The CRA’s Golden Rules for Documenting Expenses (The Audit-Proof Method)

If Parts 1 and 2 taught you what you can deduct, Part 3 teaches you how to prove it.

Because here’s the truth most business owners only learn during an audit:

The CRA doesn’t care what you remember — they care what you can document.

An expense is only deductible if you can back it up.
This post shows you exactly how to do that, step by step.

Rule #1 — Keep Every Receipt (Not Just Bank Statements)

Bank statements show that you paid for something — not what you bought.

The CRA requires the actual receipt showing:

• vendor name
• date
• amount
• tax breakdown
• items purchased

For meals or client meetings, you must also write:

• who you met
• the purpose of the meeting

No receipt = no deduction.

(Yes, CRA auditors throw out undocumented expenses — even if the charge shows in your bank.)

Rule #2 — Write Short Notes on Purchases

A tiny note makes a huge difference.

Examples:

• “Lunch with supplier — discussed pricing for 2025 contract”
• “Purchased drill bits — used for Bernhardt Projects renovation job”
• “Google Ads — lead generation for Castle Bookkeeping”
• “Fertilizer — Happy Grass weekly route”

A five-second note protects you from hours of explaining later.

Rule #3 — Keep Digital Copies Backed Up

Paper receipts fade, get lost, or end up in the washing machine.

Digital copies last forever.

Best practice for Castle clients:
Upload receipts to Google Drive or directly into QuickBooks Online as you go.

If you ever get audited, we simply open the folder.

Rule #4 — Track Vehicle Mileage (This One Is Non-Negotiable)

You can only deduct vehicle expenses if you keep a mileage log.

Must include:

• date
• start/end KM
• total KM
• destination
• purpose of the trip

No log = zero vehicle deduction.
The CRA is strict on this one.

Apps like MileIQ or QBO’s mileage tracker make it easy.

Rule #5 — Track Home Office Square Footage Properly

You must calculate and document:

• total square footage of your home
• square footage used regularly & exclusively for business

Then you can prorate heat, electricity, rent/mortgage interest, internet, etc.

If CRA sees “rough estimates,” they disallow it.

Rule #6 — Prorate Mixed-Use Expenses Honestly

Phones, internet, vehicles, utilities — if you use something for both personal and business, you must:

1. Choose a reasonable percentage
2. Document how you arrived at it
3. Apply that percentage consistently

Examples:

• Phone 60% business use
• Internet 40% business
• Vehicle 72% business (based on mileage log)

Honesty protects you more than guessing.

Rule #7 — Keep Year-End Inventory Support

If you have products, you must be able to show:

• what you had on hand at year-end
• the cost of that inventory
• how you calculated it

Liquor stores, retail shops, and e-commerce brands get flagged most often on this point.

Rule #8 — Store Everything for 6 Years

CRA requires you to keep records for six years from the end of the tax year.

If you shred too early or can’t produce documents, they can:

• deny expenses
• reassess taxes
• apply penalties

Digital storage is your best friend.

Rule #9 — Don’t Rely on Memory

“I think this was for business” won’t work.

You need to be able to show:

• what it was
• why it was needed
• how it ties to earning income

The more clear your records, the less CRA digs.

The Castle Bookkeeping Advantage

When everything is organized and supported, filing taxes becomes simple — and audits become painless.

We build this structure for you so you’re always protected.

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