Requirements for Maintaining Books and Records
May 2006
Release No: 06-02
Not only does keeping good financial records make sense so you can make informed business or investment decisions, but if you carry on a business or are required to pay or collect taxes, you have a legal obligation to maintain proper books and records of account. There are several pieces of legislation that contain rules concerning record keeping: the Income Tax Act (“ITA”), the Excise Tax Act, the Canada Pension Plan, and the Employment Insurance Act. To provide guidance on the rules, the Canada Revenue Agency (the “CRA”) has released income tax circulars and GST memoranda which outline their record keeping requirements.
In June 2005, the CRA released a revised Information Circular (IC 78-10R4, “Books and Records Retention/Destruction”) and a new Information Circular (IC 05-1) entitled “Electronic Record Keeping”. As well, the CRA issued updates to the GST/HST Memoranda Series that address the requirements for books and records, including computerized records. The CRA publication entitled “Keeping Records” (RC4409) has also been updated and provides good reference material for this subject. This Fast Fact highlights some key rules with respect to keeping records.
Who must maintain books and records?
Generally, any individual, partnership, corporation, or trust must maintain adequate records if:
- they are carrying on a business or are engaged in a commercial activity;
- they are required to pay or collect taxes or other legislated amounts;
- they are required to file an income tax or GST/HST return or apply for a GST/HST rebate/refund.
- they are a registered charity, a non-profit organization or a registered Canadian amateur athletic association.
- they are a registered agent of a registered political party or an official agent for a candidate in a federal election; or
- they are a university, college, school authority, municipal corporation, or hospital.
What books and records must be kept?
The definition of what constitutes a record is very broad and includes, for example, an account, an agreement, a book, a chart or table, a voucher and any other thing containing information, whether written or in any other form. While there is no rule specifying exactly what books or records have to be kept, the CRA does indicate that books and records must:
- provide the ability to determine what are the taxes payable or what are the taxes or other amounts to be collected, withheld or deducted;
- provide information that substantiates that a registered charity or registered Canadian amateur athletic association qualifies for registration under the ITA;
- provide information to confirm all charitable, athletic and political donations received for which a deduction or tax credit is available; and
- have source documents available that would allow verification of the information in the books and records.
What is considered adequate books and records will vary from business to business, but will generally include such traditional information as general ledgers, subledgers, and supporting documentation and receipts. The CRA “Keeping Records” guide lists specific requirements for special purpose entities such as trusts, charities and amateur athletic associations.
Where must the books and records be kept?
Generally, the books and records must be kept in a secure environment at the place of business or at your residence in Canada unless you receive special permission from the CRA to maintain them elsewhere. Note that records for a charity must be maintained in Canada without exception. If the CRA requests the books and records, they must be made available at all reasonable times. It is important to note that even if books and records kept outside of Canada are accessed electronically from Canada, they would not be considered to be books and records maintained in Canada.
What format must the books and records be in?
The CRA will recognize books, records, and supporting documentation kept in paper format. The CRA will also recognize books and records that are produced and retained electronically. The electronic records must be in a readable format that can be traced to the supporting source documents and which can be provided in a readable and useable format to the CRA such that they can process these records on CRA equipment. Even if you keep records electronically, you will still need to retain all your source documents such as sales invoices, purchase invoices, and other relevant documents. As well, you should ensure that you have a proper back-up of your records in case the records get damaged or destroyed! If you lose your electronic records and have no hard copy of the information, you must report this situation to the CRA and recreate the files within a reasonable amount of time.
If you create records and books in a paper format, you do not necessarily have to keep all the paper if you produce an electronic image of the documents that follows the requirements prescribed by the Canadian General Standards Board.
Note also that the books and record keeping responsibility will always remain with you even if you contract out this function to a third party.
Are there special requirements for electronic record keeping?
The CRA considers electronic record keeping to include “those electronic business systems that create, process, store, maintain and provide access to the financial records of a person” and can include custom and commercial software, point-of-sale systems and internet-based electronic commerce systems. As mentioned, the CRA must be able to process and analyze this data using CRA equipment and software. In particular, the CRA has a right to request an electronic copy of the records even if you provide them with a paper copy and they have the right to take an electronic copy of your records with them back to the CRA’s offices.
Note that IC 05-1 outlines further documentation requirements that are to be maintained which include a description of your operating and business systems, a chronological record of changes to your business system, and a detailed audit trail that would support any summarized information. The CRA may review your systems to understand the flow of information, to determine the reliability of its internal controls and to identify required electronic files.
This new circular also provides information about how to maintain the accuracy, integrity and security of electronic business systems.
Are there special rules for Internet-based eCommerce?
If you do business over the Internet, you must also ensure a proper audit trail is maintained, either by generating web logs or emails that can be used to confirm a transaction or by using security measures to preserve the authenticity and integrity of records (such as electronic signatures). Otherwise, the requirements discussed throughout this Fast Fact apply. Note that if you use third-party services providers to run your website and the associated eCommerce, it is still your responsibility to make sure their systems are producing and maintaining proper documentation.
How long do I have to keep the books and records for?
In general, you will have to keep your books and records for a minimum of six years from the end of the last tax year to which they relate. However, there are specific retention periods prescribed in the Income Tax Regulations for registered charities and Canadian amateur athletic associations that have their registration revoked, and certain donation receipts or records relating to political contributions. The retention period will be extended if returns are late-filed or if there is a notice of objection or appeal underway. Note that it may be possible to destroy records sooner with CRA permission. The same time periods apply to both electronic and paper copies.
An exception to the six-year rule applies for permanent records, including records related to the acquisition and disposal of property, the share register of a corporation and other historical information that would have an impact on the sale, liquidation or wind-up of a business. These records must be maintained indefinitely. Special rules apply to charities and amateur athletic associations.
What information does the CRA have access to during an inspection, audit or examination?
The CRA may review or audit any of your relevant documents, property and processes but may also review documents of any other person that may have information the CRA believes should be contained in your books or records. This requirement extends to “foreign-based information or documents” located outside of Canada as they may contain relevant information required by the CRA to administer and enforce the ITA. Therefore, a non-resident who carries on a business in Canada may be required to provide this information. The CRA may assess penalties for failure to provide requested information or documents.
What if my books and records are not adequate?
If you do not have adequate books and records, the Minister has the ability to specify what books and records you need to maintain and will normally request a written agreement to this effect. The CRA will follow-up to ensure that you are complying with the agreement. If your books and records are still found to be inadequate, they will issue a formal requirement letter outlining the books and records to be maintained and what the legal consequences and penalties of non-compliance are. The CRA may assess penalties if adequate books and records are not maintained.
What requirements are there for GST/HST records?
The rules outlined above for maintaining adequate records also apply to GST/HST records. You must keep adequate records if you:
- carry on a business or are engaged in a commercial activity in Canada;
- are required to file a GST/HST return; and
- make an application for a rebate or refund.
Adequate records must include sufficient details on the goods and services traded to be able to determine whether they are subject to GST/HST and to perform the required tax calculations.
What records do I have to maintain in order to support a claim for a GST/HST input tax credit (ITC)?
Remember to maintain adequate records to support your claim for an input tax credit. This documentation, whether it be on receipts, invoices or contracts, must provide specific information about the purchase. The specific information required by the CRA depends on the amount of the purchase.
For purchases where the total sale is under $30, the required information includes:
- the vendor’s (or the intermediary’s) business or trading name;
- the invoice date (or if invoice not issued, date on which the GST/HST is paid/payable); and
- the total amount paid or payable.
For purchases where the total sale is from $30 to $149.99, the required information includes:
- all of the requirements listed above;
- the total amount of GST/HST charged or that the amount paid/payable for each taxable supply includes GST/HST and the applicable rate of tax; and
- the vendor’s (or the intermediary’s) Business Number.
For purchases where the total sale is $150 or more, the required information includes:
- all of the requirements listed in the above two sections;
- the buyer’s name or trading name of the duly authorized agent or representative;
- a brief description of the goods or services; and
- the terms of payment.
With the CRA release of information circulars and memos concerning record keeping, this is a good time to review your approach to keeping books and records to ensure that you are in compliance with the rules. It will also ensure you are able to provide the CRA with the relevant information or documents if they are requested during a CRA audit or review.
Should you require any assistance in complying with these requirements or receive an information request from the CRA, consult with your BDO advisor.
Please note: this material is general in nature and should not be relied upon
to replace the requirement for specific professional advice. © May 2006, BDO Dunwoody LLP
