Date: 01/02/2010

Record Keeping For Businesses and Individuals

Most business people (and for that matter, most individuals) view the subject of record keeping with about the same enthusiasm as they view budgets or tax return preparation - as a dreary obligation to be put off until it can't be ignored any longer. Notwithstanding, anyone who is required to file a tax return or who is engaged in carrying on a business is required by law to maintain "adequate" records, as that term is defined by the Canada Revenue Agency (CRA).

What records are required?

In most cases, the CRA doesn't actually specify just what records anyone needs to keep. Rather, the CRA's requirements are expressed in terms of the standards that the records kept must meet. Specifically, the Agency requires that records kept be "reliable and complete", provide the individual or business with the correct information needed to allow that person or business to satisfy their tax obligations, and be supported by source documents to verify the information contained in the records. As well, additional record keeping obligations are imposed on corporations and trusts. Corporations are required to keep the records of directors' and shareholders' meetings, as well as a share register documenting both the ownership of corporate shares and any transfers of those shares. Trusts are required to have a copy of a testator's will, if there is one, together with a listing of trust assets and liabilities as well as any books of account and records of any transfers of trust property.

Taxpayers are frequently surprised, when there is an error or omission in a tax return which they have paid a third party to prepare, to find that they remain responsible for any such errors or omissions. A similar rule applies to record keeping, in that both individuals and businesses are responsible for meeting the CRA's requirements with respect to record keeping, even where those records are prepared or maintained by a third party, like a bookkeeper, accountant, payroll company or internet transaction manager. The obligation actually goes even further, in that taxpayers or businesses are held responsible for third party changes (such as software or hardware upgrades or conversions) which might affect their records.

How long do I have to keep tax records?

The question of how long financial records, including income tax records, have to be maintained frequently arises. In most cases, the answer is six years from the end of the tax year to which they relate. In other words, the CRA requires that tax records for the 2005 individual tax year be kept until the end of 2012. For corporations which have a fiscal year which ends at any time other than December 31, most records must be kept for a period of six years after the end of the fiscal year.

While a retention period of six years is the general rule, there are numerous exceptions. For individuals, the most important of those exceptions relate to tax years for which a return is late-filed or for which a notice of objection or appeal has been filed. In such circumstances, records should be kept for the six-year period following the date on which the return was actually filed. Where a notice of objection was filed, records should be maintained until the notice of objection or appeal is disposed of and the time for filing any further appeal has expired, or until six years after the end of the tax year in question, whichever is later.

Where corporations are concerned, a number of factors can change or extend the time period for records retention, including corporate amalgamations or mergers and corporate dissolutions.

What if I keep my records in electronic format?

It is now the case that most businesses, and many individuals, keep tax and financial records in an electronic format of one kind or another. The use of such electronic format does not alter the six year retention requirement, but it does create some additional requirements with respect to the CRA's continued ability to access the information contained in those records.

The CRA requires that where records are kept by electronic means, the system utilized must have the capacity to produce and retain sufficient details to allow the taxpayer to determine tax obligations and entitlements. As well, any computerized records must be maintained by a system capable of producing records that are accessible to CRA officials and readable by CRA software. Any electronic records created must be maintained in an electronically readable format even where the original electronic source documents have been transferred to another medium (such as microfilm) or paper back-ups are kept. Finally, the CRA requires that the taxpayer maintain back-up records at all times, and that such back-ups be stored at a secure location, preferably off-site. Should the records be destroyed, it is the taxpayer's responsibility to recreate them, presumably using back-ups, within a reasonable period of time.

Where are records to be kept?

The CRA requires that all records, whether they are in paper or electronic format, be retained in Canada. When it comes to electronic records, records which are kept outside Canada (for example, on a server located in another country) and accessed electronically from Canada are not considered by the CRA to meet the "in Canada" requirement. The Agency does provide some latitude, in that where electronic records are maintained outside Canada, it will accept "true" copies of those records which are made available to the CRA in an electronically readable and useable format and which contain sufficient details to support tax returns filed with the Agency.

While the Income Tax Act does provide for penalties for a taxpayer's failure to maintain adequate records, a more frequent consequence of poor record keeping is the loss of deductions where expenses claimed cannot be supported by documentation. Receipts for many types of expenses claimed by individual taxpayers (such as child care expenses) do not need to be filed with the return, but must be retained in case the CRA later wants to verify the claim. And, of course, where tax returns are filed electronically (by telephone or computer) all supporting documentation remains in the hands of the taxpayer. No matter how a tax return is filed, the onus remains on the taxpayer to prove entitlement to any tax deduction or credit claimed, with adequate documentation. Failure to come up with the necessary documentation when it is requested by the CRA, either on a random spot check or as part of an audit, will undoubtedly result in loss of the related deduction. In the long run, while creating and maintaining complete tax records is undoubtedly a chore, doing so can save a lot of expense and aggravation down the road.

The CRA has summarized its policies on record keeping for tax purposes in a recently updated guide, which is available on its website at http://www.cra-arc.gc.ca/E/pub/tg/rc4409/rc4409-06e.pdf