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TAXFlash News from IncomeTaxCanada.net
:: Canadian Income Tax Act requires taxpayers to keep records and books, including all source documents to verify the information
:: In the wake of another tax year, taxpayers may find themselves faced with yet another pile of paper to file away. Dealing with ever-expanding storage needs, taxpayers invariably wonder what they are supposed to do with all the stuff they’ve accumulated in support of their tax filings. Managing books and records isn’t usually an insurmountable problem for taxpayers with basic tax returns – the same cannot be said for self-employed taxpayers or those with rental properties, for example. Depending on the complexity of their affairs, these people may find themselves swamped with paper. Not surprisingly, taxpayers begin to question the nature of their responsibility to manage all of this information. Who has to keep books and records? The Income Tax Act states, “every person carrying on business and every person who is required… to pay or collect taxes… shall keep records and books of account”. So in essence, if you’re a taxpayer, you’re required to keep books and records. What are books and records anyway? Turning again to the Income Tax Act, we find “record” is defined to include “an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form”. With a phrase “any other thing containing information” could the definition be any broader? CCRA’s Information Circular (IC78-10R3) on the issue points out that, as a general rule, the Department does not specify the books and records to be kept. Rather than attempting to produce the all-inclusive list, CCRA spells out what the taxpayer’s books and records must do, namely “permit the taxes payable or the taxes or other amounts to be collected, withheld, or deducted by a person to be determined” and “be supported by source documents that verify the information in the records and books of account”. Typical books and records will consist of sales and purchase invoices, bank statements, cancelled cheques, deposit books, inventory listings, contracts, cash register tapes, work orders and so on. Where do books and records have to be kept? Foreseeing that some smart aleck will decide to store his books and records in the remotest place on the planet, the Income Tax Act stipulates that such documents must be kept “at the person's place of business or residence in Canada or at such other place as may be designated by the Minister”. No doubt drawing on actual experience, the Circular goes on to point out that such access must be at all reasonable times - forcing a tax auditor to work the midnight shift because that’s the only time your books and records are available won’t likely be considered reasonable. In what form can books and records be kept? The Circular provides that all documents that originate in a paper format must be kept. This includes documents that are used as a source from which data is entered into an electronic record-keeping system. So maintaining a computerized accounting package or spreadsheeting expenses doesn’t negate the need to retain paper source documents. To state the obvious, computer technology changes rapidly and it’s not unusual to encounter situations where older computer files cannot be read by newer software/hardware. Where electronic records are concerned, it’s up to taxpayers to ensure that electronic records are in an electronically readable format and properly backed-up. Accepting that computers are not a fad, CCRA does allow paper source documents to be converted into digital format. Before firing up your CD burner and scanning to your heart’s content, you should be aware that reproductions of books of original entry and source documents must be produced, controlled and maintained according to the national standard of Canada. What’s that you ask? Well the Canadian General Standards Board actually produces a publication called Microfilm and Electronic Images as Documentary Evidence. The rules in this area are fairly stringent so my hunch is that scanning source documents isn’t likely to be worth the effort for the average taxpayer, even those who are self-employed. How long must books and records be kept? For individual taxpayers, books and records must be kept for a minimum of six years from the end of the last taxation year to which they relate. Notice that the operative word here is “relate”. This means the minimum retention period is generally determined by the last tax year when a record may be required for purposes of the Income Tax Act, and not the year when the transaction occurred and the record was created. For example, records supporting the acquisition and capital cost of investments and other capital property should be maintained until the day that is six years from the end of the last tax year in which such an acquisition could enter into any calculation for income tax purposes. In most cases this will be the year in which such an asset is sold and not the year of purchase. Finally, if you just can’t wait to start shredding, you can apply to CCRA (Form T137) for permission to destroy books and records. Before permission will be granted all required tax returns must have been filed and assessed and the periods for filing notices of objection or appeals must have expired. It’s also worth noting that CCRA can only grant permission to destroy income tax related records; other government departments (EI, CPP and WCB for example) will have their own rules of retention. Maintaining and storing books and records is a major pain but premature destruction isn’t likely to help your situation if you’re called upon to support your filing position.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney