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TAXATION

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 Responsibility

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.

CRA Request

In the event the CRA requests information, it is your
responsibility to:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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 userfriendly
    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.

Record Format

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.

An Important Business Procedure

Records must be kept in a format and for the time
period prescribed by the CRA and other regulatory
bodies. Meeting regulations is an important business
procedure that will ensure that any review of historical
records by the CRA will be as effortless as a review of
today’s information.

 

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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