Personal Income Tax

For the Record

Good record keeping today can prevent CRA penalties tomorrow.

We live in a digital world where everything is captured electronically in real time. Paper financial statements have become relics from the past; unfortunately, the requirement to produce evidence for the Canada Revenue Agency (CRA) for HST or income tax has not.

Tax

The CRA accepts records in:

  • paper format
  • paper format later converted to and stored in an accessible and readable electronic format
  • an accessible and readable electronic format.

As explained on the CRA website, Keeping Records: “We consider you to have electronic records if you create, process, maintain, and store your information in an electronic format. You are required to retain these records in an electronically readable format, even if you have paper printouts of these records. If any of your source documents are initially created, transmitted, or received electronically, they must be retained in an electronic format. Scanned images of paper documents, records, or books of account that are maintained in electronic format are acceptable if proper imaging practices are followed and documented.” (Canada Revenue Agency, Keeping Records, https://www.capacitycanada.ca/wp-content/uploads/2014/09/CRA-Record-Keeping-Guidlines.pdf)

For complete details of what is required, see Information Circular IC78-10R5, Books and Records Retention/Destruction, and GST/HST Memorandum 15.1 General Requirements for Books and Records and Canadian General Standards Board (CGSB) publication, CAN/CGSB 72.11 Microfilm and Electronic Images as Documentary Evidence, and its latest amendment.

Orderly Fashion

Both corporate and individual tax payers should be aware of the following:

  1. Records must be kept at your place of business or residence. They may not be kept outside Canada unless you receive CRA permission. This suggests that Cloud accounting to servers outside Canada does not meet the CRA’s criteria and that businesses need to keep the general ledger in CSV (comma-separated values) or PDF format on their own computers.
  2. Bank statements and credit card statement amounts, with the exception of bank charges and overdraft interest, will not satisfy the CRA. Original source documents that support e-transfer, cheque or deposit information are required.
  3. Payments of credit card balances are often lumped together with other expenditures when payments are made to the credit card company. In the event of a review, not only will you be required to produce the statements, you will have to produce the backup (i.e., invoices) for amounts shown on the credit card. Thus, original purchase invoices will be required.
  4. Receipts for debit card purchases for small items are often discarded. Without an original source document, these expenditures may be disallowed by the CRA.
  5. Accounting programs are available that attach the original electronic invoice to the specific purchase or sale. This is helpful when backtracking to the original electronic invoice. But what about purchases made off the business premises? Documents for these purchases should be scanned or photographed and placed into an appropriate folder that establishes the date of the transaction, the amount, and a description of the item(s). If using PDF software, indicate the journal entry on the PDF so that a review of the general ledger can quickly source the document.

Keep all original copies in case of a lawsuit.

Retention of Legal Documents

Documents such as purchase contracts, financing covenants, shareholder agreements, etc., should be scanned and saved in perpetuity. Hard copies of such documents should also be kept because the original source document will be required in the event of a lawsuit.

Since source documents must be maintained for a minimum of six years, it is advisable to:

  • ensure all records are electronically copied to an external hard drive stored off-site
  • back up data to a local offsite facility or the Cloud as well as an external hard drive
  • ensure data is stored in a format useful if you need to produce historic financial records. Because some software providers can only provide backup of financial data in CSV, charts, formulas, row styling, images, and other presentations will not be forthcoming when using a CSV data dump.
  • back up on a regular basis. Software is available that will automatically back up data as frequently as you need.
  • ensure that a new computer, software or operating system will allow updating of the old database. It may be advisable to hold onto the older computers to ensure access to old records if required. Ensure that all old passwords are stored with the old devices.
  • ensure computers used in discontinued operations are not discarded and data stored in the Cloud is recovered and stored on an external hard drive and/or payments for the Cloud service are maintained.

Failure to record and retain records properly can be costly. Consider this: if a business spends $1,000 and does not have the supporting receipt, not only has the business lost the income tax deduction, it has also lost the ITC charged on the purchase. Self-employed individuals in Ontario could lose $430 if they are in a 30% tax bracket and entitled to an ITC of 13%. An incorporated business would suffer similar losses in tax advantage and ITC refund, depending on the business’s province or territory.

Check Your Record Keeping with Your CPA

Your CPA understands the need for record retention to satisfy not only business needs but also CRA requirements. Your chartered professional accountant should review your accounting and record-keeping system to determine whether improvements could be made to ensure your business is ready and able to provide the information required in a CRA review.


The preceding article is reprinted from the February 2018 newsletter Business Matters with the permission of the Chartered Professional Accountants of Canada.  Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request. 

This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this article, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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