Last Blog Post we discussed GST/HST audits and how to avoid them! But what are some things you can do if you find yourself in a GST/HST Audit or Review situation?

1. Approach it with the right attitude: GST/HST is dollar for dollar important: Our tax dollars! If GST/HST is not correctly remitted and reported by our business neighbours, it ends up costing tax payer money, and taking government funds away from things that are important to us. Consider if your business neighbour was incorrectly claiming thousands of dollars of GST/HST back from CRA that was not rightly theirs. If it's intentional, they should be stopped. If it's accidentally, then they should be corrected. CRA has to find those things, and checking your work is part of that effort. As a business owner, it is your responsibility to be ready to supply the details and support of the numbers you filed with CRA. And that's all you need to do. CRA isn't out to 'get you'. CRA is simply out to make sure the correct numbers are being filed, period. And as a business owner... you have the SAME GOAL! You also want the correct numbers to be filed with CRA! Same goal! Sure, the approach is slightly different; CRA doesn't want you to get back more than you should, you don't want to get back less than you should. But at the end of the day, we are on the same team with the same goal; what is filed should be correct. Understanding that you are on the same team as the auditor is a huge help, because you can literally ask them "what specifically do you need to see" and they will give you specific and actionable answers. Don't be intimidated or anxious. If you've made a mistake somewhere, then it just gets corrected. You may owe because of a mistake you've made. But if you've taken your bookkeeping seriously, and followed the advice of my previous hacks newsletter, there shouldn't be anything major of concern.​
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2. Make it easy for the Auditor to Understand: Approach everything you are submitting as if you were the auditor; what would YOU need to understand and feel confident in the numbers?
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   The auditor is looking for a list. If you claimed $45,000 in sales, and $4,950 in GST/HST collected, then you need to be able to show the details. A list of each invoice with the date, customer name, sales type, and amount of GST/HST collected is required. The numbers in the list needs to add up to the numbers filed. (By 'sales type' what I am referring to is, if you have different products/services subject to different taxes, be sure to note that. Honey sales is zero rated. Sales to Alberta are at 5% GST. Sales to the US are zero rated. Etc). Be aware that paid date is not the same as invoice date. These lists you should be able to download directly from your bookkeeping software. Ideally you have them saved from when you filed the GST/HST return. (QBO, for example, saves a 'snapshot' of these details, so if items are added to the period later, you still have the list of numbers you filed with for CRA if audited). If your business is not the type that 'invoices' clients, (perhaps a store with a register or an e-commerce operation), be sure that the reports you provide from your register or software breaks out important details such as gift cards sold (not technically sales, just a promise to provide goods and services in the future), tax collected, etc.
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   It is the same approach now for the credits you have claimed. (These are called "ITCs, or, "Input Tax Credits"... aka GST/HST paid on expenses). If you claimed $2,459.69 in GST/HST paid on expenses, you will need to list out every bill and receipt that comprises that amount: Bill date, supplier name, bill total, and GST/HST amount. Again, paid date is NOT the bill date. (Bills can be paid on their bill date, but that's not always the case). You should be able to provide on demand any bill or receipt listed on that list with the matching date and amount that is on the list. So, if you claimed HST on a 'payment on account', be prepared for a lot of extra work!!! Because now you have to prove what bills that $5k was applied to and provide those! Which is the wrong way to go about bookkeeping and thus why it's not easy to have in a GST/HST audit. This is why we enter the bills and their payments into our bookkeeping, not just the payments as if they were the expense themselves (aka cash accounting). Just backing GST/HST out of payment transactions means you're gonna have a bad time in an audit situation. (Typing that inspired a meme now added below). And those physical or pdf bills should all have the the GST/HST amount listed out with the GST/HST number of the vendor showing. If they don't have a GST/HST number on them, ask the vendor for a re-print of the bill with the correct GST/HST amount and their GST/HST number. The bigger the bill, the more CRA will want to see it. So, during the year, BEFORE you are audited, that's when you need to make sure you are not missing any of these bigger bills, and that they ALL have a GST/HST number on it! (Refer to my last hack "you gotta see it to believe it").
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3. Vehicle Log!!!: If you use your business vehicle for 100% business, you don't have to keep a vehicle log forever... but you do have to support the 100% business use. So keep a vehicle log for three months with a photo of the starting odometer and a photo of the ending odometer (or from oil change to oil change with the odometer on the bill). Keep this vehicle log as a reference for when you are reviewed. This is even more important to do when you buy a new work truck, and your usual GST/HST payable turns into a refund. CRA is gonna want to take a closer look at that... be ready! If you use your vehicle for less than 90% for business, you need to keep that vehicle log on an ongoing basis, and only claim the correct percentage of GST/HST on your vehicle expenses. Too late? In an audit with no vehicle log? You have receipts with dates. You have client invoices with dates. You have a couple of vehicle maintenance bills. You have google maps! You have enough clues to put together a 3 month vehicle log! Make one!
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4. Communicate, meet deadlines, ask for help, and if needed, object!: I couldn't choose my three favorite hacks on this subject, so, the last few are pretending to be #4! Firstly, always communicate with the auditor. You're working together... if you ghost them, they may just go with what they have and disallow the rest. So keep the communication going, and always meet those deadlines. Get their name right and don't lose their phone number. If you have a hard time understanding what is being requested, ask that it be written out in a letter and sent to you. Sometimes the 'lingo' is familiar to us in this space and we forget that it's not as familiar to others, so feel free to reach out to your bookkeeper or accountant to help work with you on the requests, they may have an easier time understanding the asks. Lastly, if there are things that you feel were disallowed incorrectly (either because the CRA auditor made a wrong call, or perhaps the paperwork didn't make it in on time), OBJECT! File an objection right away. (And *I* just got my idea for my next YouTube video! How to file an objection with CRA!) You have 90 days to file an objection, so don't delay. Pay any tax bill that arises from the audit, because if the objection is accepted, the money will be returned to you. But if the objection is only partially accepted, not only are you incurring interest, CRA collections will be bugging you for the funds in the meantime, and objections take forever (think 8 to 16 months!). So clear up the bill, and object to get it back.

Last Blog Post we discussed how to claim HST credits on mixed use expenses. This post we'll discuss GST/HST audits and how to avoid them!

1. HST is Serious Business to the CRA: CRA conducts reviews and audits on income tax returns and also on GST/HST returns. If an entrepreneur owes income taxes, that's their own money that the law dictates needs to be contributed to society. But if an entrepreneur owes GST/HST, that's CRA's money, and CRA is more aggressive in their collections procedures, even mandating that the bank takes the money directly from the business bank account and freezing the bank if necessary. Because when an entrepreneur doesn't remit to the government the GST/HST they collect on CRA's behalf, that's akin to stealing funds from CRA. So if you receive a collections call from CRA regarding GST/HST, don't ignore that call... talk and figure out a payment plan with them so that they do not need to resort to the extreme measures of contacting your bank. Also, if an expense is disallowed in an income tax audit, it's only about 25% important. That is, if a $100 expense is disallowed, it may effect how much income tax you owe on the revised profit, so, only about 25% of the change; $25. But GST/HST is dollar for dollar important! If you are disallowed a $100 dollar GST/HST credit, you will owe all $100 back of the disallowed credit; that's what I mean when I write GST/HST is "dollar for dollar" important, and CRA takes GST/HST very seriously. If a business owes both GST/HST and Income Taxes, CRA demands that the GST/HST is paid down first. (Payroll taxes are even more serious... that's the Employee's money, so that's at the top of CRA's list! Same deal, ignore collections, and they move on to your bank and freeze your funds. So not something you can put off!)
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2. You Gotta See it to Believe it!: Many people assume that everything has GST/HST on it, but this is far from the truth. I always say, "You gotta see it to believe it". There is no GST/HST on loan payments, insurance, bank charges, interest charges, and zero rated supplies such as unprepared food. Oh, you see tax on your insurance policy? Take a closer look... that's RST (Retail Sales Tax) or PST (Provincial Sales Tax), the provincial portion of sales tax, not GST/HST, so it is not a GST/HST Credit. Which leads me to my next point, it's gotta either say GST or HST, or it's not going to Feds (CRA). PST, QST, RST are all provincial sales taxes that CRA doesn't get passed up to them. So if they aren't expecting to get it, you don't get it back. Which again, leads me to my next point, you have to be able to support that CRA will be receiving the funds from the business billing you. And to do that, the bill or receipt has to show the GST/HST number of the collecting business, and also specify how much GST/HST is being collected. A business MUST be registered to collect GST/HST to add it to their bill, and the only way you know that for sure is if they have the GST/HST number right on the bill itself. Just because an entrepreneur is a business, it does not automatically mean they are registered for GST/HST (as we discussed in November's newsletter). If CRA can't see and confirm that CRA is to receive those funds from the business issuing the bill on the paperwork, your GST/HST credit will be denied in an audit. That also means that just a vendor statement is NOT enough support. It doesn't show what was purchased (could be zero rated goods!) and if it was subject to GST/HST and if so, how much. Similarly, a line on a bank or credit card statement just won't cut it in an audit, (it is not accepted in an income tax audit or a GST/HST audit. There's no way around it.. ya need that paperwork!) It's also the wild west of sales tax out there in internet land. Just because a fee is charged to you from an online subscription, you cannot assume that it does or does not have GST/HST. I've even seen GST/HST charged on transactions in USD (like Shopify fees), so look at the bill to confirm... you gotta see it to believe it.
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3. Avoid a GST/HST Audit: Even if you feel confident that your business is claiming GST/HST credits correctly, GST/HST audits take a lot of time, work, and energy that you would rather put somewhere else. There is one simple and best way to reduce your chances of a GST/HST Audit; file and pay your GST/HST on time. Consider that CRA has limited resources. They cannot audit and review every single business. So, they focus their attention on businesses where they are most likely to find incorrectly claimed credits. And those businesses where they are most likely to find incorrectly claimed credits are disorganized businesses. It's that simple. Filing and paying late is like attracting the Eye of Sauron. Though filing and paying on time is no guarantee against an audit. CRA does do random audits also, as well as focusing in on sectors that often are susceptible to cash transactions such as restaurants and construction. Just being part of these industries increases your chances of an audit, so it's always good to be confident in your bookkeeping and tax filing, and keeping good records. There are two different ways CRA can take a closer look at your GST/HST; they can conduct either an Audit or a Review. Audits are more intense, CRA often wants to see every single document. But these are quite costly for CRA to perform, so they sometimes instead just do a Review, which is more like a "spot check". In a Review situation, they'll ask to see a listing of all the transactions for the period, and the top 10 largest invoices, and the top ten largest bills. Then they'll ask for a few random others from the list, and ask a few additional questions, and that's it. So, Reviews are much less work for both CRA and the Business. Reviews can be triggered simply because a business that usually files a payable return suddenly files a large refundable return. And CRA just wants to check that the reason for the refund is legit before they release the funds!

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Last Blog Post we discussed why a business would want to register for GST/HST before they have to. This month we discuss what businesses can claim GST/HST credits on. (And next Blog Post we'll discuss what a business can't claim GST/HST credits on!)

Today, we'll look at three different categories of what businesses can claim GST/HST credits back on; 100% business use purchases, purchases with a personal use portion, and business use of home expenses;
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1. Claim 100% of the GST/HST credits on Direct Expenses: You want to make sure to claim all the HST on transactions that occurred that would not have happened if you were not running the business. Be sure that the bill-to name on the bill is either the name of the GST/HST registrant (either a person in the case of a non-incorporated business, or the corporation's official name if incorporated) or the operating name of the business. Only the person/business being charged the GST/HST can claim the credit. We'll dig into that more next month! If you're unsure about what direct expenses (and related GST/HST) you can claim for your business, check out my blog post on what expenses a business can claim here​
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2. Prorate the GST/HST on the expenses that have a personal portion: If you have an expense that is used for both business and personal, you can only claim the business portion of that expense, along with the associated GST/HST. If the business portion is over 50%, then you'll want to see that expense entered into your bookkeeping. Your internet bill or your cell phone bill are good examples of mixed use expenses that you can claim a good portion of. Once you've worked out the portion that is used for business, for example 75%, then you have a few options for adding this to your bookkeeping. One option is that you can enter the bill with two separate categories: on the first line put 75% of the expense portion and catagorize it as the expense (cell phone, or internet for example), and then calculate the GST/HST on that reduced amount, (or manually put in 75% of the GST/HST in the tax field). Note in the description that it is 75% of the bill, and communicate it to your tax preparer how you entered these so that they don't further reduce the amount! If you are paying the bill from your business account, or you'd like to have the full amount of the bill in the bookkeeping, on the next line choose the category "Owner's contribution/Draw" or a similar category. Put in the remainder of the bill amount... NO HST can be claimed on the personal portion, so the total amount here would be the remaining amount of the bill.. no GST/HST!
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3. Claiming GST/HST on Business Use of Home expenses: This is a weird one. If your business is incorporated, you would need to connect with your accountant about how to claim your home office expenses. If your business is not incorporated, then you may already know that you may be able to claim a portion of your home expenses related to your home office expense on your tax return to reduce your taxable profit. But did you know you can also claim the GST/HST credits related to that? If you do not have a business location outside of your home, and you have a designated office space in your home to run your business, you can calculate the square footage of that space as compared to the square footage of your home, and how often it is used for business vs personal. Then, you may be able to use this percentage of your home expenses to reduce your taxable profit (connect with a tax specialist to see if it is applicable for your specific situation). If you can claim this, then how do you claim the associated GST/HST? Usually you CAN'T claim the GST/HST on expenses related to a property that is mainly used for residential use. But I said Business Use of Home was a weird one! We can claim the GST/HST credits related to the portion of the expenses we claim for business use of home at the end of the year! Whether you add the business use of home expense to your bookkeeping monthly, quarterly, annually, or not at all, is personal preference, but since it's usually such a low percentage, and because it's expense you'd pay even if you weren't running a business, many people opt to just put in an adjusting entry at the end of the year, or only adjust for the HST portion. You can put in an expense for just the percentage for the year (and associated HST) on the last day of the year before preparing your GST/HST to be filed. Or you could just add a GST/HST adjustment using a Journal Entry! If you do the latter, it's important to tag the GST/HST as "GST/HST on purchases/ITC/Line 106". Here's a video that can show you how!