such expenses can be supported by credible viva voce testimony and the amounts can be identified with a reasonable degree of specificity (Weinberger v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or evhey owes taxes in a tax year: §150(1) ITA; they have to estimate the amount of the taxes they: §151 ITA; remit those taxes:§156(1) ITA; and it will then be up to the Minister of National Revenue (“MNR” but in practice it means Canada Revenue Agency (“CRA”)) to assess the tax for the year.

Accordingly the taxpayer files their T1 return, by April 30: §150(1)(d) ITA; and they purport to deduct their business expenses.

Best Practices

The Guide for Canadian Small Business (RC4070E Rev. 01; chapter 6) suggest that taxpayers’ “should keep a day-to-day record of [their] receipts and expenses. A book with columns and separate pages for income and expenses is good for this. [They should k]eep this record along with [their] duplicate deposit slips, bank statements, cancelled cheques, and receipts. This will support [their] expenditure claims.”

Consequently, it is the best practice is for a taxpayer claiming a deduction to have third party receipts fully supporting all of their deductions; but, is it the only practice?

An Exception

Between 1990 to 1992 Anthony Merchant claimed a number of deductions, some of which were “without any supporting document-ation”: Merchant v. The Queen, [1998] 3 CTC 2505 per Bowman, J.T.C.C. §22.

“It is my view that there is no requirement in law that expenses be supported by receipts or other corroboration if such expenses can be supported by credible viva voce testimony and the amounts can be identified with a reasonable degree of specificity (Weinberger v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or events, cancelled cheques, and receipts. This will support [their] expenditure claims.”

Consequently, it is the best practice is for a taxpayer claiming a deduction to have third party receipts fully supporting all of their deductions; but, is it the only practice?

An Exception

Between 1990 to 1992 Anthony Merchant claimed a number of deductions, some of which were “without any supporting document-ation”: Merchant v. The Queen, [1998] 3 CTC 2505 per Bowman, J.T.C.C. §22.

“It is my view that there is no requirement in law that expenses be supported by receipts or other corroboration if such expenses can be supported by credible viva voce testimony and the amounts can be identified with a reasonable degree of specificity (Weinberger v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or evr v. M.N.R., 64 DTC 5060)… Failure to keep books and records carries its own sanction [i.e., §238(1) ITA] but had Parliament intended that sanction to include non-deductibility of expenses it would have been quite capable of saying so” (Ibid, §23) [Emphasis added].

Generally speaking, the ITA is to be literally applied; e.g., Fayle v. The Queen (2005-01-12) Tax Court of Canada.

Deductions

It is possible to deduct expenses that are not fully supported by receipts. In practice, taxpayer’s don’t file their receipts with their return so if the MNR (i.e., CRA) doesn’t challenge their deduction, as claimed, through a reassessment they actually have the benefit if the deduction, without the receipt, but ‘possible’ does not equate to probable – or even likely.

Reassessment

In most cases were the CRA does reassess a taxpayer to disallow their deduction of business expenses, or some of them, it will have reasons for doing so. Whether CRA’s reasons will be accepted will be binding on the taxpayer will be determined through Objections: §165(1) ITA; and/or the appeal process: Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082; and Singleton v. Canada, [2001] 2 S.C.R. 1046.

Lessons Learned

In Mr. Merchant’s case, he was only partially successful, “[a] number of the other items listed… lack the degree of specificity as to the purpose of the expenditures” and to the extent the evidence found the evidence unconvincing, the Court declined to interfere with the assessor’s decision (Op. Cit., §24).

It is useful to remember that as the taxpayer is objecting, or appealing, they have the onus of establishing that CRA’s position is wrong, either in law, on the facts or both.

In Mr. Merchant’s case, although he was successful and ordinarily might have expected an award of costs, Justice Bowman took the extraordinary step of awarding costs against Mr. Merchant, to the losing party – and he did so on a solicitor and client basis (Ibid. , §61) in part, because:

• of Mr. Merchant’s distain for the Court (Ibid. , §56);

• his “reprehensible, scandalous or outrageous conduct” (Ibid., §58 relying on Young v. Young, [1993] 4 S.C.R. 3 per McLachlin J. at p. 134; and

• he deliberately frustrated the audit and objection process by bringing matters before the court that shouldn’t have been there. (Ibid. , §59).

A Better Way

The regrettably part of Justice Bowman’s decision, is his reference to the need for “viva voce testimony” to establish payments, absent receipts. Viva voce (Latin for living voice) statements, are given in Court, under oath, and just being in Court is undesirable for a taxpayer because they could be back running their business.

The moral of the story is that taxpayers who don’t intend to give money out of their after-tax income to third parties should get (and keep) receipts.