Record Retention Guidelines

Canada vs US

by L. Kenway BComm CPB Retired

Published in 2009 | Revised April 13, 2024 | Edited April 15, 2024

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We are going to chat about books and record retention requirements ... the fifth item in my list 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 in Canada, 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.

It is my understanding that this is only the case in the U.S. if the taxpayer has underreported their income or fraud is suspected. Otherwise it is the IRS's responsibility that bears the burden to prove a taxpayer has erred or committed fraud; after which the burden "shifts" to the taxpayer.

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The differences between the Internal Revenue Service (IRS) in the United States and the Canada Revenue Agency (CRA) record retention requirements.

Here is a very high level comparison between the IRS vs CRA record retention requirements.

IRS Record Retention Requirements

1. Period of Retention: For the IRS, taxpayers must keep records for as long as they can be important for any provision of the federal tax law, which is normally the period of limitations that applies to your tax return.

     - This often means retaining records for at least 3 years from the date of filing the tax return (or the due date, if later); 4+ years for employment tax records.

     - However, if you omit more than 25% of your gross income on your return, you should retain your records for at least 6 years.

     - If you filed a fraudulent return or you haven't filed a return, you must keep your records indefinitely.

2. Type of Records: The IRS expects you to keep all supporting documents also referred to as source documents:

     - Gross receipts of income records including cash register tapes, deposit slips, receipts books, invoices, and 1099-Misc.

     - Purchase and expense records would include bills and receipts, canceled checks and bank statements, account statements as well as credit card receipts and statements.

     - Any other documents that support an item of income, a deduction, or a credit appearing on your tax return.

3. Electronic Records: The IRS accepts electronic records. They should be as accurate, complete, and as readable as the original paper records. All the requirements of hard copy books and records apply to electronic records.

MORE >> IRS Publication 583 Starting a Business and Keeping Records 

4. Data Residency: The IRS does require data security and has strict guidelines on how taxpayer information is stored and transferred. But it does not explicitly require that the data be stored or processed only in the United States. While the data does need to be accessible to the IRS and fall under U.S. jurisdiction, it does not necessarily have to be physically located in the U.S.

MORE >> IRS Use of Electronic Accounting Software Records During Audits

CRA Record Retention Requirements

1. Period of Retention: For the CRA, you're required to keep all necessary records and supporting documents for a period of six years from the end of the last tax year they relate to. The tax year is usually the fiscal period for corporations and the calendar year for individuals. Thus, this can be a longer period than for the IRS.

2. Type of Records: Similar to the IRS, the CRA expects you to keep all relevant records and original supporting documents related to your tax return. This includes income records, sales invoices, bills and expense receipts, bank statements, credit card statements and accounting ledgers. If you claim input tax credits, CRA has very strict supporting document requirements.

MORE >> Canadian Business Record Retention Guidance

3. Electronic Records: The CRA also accepts records in an electronic format. The electronic records must be reliable and easily accessible for review by the CRA.

4. Data Residency: CRA has data residency restrictions.

MORE >> Canadian Cloud Accounting - Importance of Location Of Servers

What does statute-barred mean in tax terms?

Statute-barred in tax terms refers to a period after which a government agency, such as the CRA or IRS, can no longer review a taxpayer’s return, or a taxpayer can no longer adjust their return.

It essentially sets the time limit for when authorities can initiate legal proceedings for any inaccuracies, omissions, or tax audits. Once this deadline has passed, the agency is generally limited in its ability to review or adjust the tax return.

In Canada, the Income Tax Act generally sets this period as three years from the date of the original notice of assessment after filing a tax return. However, the record retention period is set at six years to allow for particular instances to review tax assessments beyond the standard three years – such as carrying out audits or investigating fraud. This gives the CRA extra time should they need it.

In the U.S., the IRS typically has a similar three-year timeframe to audit your tax return but also has a few exceptions that may extend the period. However, unlike the CRA, the IRS has decided record retention based on the normal three-year auditing period but extended it for cases where significant income is omitted.

Do note, these rules can be complicated and exceptions may apply in both countries. For example, if fraud or tax evasion is suspected, there is no statute-barred period.

Therefore, both Canada and the U.S have statute-barred regulations with different time frames, and it results in a difference in record retention rules between the two countries. It's also worth noting that these rules reflect the balance between the needs of tax authorities to verify compliance and audit returns, and the burden on taxpayers of keeping records.

Remember, concerns about record retention rules or statute-barred periods should be directed to tax professionals that are familiar with the specific laws and regulations in each jurisdiction.

Wrap-Up

As a small business owner, you need to pay attention to IRS record retention requirements or CRA record retention requirements.

I haven't mentioned data privacy regulations in this article.  However, remember to factor in all the regulations pertaining to privacy these days where keeping too much information and for too long puts you at risk of liability due to possible data breaches.

Also keep in mind that these are just tax record rentention requirements. Other government agencies may have different requirements

In the US: 

• The Department of Labor FLSA (Fair Labor Standards Act) 
• Equal Employment Opportunity Commission (EEOC) 
• The Environment Protection Agency (EPA)
• The Occupational Safety and Health Administration (OSHA)

In Canada:

• The Employment and Social Development Canada (ESDC) Labour Program
• Federal Contractors Program (FCP) 
• Canadian Environment Protection Act (CEPA)
• Canadian Centre for Occupational Health and Safety (CCOHS)

Sources: CRA Website & IRS Website

Bookkeeping Essentials › Bookkeeping Systems › Record Retention