Taxes, Documents, and Records

With another tax season over, what are your responsibilities for maintaining the documents, records and copies of submitted forms that you gathered to support the preparation of your return? What records do you have to keep and how long must you keep them before they can be destroyed?

For tax purposes, books and records, including computerized and e-business records, must be kept by:

• Every person who is carrying on a business; and
• Every person who is required to pay or collect taxes or other amounts according to
• Federal and provincial statutes, such as the Income Tax Act, Canada Pension Plan, Employment Insurance Act and other statutes, whether federal, provincial or municipal.

A “person” in this context includes not only individuals, but also corporations, charitable organizations and trusts.

Paper Format Books and Records

Records and books must be kept in a way that will ensure the trustworthiness and readability of the information recorded. Records and books of account (including source documents) that originate in paper format have to be kept in that format except where an acceptable imaging or microfilming program is in place in accordance with the national standard. Note that paper format also includes paper source documents from which data is entered into an electronic recordkeeping system.

Electronic Books and Records

If you keep records of business transactions or business information on a computerized system, (including e-business records), make sure:

• Your computerized system is capable of providing the correct information you need to calculate your tax obligations.
• Your computerized records are retained and easily converted into an electronically readable format that can be made available to the CRA upon request.
• Computerized records (electronic data files) are kept even when hardcopy is available.
• Encrypted records can be decrypted and produced in an accessible and electronically readable format.
• Appropriate back-ups are kept of all electronic records.

If you change your computerized record-keeping system - either hardware or software - you must maintain the capability to retrieve the data already stored on the former system and be able to provide the data in a readable format to the CRA upon request.

If your records are stored on a Web server outside of Canada, you are responsible for making arrangements for the records to be made available upon request.

Your obligations for maintaining, retaining and safeguarding books and records when conducting business over the Internet are the same as for any other type of business. If you use a third party to run your e-commerce business, it is still your responsibility to ensure that the electronic records are complete, are retained, are readable and will be made available to the CRA if required.

Retention of Books and Records

Your books and records must be sufficient to determine and verify your tax obligations. They must:

• Be maintained in Canada, unless permission is granted to maintain them elsewhere.
• Be made available to the CRA upon request.
• Include electronic records that are maintained and created by computerized record-keeping systems.

Generally, books and records (including business transactions or business information on a computerized system) should be kept for a minimum of six years from the date of the last taxation year to which they relate. The taxation year is the fiscal year for incorporated entities and the calendar year for the individual taxpayers. Keep in mind, though, that other federal or provincial statutes may extend this period for the same records.

If a tax return is filed late, the corresponding books and records must be maintained for six years from the date the return is filed. Further, if a federal Notice of Objection is filed, every book and record necessary for dealing with the notice of objection or appeal must be retained until that process is completed.

If a business closes, a non-incorporated entity must retain certain records until six years after the end of the taxation year in which the business ceased. Similarly, a corporation that is dissolved must keep certain records until the day that is two years after the day the corporation is legally dissolved. However, records for corporations that are amalgamated with, or wound-up into, another corporation must be retained for the time period of the amalgamated or parent corporation. The records referred to above need to be retained for six years after the year to which they relate. This may be much longer than it originally appears. Records for security purchases or the purchase of other capital assets will also relate to the year in which the asset is sold and, therefore, must be kept much longer.

Certain records, such as all shareholder and director minutes and a general ledger containing summaries of the year-to-year transactions, must be kept until after the corporation is dissolved.

Destruction of Records at an Earlier Date

In some circumstances, individuals and companies may apply for permission to destroy records at an earlier date than that prescribed by the Income Tax Act. However, if the CRA gives permission to destroy records and books, this permission does not extend to books and records that you are required to keep under any other legislation or by any other department or governmental agency.

Safeguards and Company Policies

Owner/managers should ensure that books and records are properly maintained and stored and not accidentally misplaced or destroyed.

What are your company’s policies for maintaining and storing documents?

• Do you have set policies and guidelines as to the specific types of files that are to be maintained such as correspondence, agreements, and source documents by type such as invoices, payroll, etc. How long are these stored?
• How and where are electronic documents stored? Are back-up copies stored off site?
• What documents are kept on site and what documents are stored off site?
• How are records of the location of these documents maintained?
• Who is responsible for the retention, and when required, the proper disposal of documents, e.g., shredding of paper, destruction of electronic media?

Whether you store documents on or off site, make sure storage boxes are marked and catalogued so documents can be easily retrieved when necessary. Certain documents, such as mortgage papers, corporate minutes, your Will, your shareholder’s agreement and the like, are best kept in a safe or at your lawyer’s office.

Good corporate governance on the retention and destruction of documents will help ensure you can meet the requirements of regulatory authorities in the event of an audit or other investigation of your records. Keeping careful records as to the location of your documents will minimize time and stress if you are required to retrieve them. And finally, destroying records that are no longer required will help reduce storage costs.

Talk to your accountant if you have questions or concerns regarding the period of retention or the appropriateness of your personal or company financial records.