You'd think by now most people would be aware of the need to maintain
accurate financial records, including receipts, if they plan to write-off
Yet, barely a week goes by without another tax court case dealing with the
validity of business expenses.
The court's most recent decision, released last month, involved Donnalynn
Ware, who claimed various business expenses that were denied by the Canada
Revenue Agency when her 2001 and 2002 personal tax returns were assessed.
Ms. Ware operated three distinct businesses in the years in question: a
business involving astrology and "other personal services," a Mary Kay cosmetics
sales operation and a hall rental business.
Unfortunately, all three businesses failed. The issue before the court was
whether Ms. Ware could establish that the expenses she claimed on her returns
were actually incurred and whether they were in connection with her three
Various expenses were claimed, including advertising fees, interest, motor
vehicle expenses, office expenses, legal and accounting fees, telephone and
utilities, as well as rent on Trafalgar Hall for her hall rental business.
However, Ms. Ware was unable to provide the court with any documentation
whatsoever for the expenses incurred. She testified orally as to the rent paid
on Trafalgar Hall and the use of her motor vehicle for business purposes. But
she could not back up the expenses in any verifiable way. There were no
cancelled cheques, bank statements, lease agreements nor automobile records
indicating business use of her vehicle.
The judge was highly skeptical of the validity of the business expenses Ms.
Ware claimed, saying her returns were "to a great extent a work of fiction."
The Income Tax Act requires that taxpayers keep sufficient books and records
to support the validity of any particular item claimed on a tax return. While
the failure to do so doesn't mean your claim will automatically be denied, the
burden of proof becomes much more difficult without supporting documentary
The judge did express some sympathy for the plight of Ms. Ware and allowed a
modest amount of $2,500 to be claimed in 2002 for rent and utilities on the
Trafalgar Hall premises. "This amount may be lower than what was paid but it is
generous in the circumstances," the judge stated.
This case will serve as yet another warning to business owners, the
self-employed or any employee who deducts expenses on their tax returns: Keep
proper records and receipts or beware the ire of the taxman -- or the discretion
of the deciding judge.