All businesses operating in Canada, from multinational corporations to the smallest start-up, are required to keep business records recording their income, expenses, and, ultimately, the profits on which they will be taxed. Traditionally, such records were kept in paper format, through ledgers and journals in which entries were made by hand. Those traditional methods are, of course, giving way (or perhaps have already given way) to the use of spreadsheets, accounting software, electronic purchasing, and inventory control systems and tax return preparation software.The move to electronic record keeping has meant, of course, that the Canada Revenue Agency (CRA) has had to adapt its rules on required record keeping to address this reality. When it comes to the basic rules around business record keeping requirements, however, not much has changed. This post summarizes those basic rules which apply to all business record keeping, in whatever format, as well as the newer rules developed to address electronic record keeping by businesses.
The Basic Rules of Business Record Keeping
There are no exceptions to the rule which requires anyone who carries on a business or engages in commercial activity in Canada to keep accurate records of their business or commercial activities. And, even if such a requirement wasn’t mandated by law, it would just make business sense. Every business needs to have an accurate understanding of its inventory,expenses, revenue, and, ultimately, its profits. And any business which doesn’t do so is very likely headed for failure. As well, it’s impossible to fulfill a business’s tax filing obligations without that information. Business expenses which can’t be documented in some way can’t be claimed as a deduction from business income, and business tax credits can’t be claimed without supporting documentation. Finally, nearly all businesses must seek external financing at some point, whether through loans from banks or other lenders, or by the sale of shares in the business. No one is likely to lend to or invest in a business which can’t provide an accurate accounting of its current financial state. The CRA does not mandate any particular form or structure for business record keeping. Rather, as outlined in the CRA guide on the subject, the Agency requires that whatever the methodology, the records kept by a business must:
• be reliable and complete;
• provide the taxpayer with the correct information needed to enable it to meet its tax obligations and to calculate any credits to which the business is entitled;
• be substantiated by supporting documents to verify the information contained in the records; and
• include other documents, such as appointment books, logbooks, income tax and GST/HST returns, scientific research and experimental development (SR&ED) vouchers and records, and certain accountants’ working papers, that assist in determining the businesses obligations and entitlements.
Where the business in question is an incorporated one, additional record keeping requirements are imposed. Corporations must keep records of the minutes of meetings of the directors of the corporation and all shareholders’ meetings, must keep an accurate record of who owns the shares of the corporation and any transfers of those shares. And, no matter what the business structure, where an individual, partnership, or corporation operates more than one business, separate records must be kept for each one. The CRA recognizes that we are, in effect, in a period of transition in which the traditional method of paper record keeping is being supplanted by electronic records. The Agency is therefore prepared to accept books and records which are prepared in either or both methods. Specifically, the CRA accepts records prepared and retained entirely in a paper format, those which are produced on paper and subsequently converted to and stored in an electronically accessible and readable format or electronic records, and supporting documents which are produced and stored entirely in an electronic environment. However, no matter what format is used, supporting documents (i.e., purchase invoices, cancelled cheques, bank deposit records, work orders, credit card slips) for those records must also be maintained and kept in either a paper or electronic format.
How Long Must Records be Kept?
The general rule for record keeping requires that business records be kept for six years after the end of the last tax year to which they relate. Therefore, as an example, business records pertaining to the 2012 tax year must be kept by the business until the end of 2018. As with most things tax-related, there are special circumstances in which different rules apply. If a business’s income tax return for a particular year is filed late, then the records relating to that return should be kept until six years from the date of filing. Similarly, if a notice of objection or appeal has been filed with respect to the CRA’s assessment of a business tax return, the records relating to that objection or appeal should be kept for six years after the objection or appeal is disposed of or the time for filing of a further appeal is expired, whichever is later.
Special rules also apply where an unincorporated business closes or a corporation is dissolved. In the former circumstance, business records must be kept for six years after the end of the tax year in which the business ceased to function. In the latter, records for a dissolved corporation must be kept for two years after the date of dissolution. Finally, where a corporation amalgamates or merges with another corporation, business records must be kept as if the newly formed corporation was a continuation of each of the original ones—in other words, even though a new corporation has been created by the amalgamation, records relating to the two original corporations must nonetheless be maintained for the time periods which would have been required if those two original corporations were still in existence.
Early Destruction of Business Records
It may happen that a business owner wishes to destroy the records of a business earlier than the time period mandated under the rules outlined above. Such destruction is possible, but only with the permission of the CRA. Such permission can be obtained in either of two ways: an application can be made to the business’s Tax Services Office (a listing is available on the CRA Web site at http://www.craarc.gc.ca/cntct/tso-bsf-eng.html), or the business owner can complete and file Form T137, Request for Destruction of Books and Records, which is also available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t137/t137-11e.pdf.
Where Must Records be Kept?
Before the advent of electronic record keeping, this is a question which would have arisen infrequently, and usually only in the context of a multinational business. For the most part, paper records were kept on the business premises, or perhaps in the office of the bookkeeper or accountant who kept the books and handled the payroll. That, of course, has changed with the implementation of electronic record keeping, which allows business records to be stored on a server located literally anywhere on the globe. Notwithstanding, the rule remains that business records, in whatever format, must be kept at the place of business or the business owner’s residence in Canada, unless permission is obtained from the CRA to store those business records outside Canada. Such permission must be requested, in writing, from the nearest Tax Services Office. No particular form is prescribed for the obtaining of such permission.