The Importance of a Paper Trail

Cash is ubiquitous. We use it everyday, everywhere. Despite what some people may think, the government does not care if you pay for your purchase or receive payment with cash or credit as long as you have evidence to record the transaction.

Missing documentation for cash transactions may cause some of your expenses to be disallowed on the basis that there is no proof that the expense is related to your business. Without receipts, Canada Revenue Agency (CRA) may consider your cash expenses as personal and disallow them.

If some of your expenses are disallowed, your taxable income will be increased and you may end up owing more taxes that necessary.

As well, the CRA does not always consider credit card statements as evidence. For example, if you are using your credit card to support gas purchases, it is possible that the CRA may not accept the statements because the purchases at the station could be for lottery tickets, snack food, etc.

Alternatively, if you deposit cash in your bank account without having supporting documentation, the government has no way to verify that the money deposited is not undeclared income. If you end up being audited by the CRA, you may find that you will owe income taxes for money that was never earned as income. For instance, if you have casino winnings or receive a lump sum or cash from a relative that you deposit into your bank without having evidence, this cash very easily can be considered income by the CRA. Ensure that all of your cash transactions have proper support.

As well, if you are choosing to partake in cash transactions, GST/HST must be paid or collected when applicable. If you are a GST registrant and collecting cash on your good or service, the method of collection does not change the need to collect GST/HST and remit it to the government. If you are paying for a good or service to a GST/HST registered vendor then you need to pay the GST/HST in order to be able to claim the input tax credits on the expense.

Finally, many people are not aware that the bank and the CRA have any relationship. If you make a cash deposit exceeding $10,000 your bank will notify the CRA.

If you have engaged in cash transactions that have resulted in misrepresented personal or corporate tax returns, you need to correct these returns before you find yourself in serious trouble with the CRA for failure to report income or for claiming personal expenditures as business. It is possible to file a Voluntary Disclosure that will allow for you to come clean with the CRA and waive any criminal prosecution. Contact Mark Feldstein & Associates Chartered Accountants for a free consultation if this sounds like a situation you are in.