Canadian Guide to Record Retention Policy Best Practices

All you need to know about Canadian document retention policies and best practices according to the Canada Revenue Agency (CRA)

Rencontre de deux personnesWell, have at it — at least some of it. As you wash winter off your windows and start tending to your garden, start going through all of that tax paperwork clutter. But before you head to the shredder, make sure you save documents that are essential to protect you in the event of an audit by the Canada Revenue Agency (CRA), as well as help you collect any possible future refund.

The last thing you want is to be caught empty-handed if the 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
2 pieces of legislation affect tax records and how long they must be retained. The 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. If the CRA wants you to keep records for a period longer than six years, a CRA official will let you know how long to keep them either in person or by registered mail. If you file an income tax return late, you must keep your records for six years from the date you file that return.

The laws are:

  • 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’s the calendar year.
  • The Excise Tax Act requires that GST/HST registrants must maintain “adequate records” for six years from the end of the related tax year

There are of course special circumstances that require different 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, the records and supporting documents that verify tax obligations and entitlements.

Unincorporated wind-down. Keep records 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 must be kept indefinitely, including acquisitions and disposals of property and historical information that would have an impact on the sale, liquidation or wind-up of the business.

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:

  • Sales invoices, purchase receipts, contracts, guarantees, bank deposit slips, cancelled cheques, credit card receipts, purchase orders, work orders, delivery slips, emails and general correspondence related to transactions.
  • Minutes of director and shareholder meetings, as well as share ownership and transfer records, special contracts, agreements, share registers, general ledgers, special contracts and agreements, investment records, and fixed asset and depreciation records used to set the capital cost of assets.
  • Personal bank statements and cancelled cheques, personal savings account passbooks and detailed identification of deposits into personal accounts.
  • Accountant working papers used to determine obligations and entitlements.
  • “Any other thing containing information, whether written or in any other form.”

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 a list of the documents to be destroyed, the tax years involved and the circumstances that justify early destruction.

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.

Be Cautious
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 RSW accountant to be sure you keep what is legally required.

Links to other sources for additional information: