Record Retention Guidelines

Record Keeping in Canada

by L. Kenway BComm CPB

We are going to chat about books and record retention requirements ... the fifth item in my list (see below) of good bookkeeping practices.

These requirements are important to your business because the records are used in determining your tax liabilities. YOU are responsible and bear the burden of proof in a tax audit ... even if you hired a bookkeeper to do your books and a tax professional to prepare your return.


BOOKKEEPER'S HANDY REFERENCE

Record Retention in the U.S.

Click here for information on American (U.S.) record retention.

Click here for a great list by TSheets on U.S. payroll record retention. 



LET'S CHAT ABOUT ...

So What are Good Bookkeeping Practices?

I like to break good bookkeeping practices into seven categories:

Click on an image to go to the chat.

Organize your bookkeeping records.

1. Get yourself organized. Enter your data regularly.

Manual vs. Computer Bookkeeping Systems

2. Use computer software so you can mine your business data.

Create an audit trial to protect your business from fraud.

3. Learn to create audit trails as you go. Some are super easy to implement.

Reconcile your bank and credit card accounts monthly.

4. Reconcile your bank statement, credit card and vendor statements regularly.

Retain your bookkeeping records for 7 years.

5. Comply with federal record retention requirements.

Learn good bookkeeping practices including how to record cash under the table.

6. Learn to avoid what gets sole proprietors in trouble with the CRA/IRS.

Learn what your government compliance responsibilities are as a small business owner.

7. Prepare and file your U.S. and Canadian government compliance reports (sales and use tax, employment and payroll tax, worker's compensation and income tax) on time. Remit the amounts owing. Don't have the money? Don't worry. I have a tip for you; just follow the country link you run your business from.




Who Must Keep Business Records

Section 230 of the Income Tax Act requires books and records be kept in a format that allows assessment and payment of taxes. The Excise Tax Act, Employment Insurance and Canada Pension Plan legislation also have this requirement. Who must keep these records:

  • any person who carries on a business in Canada;
  • any person or business who is required to pay or collect government taxes which includes GST, PST, and payroll source deductions;
  • any person or business required to file an income tax or GST return;
  • not for profit organizations.




What Business Records Must Be Kept

YOU must keep all records and supporting documents. Following is a general list of what must be kept:

Records generally refer to the organized method of documenting and summarizing accounting and financial information. This would include:

  • financial statements;
  • ledgers and journals - computerized or manual;
  • log and appointment books;
  • spreadsheets and working papers;
  • tax reports and records;
  • your Business Journal; and
  • other documents that support your claims.

In addition, invoices MUST display sales tax information on a separate line OR by a statement that shows the amount of sales tax paid. Other invoicing information requirements must also be met.


When supporting documents are requested, it usually is a reference to source documents. Source documents are the original documents which prove the transaction occurred. Examples of this are:

  • bank statements, cancelled cheques and deposit slips;
  • sales invoices and receipts, cash register tapes, purchase orders;
  • credit card statements and all business purchase receipts;
  • legal and government correspondence;
  • any other documents and correspondence including e-mails.

If you are claiming the GST/HST input tax credits (ITCs), the detailed information required to support your claim is very specific. Read more here.


How Must Business Records Be Kept

GOOD TO KNOW

Cloud Accounting - Location of Servers

CRA's GST/HST Memorandum 15-2 Computerized Records> place of retention> location outside Canada for more information ...

Point 16 states, "Persons with businesses that operate via the Internet and that are hosted on a server located outside Canada should be cognizant of their responsibility of maintaining their records within Canada."

Does this mean cloud accounting options don't meet CRA's criteria. Yes and no. Yes the servers are outside Canada but the work around is to have a copy of your General Ledger in csv or pdf format on your local computer or  hard drive.

How must you keep your records? Your records must be kept at your place of business or residence. They may not be kept outside of Canada, even if electronic access is available in Canada ... unless you receive CRA permission. They must meet this criteria:

  • be complete and reliable;
  • be in paper format or electronic format (but you must ensure they are accessible and readable even if technology changes);
  • provide correct information to assist in meeting your tax obligations and entitlements
  • be supported by source documents (discussed above); and
  • include other documents (described under records above).

If you have more than one business, you must keep separate records for each business. It is also interesting to note that if the original transaction was electronic in nature, you must retain the original computerized or electronic files in a readable format ... even if you have printouts of the records.

Be sure to follow the link above as it discusses CRA's policy on scanned receipts ... scanning is NOT the same as imaging.

How Long Must Business Records Be Kept

The general rule for record retention is records must be kept for six years from the end of the tax year which they are referring ... which really means seven years ... or as long as CRA has informed you (usually by registered letter).

The tax year is the calendar year for taxpayers and unincorporated businesses and the fiscal period for corporations.

Some records and supporting documents that must be kept indefinitely are:

  • acquisition and disposal of property;
  • share registry;
  • historical information that would have an impact on the sale, liquidation, or wind-up of the business;

Some situations have different record retention requirements:

  • corporations - two years from dissolution (mergers and amalgamations are considered to be a continuation of the business);
  • late filed returns must be kept six years from the date the return is filed;
  • notice of objections must be kept until the objection or appeal is over AND the later of the time for filing appeals has passed or the normal six year period.
  • charities and political donation receipts and specified records - generally two years from the end of the calendar year they relate but verify this with CRA.




Early Destruction of Business Records

Records may be destroyed early if permission is received from CRA and any other relevant authority. File T137 Request for Destruction of Records with CRA. Early destruction without permission may lead to prosecution.


Pay attention to these record retention requirements and remember to factor in all the new regulations pertaining to privacy ... where keeping too much information and for too long puts you at risk ... not to mention the costs related to storing of the records.

Also keep in mind that these are just CRA's record rentention requirements. Other government agencies such as WCB may have different requirements.



It's been great chatting with about bookkeeping today.

It's been great chatting with you .
Your tutor Lake


Source: CRA Website

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