What a coincidence! Once the general tax-filing deadline passes and you file your return, spring cleaning begins.
As you wash winter off your windows and start planting your garden, you’ll likely want to clear out some of the clutter of your tax paperwork. Before you head to the paper shredder, though, make sure you’ve saved the essential documents that can not only protect you during an audit, but also help you collect a future refund.
The last thing you want is to be caught empty-handed if Canada Revenue Agency (CRA) contacts you or your business about an audit or a clarification of items on your recent or previous tax returns.
The CRA states: “As a general rule, [taxpayers] must keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years from the end of the last tax year to which they relate. The six-year retention period under the Income Tax Act begins at the end of the tax year to which the records relate.”
Statutory Lengths of Retention
Five pieces of legislation affect tax records and how long they must be retained:
These laws govern the retention, storage and disposal of all tax-related documents. The records must be supported by source documents. Moreover, the laws put the burden of proof on you in a tax audit, even if you hired a bookkeeper to do your accounts and a tax professional to prepare your return.
The Income Tax Act requires you to keep books, records, accounts and vouchers for at least six years from the end of the last taxation year to which they apply. So it isn’t the year of the transaction that’s important, but rather, the year the transaction is claimed on a tax return. For corporations, the fiscal period is the financial year-end. For individuals, it is the calendar year. So, after January 1, 2016, the CRA doesn’t require you to keep income tax records for your 2009 tax year or earlier years. You must keep 2010 records until the beginning of 2017.
The Excise Tax Act requires GST/HST registrants to maintain “adequate records” for six years from the end of the related tax year. Under the Employment Insurance Act and Canada Pension Plan Act, the retention period begins at the end of the calendar year. The Air Travelers Security Charge Act generally requires records to be kept for six years after the end of the related tax year.
Special circumstances require these retention periods:
|Notices of objection or appeal. Generally, you must retain records until the situation is resolved or the time for any further appeal has elapsed, whichever is later.Corporate mergers or amalgamations. Retain business records as if the new corporation were a continuation of each of the original corporations.
Corporate dissolution. Keep for two years following the dissolution records and supporting documents that verify tax obligations and entitlements.
Unincorporated wind-down. Keep for six years from the end of the taxation year in which the business ceased to exist.
Death. Trusts or legal representatives of deceased taxpayers can destroy records after receiving government clearance certificates to distribute any property under their control.
Some records and supporting documents that must be kept indefinitely are:
Records must be kept in Canada unless you receive government permission to store them elsewhere. Documents kept outside the country and accessed electronically aren’t considered valid records and books of account. (Quebec has specific rules about where records can be stored and transferred if the files contain personal data about a resident of the province.)
Types of Records
In general, the CRA doesn’t specify the records and books a business must keep, but what you do retain must clearly allow for the determination of taxes payable and of taxes or other amounts to be collected, withheld or deducted. Supporting documents must be available to verify the information.
According to the CRA, supporting records may encompass:
Access to Documents
The records and source documents must be in a readily accessible format, whether paper or electronic.
Access to electronic records means direct, physical contact to the medium on which the record is stored. Computerized records must be easily converted into an electronically readable format and must be kept even when your company has a hard-copy version.
Remember, electronic records are particularly vulnerable to damage or accidental destruction, so it’s essential to back them up regularly and to keep them safely stored.
In some instances, the CRA may allow you to dispose of records early, but you must obtain permission. This can be accomplished by submitting a Request for Destruction of Books and Records, or by submitting a written request to the director of the local tax service office. The letter should include:
For example, a taxpayer serving as an estate executor may want to dispose of records because the distribution of assets has been completed and a tax clearance certificate has been issued.
When your company does toss documents, federal law and some provincial statutes require that records containing personal data be destroyed. If the records contain only business data, there’s usually no legal requirement for destruction, but it’s a prudent move. Careless disposal of confidential documents could lead to problems.
If you have questions, consult with your accountant to be sure you keep what is legally required.