Taxation – For the Record
For the Record
Complete, accurate and readable records will make a CRA audit less onerous.
Regardless of whether your business is a proprietorship, a partnership or an incorporated company, the Canada Revenue Agency (CRA) requires the business to maintain financial books and records. Here are a few of the CRA’s record-keeping requirements you should know.
Only in Canada, eh?
The CRA requires that records must be kept in Canada, either at your place of business or your residence. If your head office is in Canada and your books and records are stored electronically outside the country and accessed by your Canadian-based operation, these records are not considered to be maintained at your head office. Thus, if you are currently running cloud-based accounting software that is storing data in a foreign jurisdiction, your business is in violation of CRA requirements. If you wish to keep records in a jurisdiction other than Canada, you must seek written permission from CRA to keep them elsewhere.
Your business must assure the books and records are protected and available for inspection even if a third party is processing or storing the information. The third party must have adequate security and backup to be able to provide information when requested.
Records must be complete and unabridged.
Complete and Unabridged Records
Records must be complete and unabridged, have sufficient information to support your tax liability or claim to funds owing to you, be supported by documentation and be maintained in English or French, or a combination of both languages.
Electronically stored data must be readable by CRA software.
In the event the CRA requests information, it is your responsibility to:
- Produce books and records (general ledger, accounts payable/receivable/payroll, etc.) requested, whether those records are in electronic form or hard copy: It is not your responsibility to provide data that is not requested. Thus, it is prudent to request written documentation outlining specific requirements for your particular business.
- Ensure documents supporting the books and records are available: In the main, the CRA would like to see original-source documents such as expense receipts, contracts, sales receipts, etc. With most businesses opting for electronic processing of sales invoices, taking pictures of expense invoices, or receiving images of suppliers’ invoices, hard-copy data is rapidly disappearing. Nevertheless, the transition to electronic copies does not diminish the responsibility to keep and be able to produce records upon request from the CRA.
- Make sure your employees or the third-party record keeper is available when an audit or examination of records is required: Co-operation in accessing and providing information means the CRA will be in and out of your office quickly.
- Allow the CRA to make copies of the data or provide copies to the agent as requested: Under normal circumstances, a business should not allow original-source documents to leave with a CRA agent.
- Be able to decrypt encoded information in order to provide the data to the CRA: If you change service providers, ensure that all data is readable.
Factors to Consider
- If data is maintained on a remote server, whether inside or outside Canada, ensure original data can be downloaded to an in-house computer or to another server.
- If you use a cloud-based accounting service, make sure your business can download data in a user-friendly format. You should also consider whether you will be able to produce current data if you stop using your service provider or it goes out of business.
- Before upgrading or changing computers, ensure all data is backed up in at least two locations.
- Ensure software is available to open historical data.
- Store older computers with historical software and data.
- Keep a written record of all software and data access codes by year, device, software, and data base. Without such a record, you may not be able to access information five years from now.
Original paper documentation must be kept in paper format unless it is converted to and stored in an accessible and readable electronic format. CRA guidelines suggest that microfiche and/or microfilm can be used as well; however, most businesses would probably opt for a high-speed scanner to store historic data. The CRA insists that any reproduction must provide the same detail as the original paper document without issues of “resolution, tonality or hue”.
Length of Storage Period
The CRA requires that all records and supporting documentation must be kept for six years from the end of the last tax year. The tax year is considered the fiscal year end for a corporation and the calendar year for an individual. This retention period is also required by the Employment Insurance Act, the Canada Pension Plan, and the Excise Tax Act (GST/HST).
Other Retention Issues
Documents concerning long-term acquisitions and disposal of property, the share registry, or other historical information that would have an effect on the sale, liquidation or wind‑up of the business must be maintained indefinitely. CRA may ask you to maintain records for longer periods. If an income tax return is filed late, the destruction date is six years from the date the return was filed.
In the event of an objection or appeal, all data must be maintained until the latest of the:
a) date the objection or appeal is resolved
b) date for filing further appeals has passed
c) six-year record-keeping period has expired.
If you are a sole proprietor or in a partnership, records must be kept for six years after the end of the taxation year of ceasing business. If a company is dissolved, keep all records and supporting documents for two years after the date of dissolution.
Before You Destroy Records
Legal representatives of a deceased taxpayer should obtain a clearance certificate before they destroy records that show how property of the deceased was distributed.
When concerned about GST/HST issues, it is advisable to ask for and fill out form GST352 Application for Clearance Certificate. If you wish to destroy records before the mandatory retention period, complete form T137 Request for Destruction of Records or apply in writing to your local tax service office.
If you have made electronic copies of the original paper books of account and supporting documents and the CRA considers the images to be representative of the original documents, you can destroy the original paper documents.
Tax regulations suggest that destruction of records in advance of mandatory retention dates or before receiving official written permission may result in prosecution.
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