Whether you plan on selling the business and need to show immaculate records to a buyer or whether you just want to ensure that an audit goes smoothly and that you are able to justify every last expense, you will need to keep good records. Not just good records – great records.
Ironically, there is no requirement in the Income Tax Act (the “ITA”) a taxpayer to have an original receipt in order to claim a business expense, yet if an auditor requests the original receipt and all one has is a copy or a scan or a credit card statement, etc., the auditor may disallow the expense altogether. So it’s best to keep everything that the auditor may want to see – and that includes original receipts. And of course we all know that some receipts fade over time. Even auditors get this. So you may want to keep a copy or a scan of those.
While taxpayers are only typically audited up to 3 or 4 years in the past, as a general rule, keep your records for six to seven years. According to the ITA, the six-year retention period begins at the end of the tax year to which the records relate. For corporations, the tax year relates to the fiscal period, and for individual taxpayers such as sole proprietors, the tax year relates to calendar years.
I suggest keeping records for a year or two longer than required even though the “CRA” may only reassess personal/corporate tax returns for up to three years and GST/HST returns for up to four years. And the reason for my recommendation is that if the auditor suspects fraud or gross negligence on the part of the taxpayer, they can open up and reassess years beyond the normal reassessment period. So it is best to be ready in case.
There are times when records shouldn’t ever be thrown out, such as things related to the disposal of property or major acquisitions. Examples include purchase/sale agreements, stock transactions and share registries. Without having access to these documents in the future at the time of disposition, it is impossible to ensure that the correct capital gain is being recorded, which could lead to more taxes being paid than necessary.
There are also some special circumstances where taxpayers must keep records beyond the standard time period.
In the case of an objection to the CRA’s Chief of Appeals, or subsequent appeals to the Tax Court of Canada (TCC), all records should be kept until the six-year period has passed, or until the matter has been concluded (whichever is later).
If a taxpayer files a late income tax return, records should be kept for six years from the date the return is assessed following filing.
If a business is unincorporated and operations have ended, records must be kept for six-years beginning at the end of the tax year that operations ended.
If the taxpayer is deceased, their executor should maintain all records until a time a clearance certificate is granted.
If there is a corporate merger/amalgamation, the resulting/acquiring company must retain corporate records as if the original business was still in existence.
When dissolving a corporation, after the dissolution, records must be maintained for two-years, and long enough that if the business is audited during the normal reassessment period (three-years for income tax returns and four-years for GST/HST returns), that it is able to prove its figures during an audit.
CRA information: IC78-10R5, “Books and Records Retention/Destruction,” provides additional guidance for record retention.
For electronic records, information circular IC05-1R1, “Electronic Record Keeping,” provides further guidance.
For those who don’t know what records they should keep, CRA document RC4409, “Keeping Records,” provides the requisite guidance.
The Importance of Maintaining Complete Records
Other than claiming Input Tax Credits or charitable contributions there is no positive requirement for a taxpayer to keep actual receipts.
In most cases auditors deny expenses when there are not perfect records and receipts. If you provide photocopies or scans or if you show bank statements and cancelled cheques, but are not able to provide the actual receipt, chances are that your expenses will be denied.
The single most important reason for maintaining complete records is that if you are ever audited in the future, unless you are operating a large company and get a competent, senior CRA auditor, your auditor may be less competent, they may be very junior, they may be inexperienced, and they will not have time to do a complete, thorough audit, and as a result of all of this, they will likely make many errors and disallow many expenses. Only with the proper records can the taxpayer properly defend themselves against this.
And remember, if you keep electronic records, you may be asked to show documentation to support your records. It’s important to keep all of your receipts, bank statements, deposit slips and cancelled cheques. Don’t find yourself in the position with your back against the wall after having lost data to a computer crash. Back up your business records. Keep a copy offsite. Auditors can use missing records as a reason to disallow expenses, which is much more costly than a backup hard drive.
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