No Escaping The Paperwork: Keep your documents

Electronic tax filing is an excellent system: no worries about getting to the post office, no wasted paper, and a faster refund (two weeks on average). No wonder more and more Canadians are choosing to file their taxes online instead of on paper. Another advantage of electronic filing is that you don’t have to send in those pesky T4s, RRSP contribution receipts, and medical receipts. But don’t fall into the trap of believing that you don’t need to keep your records and receipts just as carefully as ever.

Let’s take the case of Carl, for example.

Carl had a root canal last year and wants to claim the amount as a medical expense, but has misplaced the receipt from his dentist, Dr. Yu. He checks his Visa bill and sees an amount of $800 paid to Dr. Yu’s office. Knowing that the figure must the amount he paid for his root canal, Carl tells his tax preparer to plug it into his tax return before filing it electronically.

Carl hasn’t actually done anything illegal. The amount is accurate, and it’s a legitimate medical expense. The problem comes if Carl’s name comes up for what’s called a Pre-Assessment Review.

The Canada Revenue Agency knows that with any honour system, there will be cheaters. As a countermeasure, they conduct periodic spot checks to make sure most people are being honest. When your name comes up for a Pre-Assessment Review, the government asks for documentation backing up one or more of the claims you’ve made on your return.

For the most part, the spot checks are random. Carl may get reviewed, or he may not. It has little or nothing to do with him personally. However, certain red flags make CRA more likely to take notice. A spike in your Medical expenses claim is one of those flags.

Carl’s preparer gets a Pre-Assessment Review letter with regard to Carl’s return. Carl and the preparer have 30 days to get send CRA proof to back up his claim for Medical expenses.

When CRA asks for documentation to support a claim for Medical expenses, they will only accept an original receipt. A copy of the Visa bill, or the doctor’s estimate from before the procedure was performed, or even a cancelled cheque, are not sufficient.

If Dr. Yu happens to be on vacation, or behind on his paperwork, or if he’s had a computer crash, Carl may be unable to get the documentation to CRA in time. CRA will then disallow the claim, increase Carl’s tax bill accordingly, charge interest retroactively, and send Carl a bill for the total.

You are responsible for keeping all the relevant documents, slips and receipts for seven years in case the government ever asks for them. So have everything in order, no matter how you file. You never know when you might need them.