Tax laws specify a number of rules regarding records, documents and information taxpayers have to keep, in order for authorities to verify compliance with income tax laws.
Unless otherwise indicated, a reference herein to the federal Income Tax Act (ITA) will generally have a corresponding disposition in the provincial Taxation Act.
Records to keep
The policy of the Canada Revenue Agency doesn’t specify the exact nature of the documents, records, books, ledgers to be kept, but says that they need :
- to permit the taxes payable or the taxes or other amounts to be collected, withheld, or deducted by a person to be determined;
- substantiate the qualification of registered charities or registered Canadian amateur athletic association for registration under the Act;
- permit the verification of all charitable, athletic, and political donations received for which a deduction or tax credit is available; and
- be supported by source documents that verify the information in the books and records.
The following documents have to be conserved :
- sales and purchase invoices;
- cash register receipts
- formal contracts
- credit card receipts
- delivery and deposit slips;
- work orders
- cheques
- bank statements
- tax returns, and
- general correspondance.
Electronic records management and imaging
When original source documents and records are in an electronic format, they must be kept in an electronically readable format. They have to be supported and maintained by a system capable of producing records that are accessible to officials and readable by agencies’ software, even if you have paper copies of them or if you transferred them to another medium, such as microfilm or scanned image. Proper backup copies have to be stored, preferably at a site in Canada other than your business location;
All ledgers and paper source documents have to be kept unless an imaging system is in place as described hereinafter.
Electronic records management and imaging
When original source documents and records are in an electronic format, they must be kept in an electronically readable format
Electronic image means the representation of a source document that can be used to generate an intelligible reproduction of that document, or the reproduction itself. In the case of paper source document an intelligible reproduction means that:
- the reproduction is made with the intention of standing in place of the source document;
- the interpretation of the reproduction, for the purposes for which it is being used, gives the same information as the source document; and
- the limitations of the reproduction (e.g., resolution, tone, or hues) are well defined and do not obscure significant details
Retention period
Books and records have to be kept for the period or periods provided by subsections 230(4) to (7) and section 5800 of the Income Tax Regulations or until the Minister gives written permission for their disposal. Failure to comply with this requirement could result in prosecution by the CRA.
Subsection 230(4.1) of the Act (ITA) requires every person who keeps records electronically to retain them in an electronically readable format for the retention period outlined in subsection 230(4).
Under the Act, books, records, and their related accounts and source documents, other than those excepted by the regulations, have to be kept for a minimum of six years from the end of the last tax year to which they relate. The tax year is the fiscal period for corporations and the calendar year for all other taxpayers.
Importance of having source documents
An audit, as the name suggests is a procedure that verifies the nature, the suitability of all the evidence that supports an income tax return. Auditors are severely upset by the absence of source documents. Often the absence of such document is equivalent to its non-existence. A number of planning operations need supporting legal documents. When none are readily available, it is not always possible to redo the sequence. Books, records and documents in order are an insurance policy against trouble.
New policy of the CRA regarding documents dating
In certain instances, the tax authorities may contest dates appearing on documents using advanced chemical data analysis capabilities, if they have doubts concerning the actual date they were prepared. It may be legally possible to reconstitute certain documents, but it not always possible or even legal to do so.
