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.
Click here for information on American (U.S.) record retention.
Click here for a great list by TSheets on U.S. payroll record retention.
TSheets also has a great FLSA lawsuits research tool at https://www.tsheets.com/flsa-research-tool. You may also want to look at their 2017 record retention quiz results to test your own knowledge at: https://blog.tsheets.com/2017/business-help/business-owners-failed-record-keeping-quiz
LET'S CHAT ABOUT ...
I like to break good bookkeeping practices into seven categories:
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1. Get yourself organized. Enter your data regularly. |
2. Use computer software so you can mine your business data. |
3. Learn to create audit trails as you go. Some are super easy to implement. |
4. Reconcile your bank statement, credit card and vendor statements regularly. |
5. Comply with federal record retention requirements. |
6. Learn to avoid what gets sole proprietors in trouble with the CRA/IRS. |
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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. |
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:
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:
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:
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.
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:
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.
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:
Some situations have different record retention requirements:
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.
Source: CRA Website
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