13 December 2006 External T.I. 2005-0156201E5 F - Records on Heat Sensitized Paper
Principal Issues: (1) What is CRA`s position regarding the retention of supporting documents on heat sensitized paper in view of the fact that one of the characteristics of this type of paper is that the data on such paper disappears over a relative short period of time? (2) Whether the CRA can disallow expenses because purchase invoices on heat sensitized paper are impossible to read? and (3) Whether the taxpayer could be penalized pursuant to ss. 163(2) for making a false statement under circumstances amounting to gross negligence if the taxpayer did not photocopy or digitize its purchase invoices on heat sensitized paper?
Position: (1) None. (2) Yes. (3) Generally, no
Reasons: (1) None. (2) The CRA's practice is to disallow unvouchered expenses unless there is other satisfactory evidence to support the amounts claimed. (3) The CRA's practice is not to levy the penalty under ss. 163(2) for unvouchered expenses unless (1) the evidence clearly indicates that expenses were grossly or deliberately overstated or (2) the amount of the disallowed expenses is material and the adjustment can be supported by a formal net worth statement.
2005-015620 XXXXXXXXXX Marc LeBlond (613) 946-3261 December 13, 2006
Dear Sir,
Subject: Thermal paper and record keeping
This is in response to your letter of October 20, 2005, in which you requested our general comments on the above subject in relation to the situation described below. We apologize for the delay in responding to this request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The situation
- In a particular taxation year, a taxpayer (either a small corporation or an employed individual) makes purchases (e.g., for the corporation, purchases of office supplies from big-box stores and for the individual purchases of gasoline from gas stations). The taxpayer obtains receipts from the suppliers as proof of his purchases ("Purchases") on thermal paper on which the supplier does not write the name of the customer.
- The taxpayer is aware that one of the characteristics of thermal paper receipts is that the information on them naturally disappears after a few months. The taxpayer is not in the practice of photocopying or scanning the receipts on thermal paper for various reasons, mainly the costs associated with doing so, which are considered to be too high.
- The taxpayer records the Purchases in the taxpayer’s books of account and keeps the invoices.
- The taxpayer takes the Purchases into account in computing income (for the corporation, from a business; for the individual, from an office or employment) for the particular year.
- It is reasonable to consider that the Purchases were made by the corporation for the purpose of earning income from a business; and by the individual for the purpose of travelling in the course of employment.
- Two years after it is filed, the taxpayer's income tax return for the particular year is audited by the Canada Revenue Agency (the "CRA"). The auditor finds that the receipts for Purchases are illegible.
Your Questions and Analysis
In essence, you are arguing that taxpayers who have supporting documents on thermal paper (on which entries disappear within a few months) may have difficulty meeting the CRA's record retention requirements for the purposes of the Act as described in Information Circular IC78-10R4 " Books and Records Retention/Destruction”, in particular, those described in paragraph 12, as follows:
A person who is required to keep books and records is responsible for keeping the books and records in a way that will ensure the reliability and readability of the information recorded.
In your opinion, in order to meet the requirement in paragraph 12 of the Circular, the taxpayer with receipts on thermal paper could either photocopy them or scan them. However, it seems unfair that taxpayers should have to take such measures given the significant costs involved, especially since the origin of the taxpayer's problem in meeting the requirement is due to the use of thermal paper technology by suppliers of goods and services.
You therefore asked us, firstly, what is the CRA's position on the retention of supporting documents on thermal paper.
Secondly, you asked us, in the situation you have presented, whether the CRA can disallow the Purchases expenses on the basis that the supporting documentation is not intelligible. If so, could the taxpayer be subject to a penalty for making a false statement in circumstances amounting to gross negligence pursuant to subsection 163(2) solely because the supporting documentation for the Purchases is illegible and the taxpayer did not photocopy or scan it? In addition, you asked whether, to prevent this problem, you should recommend that your clients keep, in addition to the thermal receipts, either a photocopy or a scanned copy of them.
Your last question is whether, in the situation submitted, the individual buys a computer and a scanner to process the vouchers for the Purchases, the cost of that equipment could be deducted in computing income.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments. These comments may, however, under certain circumstances, not apply to your particular situation.
Generalities
Section 230(1) "Records and books" reads as follows:
Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.
[Emphasis added]
It follows from section 230 that every person carrying on a business and every person liable to pay tax is obliged to keep records and books of account in such form and containing such information as will enable the CRA to ascertain, inter alia, the validity of expenses claimed by a person (e.g., in the person’s income tax return) and thus to determine the amount of tax payable under the Act by the person for a particular year.
Information Circular 78-10R4 provides, inter alia, for the following:
Records to be kept
6. As a general rule, the Canada Revenue Agency (CRA) does not specify the books and records to be kept. However, books and records have to:
- permit the taxes payable or the taxes or other amounts to be collected, withheld, or deducted by a person to be determined; […]
- be supported by source documents that verify the information in the books and records.
7. A source document includes items such as sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form.
[Emphasis added]
Furthermore, the CRA requires that receipts or invoices include all of the following information1 (which, of course, must be intelligible):
- the date of purchase;
- the name and address of the vendor or supplier;
- the name and address of the buyer;
- a full description of the goods or services.
Response to Question 1
To the best of our knowledge, the CRA has not established a specific position with regard to the retention of supporting documents on thermal paper.
Response to Question 2
The CRA could, in the situation you have presented to us, disallow the expenses for the Purchases. On the other hand, the fact that the supporting documentation for the taxpayer's Purchases is illegible and has not been photocopied or scanned, in and of itself, would not necessarily result in the application of the subsection 163(2) penalty. Our conclusions are based on the following observations.
Denial of unsupported expenditure
It is CRA's practice to disallow expenses that are not supported by appropriate documentation, unless there is other satisfactory evidence to support the amount claimed.
Gregory J. Keating v. The Queen, [2001] T.C.J. No. 466, Docket No. 2000-5178(IT)I (2001 UDTC 198 (2001 DTC 3750)), points out, in paragraphs 13 and 14 of the judgment, inter alia, that non-compliance with subsection 230(1), in and of itself, is not sufficient to conclude that an expense was not made, and that in such a case, the taxpayer bears the burden of proving that the expense was incurred:
[13] In Archambault v. Canada, Judge Archambault reviewed the jurisprudence relating to section 230 and stated at paragraph 44:
Associate Chief Judge Christie provided a very good summary of the state of the law on that issue [s.230] in Kay v. Canada, [1994] T.C.J. No. 487, para. 9:
It may be appropriate to say something about taxpayers keeping records and books of account. Under subsection 230(1) of the Income Tax Act every person carrying on business and every person who is required to pay taxes shall keep records and books of account in such form and containing such information as will enable the taxes payable under the Act to be determined. Failure to comply with the subsection will not, of itself, result in the dismissal of an appeal against a reassessment of liability to income tax. But it could interfere with an appellant's ability to discharge the burden of proof on him of showing that, on a balance of probability, the reassessment is in error. This was recently dealt with by the Federal Court of Appeal in Sidhu v. M.N.R., 93 D.T.C. 5453 (F.C.A.). Mahoney J.A. in delivering the judgment of the Court said at page 5454-5:
The requirement of s. 230(1) may fairly be characterized as absolute but the consequence of not complying is liability to conviction of an offence under s. 238(2), not necessarily a conclusion that transactions which ought to have been recorded did not occur. The failure to record transactions will inevitably handicap a taxpayer seeking to discharge the burden of proving that they took place but the responsibility of the trial judge in such circumstances is to decide, on a balance of probabilities having regard to all the evidence and its credibility, whether any, all or none took place. The proper approach was demonstrated by Strayer, J., in Schwartz v. Her Majesty the Queen, 87 D.T.C. 5274 at 5275.
The law places the onus on the taxpayer in such cases to prove wrong the Minister's reassessment on the basis that the taxpayer is in a better position to prove what actually happened, if he chooses and is able to do so. Unfortunately, the plaintiff has not been willing or able to particularize in any way the purchases made by him. He has confirmed on many occasions that the figures provided by his accountant as to his total purchases were correct. If he had made any effort to corroborate this and his oral evidence had seemed forthcoming and credible, it might have been possible to find in his favour even in the absence of any vouchers, receipts or other written records. Unfortunately neither of these requirements were met.
[emphasis added]
[14] The Appellant does not have any records pertaining to his use of the Company car for the 1996, 1997 and 1998 taxation years. However, this does not necessarily bar him from claiming a reduced standby charge. Despite a lack of records kept, corroborating oral and other evidence, if credible, can nevertheless discharge the Appellant's evidentiary task of proving on a balance of probabilities that he used the Company car more than 90% for employment purposes.
[emphasis added]
In light of the above comments, in the situation you have presented to us, it is our view that the CRA could disallow the expenses relating to Purchases if the supporting documentation for them is illegible. However, it could be otherwise if the taxpayer presented evidence that would allow the CRA to satisfy itself, on a balance of probabilities, having regard to all of the evidence and its credibility, that the taxpayer did in fact incur the Purchases.
Section 163(2) and unsupported expenditure
In general, the CRA's practice is not to apply the subsection 163(2) penalty where expenses are disallowed or reduced because they are not supported by documentary evidence unless the supporting documentation (1) clearly indicates that the expenses were clearly or deliberately overstated (e.g., fictitious expenses) or (2) does not clearly indicate that the expenses were clearly or deliberately overstated but the total amount involved is large and the total adjustment is supported by an official net worth statement.
It is impossible for us to give a definitive view on the potential application of section 163(2) in the absence of an analysis of all the facts and circumstances relating to a particular situation.
It should be noted that your letter only briefly describes a hypothetical situation. Nevertheless, in the situation you have presented, we believe that the fact that the supporting documentation for the taxpayer's purchases is illegible and has not been photocopied or scanned would not result in the application of the subsection 163(2) penalty.
Preventive measures for receipts on thermal paper
In our view, to prevent an expense from being disallowed on the basis that the thermal receipt is illegible, a taxpayer who purchases property from a supplier who uses thermal receipts should require a conventional paper receipt from the supplier that includes all the information requested by the CRA. Alternatively, if the taxpayer is unable to obtain a proper receipt or invoice from the supplier, the CRA expects the taxpayer to record in the taxpayer’s books and records the name and address of the supplier, the date of payment, the amount paid, the method of payment, and the details of the transaction (including a full description of the goods or services). Also, in this case, the taxpayer would be well advised to keep all other corroborating evidence of purchases (including, for example, proof of payment, such as cheques, bank statements, credit card receipts and credit card statements).
Response to Question 3
In the situation submitted, if a salaried individual buys a computer and a scanner to process thermal paper vouchers in relation to his Purchases, the cost of this equipment could not be deducted in computing the taxpayer’s income. Our conclusion is based on the following observations.
Section 8(1) provides that:
In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
The CRA states in Interpretation Bulletin IT-522R - "Vehicle, Travel and Sales Expenses of Employees” that:
An employee may only deduct those reasonable outlays and expenses related to employment income which are specifically permitted under section 8 in determining employment income.
[Emphasis added].
Section 8 does not provide for any deduction in computing a taxpayer's income for a taxation year from an office or employment in respect of the cost of acquiring a computer and scanner in circumstances similar to the particular situation.
We hope that these comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 In this regard, we refer you to the following CRA website address http://www.cra-arc.gc.ca/tax/business/ topics/solepartner/records/expense-e.html