Tax Articles
It’s Not Yet a Paperless World When Keeping Records for CRA
Business TImes
Kais Aziz, CA
While it may be the electronic era, the Canada Revenue Agency (CRA) has been issuing reminders that, when it comes to keeping books and records for your business, the Agency expects you to maintain appropriate documentation.
Over the past year, the CRA has issued a number of revised information circulars related to documentation for income tax and has updated its publication Keeping Records, to ensure that taxpayers get it right.
In case the CRA reviews or audits your business, this would be a good time to take a look at your approach to keeping books and records to ensure that you’re in compliance with the rules. You have a legal obligation to do so and can face penalties if you don’t comply.
While there are no rules specifying exactly what books or records you must keep, the CRA requires that these documents must:
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provide the ability to determine taxes payable or amounts to be collected, withheld or deducted;
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provide information to confirm all charitable, athletic and political donations received for which a deduction or tax credit is available; and
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include source documents that allow the information in the books and records to be verified.
What is considered ‘adequate’ books and records will vary from business to business, but generally includes such traditional information as general ledgers, sub-ledgers, and supporting documentation and receipts.
The CRA will accept electronic documents as well as those in paper form, however they must be in a readable, usable format that can be traced to supporting source documents and that would allow the CRA to process these records on its own equipment. Records 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. The information circular Electronic Record Keeping (IC 05-1) outlines the specific requirements. These include a description of your operating and business systems, a chronological record of changes to your business system, and a detailed audit trail to support any summarized information. This new circular also describes how to maintain the accuracy, integrity and security of electronic business systems.
If you keep records electronically, you need to retain all your source documents such as sales and purchase invoices. As well, be sure to back up records in case they are damaged or destroyed.
In general, you will have to keep your books and records for a minimum of six years from the end of the last taxation year to which they relate. Registered charities and Canadian amateur athletic associations have additional rules for certain records such as donation receipts. An exemption to the six-year rule applies for permanent records such as your general ledger and records relating to acquisitions and disposal of property, the share register, and any other historical information that would have an impact on the sale, liquidation or wind-up of a business. The CRA could extend this retention period if a return is filed late or if you have registered a notice of objection or appeal. Should the CRA request your books and records, you must make them available within a reasonable period of time. 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.
In the event that the CRA determines that your books and records are not adequate, the Agency may issue a written agreement specifying the documents you need to maintain. The CRA will follow-up to ensure that you comply and if it finds that documentation is still inadequate, will issue a formal requirement letter that outlines the legal consequences and penalties of non-compliance. If you still don’t comply, the CRA will likely assess penalties.
Don’t think of keeping books and records as an annoying legal and tax obligation, however. Think of the paperwork as an opportunity to make informed business decisions, to optimize the deduction of expenses, to reduce income tax preparation time—and to avoid problems in the event of an audit. All good reasons to keep your documents in order.
Kais Aziz, CA, is a senior manager of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Kais at (905) 270-7700 or kaziz@bdo.ca.
