My Writing > The evidence chain

Paper more important than ever
15 Mar 2007

Originally published in The TaxLetterVolume 25, No. 3, March 2007

by Eileen Reppenhagen

My mantra this and every year is "even if there are no transactions, never toss your statements for any of your investment, bank, or credit card accounts." But it frequently falls on deaf ears. Once again, at tax time, clients turn up missing months of statements. Yes, your friendly neighborhood TaxDetective may look like a miracle worker, but we simply cannot make things up.

If you have any losses carried forward, seriously consider keeping your investment files forever, or at least until enough time has elapsed that the last of your loss claims has been used up and six years after that date, but only if you don’t own anything now that was purchased before that six-year period has elapsed.

Why? Because you have to prove not only how much you sold something for but also what you paid for it and that it wasn’t part of a series of transactions where there were calculations of average cost of units acquired or sold at various times.

Don’t throw anything out if it has the potential to form part of a calculation for tax purposes. Keep all the pages for all the statements for each month, because sometimes there are notes that explain things that might not seem important but could be critical information.

You may not care, for example, that shares were exchanged, but an accountant calculating the adjusted cost base would definitely be interested in that information, because it might totally change the calculation of the capital gain or loss on disposition.

A nil statement proves that there were no transactions. Why would this matter? Even though the shares and cash may remain the same when there is a month missing, there could have been a buy/sell where the shares went in/out and the money was transferred in the exact amount so that the whole transaction would be invisible if that month’s statement were missing.

Believe me, CanRev doesn’t fool around. And they have plenty of tools at their disposal. For instance, the Proceeds of Crime, Money Laundering and Terrorist Financing Act requires that you identify the source of all funds. If your accounts lack total continuity, you could be required to produce the missing months in order to prove that there was no money-laundering activity.

Okay, I can almost hear your indignant objections: "Yes, but I’m just a one-man marketing company or a small mom-andpop convenience store. How would this possibly apply to me?" Well, think again. I don’t believe there has ever been a law made that hasn’t eventually been used against everyone. Think RICO in the US and similar laws in Canada, which were originally intended to bring racketeers and mobsters to book. Think I’m exaggerating? If you are not familiar with this law, check out the FINTRAC Website at www.fintrac.gc.ca.

Here’s an example of how you could be innocently caught up in a scheme. Has anyone asked you to hold money in your account for them during a month and requested the money back during the same month? Did you consider that you might be aiding and abetting a felon, otherwise known as a money launderer? The money may come from crime and may be third- or fourth-hand.

Money launderers are willing to spend money to clean money. The person approaching you may be earning money by washing the money through your account to make it legitimate. Here’s how it works. Someone hands you $1,000, asking you "invest" in some scheme that will double the money in a month. You flow the money through your bank or brokerage account. It may look like nothing has happened if you conveniently throw out that month’s statement. The gain would go undetected unless someone knew to look for that particular month’s statement. Or so you think.

The paper trail: These days, brokers are required to report all sale proceeds transactions directly to the Canada Revenue Agency. You may find that if you do not report your gains, someone from CanRev will eventually come knocking on your door.

The RCMP commercial crime unit makes presentations to accountants at our annual conferences. They warn that we can be a target for individuals wishing to launder money. To make it look legitimate, they will attempt to utilize the services of regular accountants, as well as unsuspecting relatives or newfound friends.

It is frightening to consider that someone would target a professional or even just an ordinary Canadian, but it makes it necessary to consider whether every client could potentially be the target of similar threat. What if someone asked you to launder money through your investment account? Would you recognize this for what it is or even consider that this is what was happening? What if they threatened that the well being of your family could become an issue if you did not do it? One minute you are just doing someone a favor and the next you’re the target of extortion. It happens.

Why keep everything? An auditor might ask to see the total history of your portfolio three or four years from now. Could you provide it? You might have to pay an hourly rate of $65 or more to the broker or bank to dig up old transaction reports just to prove there were no transactions in the missing months. If an account goes dormant for a month or two, some brokers will stop issuing a statement but will display the date of last statement on the next one.

If the statement says that there are three pages, then keep all three pages. Don’t toss extra pages. Yes, I know that the extra sheet is probably not valuable, but if the auditor can’t see it, he or she can’t determine that it has no value. Keep every page as well as the trading slips and other correspondence. If you move money in and out of various accounts, write notes beside the deposits and the transfer out on each statement to identify where the money came from and where it went to and keep the paper trail electronic.

Cash flow: Avoid moving cash from one institution to another. It is like a red flag to an auditor who is looking for a reason to do what is called an "Independent Verification of Income" or "net worth assessment" to determine that your deposits equal your revenue and that your lifestyle matches your cashflow. How easy is it to take out cash and then replace what looks like the same cash in the bank across the street and keep the original cash to spend?

Brokerage firms have disclaimers that you are required to keep your information. CanRev has the same rules for taxpayers. It is not your accountant who has to keep the records. It is you, the taxpayer. If a brokerage firm ceases to exist — and small ones go out of business all the time — its records must be kept for only two years after its windup. All the more reason for you to keep an extra banker’s box or two in the basement.

It is important to keep every statement to show total continuity. Recreation is very expensive and time consuming and sometimes impossible.

Just say "no": If anyone ever asks you to buy and sell something through your investment account, think twice and distance yourself from that person. In fact, contact the RCMP or FINTRAC immediately. Don’t just think, "Oh well, what’s the harm?" Don’t kid yourself. Do it once, and there will be a next time, and for ever-larger amounts. And soon you will be sucked into a place where you really, really don’t want to be.

People who are desperate to launder money find new and creative ways to do so and usually target friends, acquaintances, and business or professional contacts. You may be their next a target with your convenient investment accounts just ready for a laundering scheme.

Keep records: If you do not have a complete set of investment, asset, banking, credit and debt records, start today. Create a set of files for everything that you do have and make a resolution to fill in the blanks. And from now on, resolve to keep every statement.

Create files for every property you own, each investment account, including each RRSP, RRIF, life insurance policy. If you own a cottage, cabin, or recreational property, put all of the paperwork for the cottage in a file along with the improvements that might be capital improvements. Those improvements might reduce the capital gain when you sell the property or when you die, or the deemed disposition before a transfer to your children or other low-bracket family member.

Keeping a trail of the money that flows through your life is a responsible thing to do given the times we live in. If someone ever attempts to utilize your accounts for nefarious purposes, stop and ask yourself why you would ever allow anyone to park their money in your possession.

Warning to seniors: My final warning is to seniors who have homes without a mortgage. If someone in your family recommends you incorporate a company and suggests that you borrow against the equity in your home to invest in the stock market through your company, please seek independent professional advice immediately.

If the family member is excited about the possibilities of investing your equity to make a quick profit, look out. Any talk of handing over signing authority, multiple brokerage accounts, or chequebooks to draw funds any time you like, should set off the alarm bells.

If the family member advises you that you don’t need to file a tax return for a company for any reason, you have probably been duped. As the sole shareholder of the company, you are liable to report on the activities of your company and all draws may be deemed as income to you, even if you don’t see the money and it goes straight into the family member’s pockets because you gave them signing authority. Liability for payroll remittances to shareholders, taxes on profits, and tax return compliance could wipe out your estate before you are gone.

When your money is all gone, your house will be left with a huge mortgage against it that will wipe out your proceeds of sale. Of course, the family member — usually a distant or not so distant relation — will be long gone. You will be left with a box or two of records and when an auditor comes knocking, you are the one who will have the tax liability and any charges or penalties for noncompliance with applicable tax laws.

What to do: Never give anyone permission to trade on your accounts or to sign on your bank accounts unless you are certain you can afford to lose everything.

Power of Attorney: Finally, handle this issue of Power of Attorney very carefully. Remember that when you are no longer competent, the person you have entrusted with your Power Of Attorney cannot be removed from signing for you unless the courts find reason to do so. When you are no longer competent to assign Power of Attorney, you are no longer competent to remove it either. Scary thought.

If things go wrong, one hopes that the Public Trustee will act competently in your best interest if it discovers that you are being taken advantage of by less than scrupulous family members bent on utilizing their inheritance before you leave this earth. But leaving matters of such importance to a government agency often ends badly for everyone. Better to get good advice now than risk having your estate gutted later.


Eileen Reppenhagen, TaxDetective®, is a regular contributor to The TaxLetter. She is a Certified Quickbooks ProAdvisor and holds the Toastmasters Advanced Communicator Gold designation. She writes and speaks on accounting and tax. 

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