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 RETENTION
OF RECORDS
Many of us are active in bookkeeping, but when can we do
some book-purging?
Copyright 2008 John Shamash CA-IT, Ruby Stein Wagner LLP
Which laws apply?
The following laws refer to a person's responsibility to
maintain books and records:
-The Income Tax Act
-The Employment Insurance Act
-The Canada Pension Plan
-The Excise Tax Act (GST)
In addition, there are many parallel statutes in Quebec that
have their own requirements. Certain industries (for example, tobacco and
alcohol production, munitions, controlled substances production and
handling) may have requirements of their own, and certain contractual
arrangements (for example, franchise agreements, leases) may impose
additional obligations.
In this analysis I will focus on the requirements of the
Income Tax act as described in the income tax information circular
IC78-10R4 but you should keep other statutes or requirements in mind.
Who must do it?
The Canada Revenue Agency (CRA) has a very clear definition
of a "Person" which includes individuals, corporations, trusts,
charities, or associations. Any person doing any of the following must
retain books and records: - Carrying on a business - Collecting or paying
taxes on behalf of a government agency - Operating a charity or athletic
association - Acting as agent for a political party or candidate
What if you don't?
If you fail to keep adequate records, you may hear from the
CRA- they are empowered to visit you to ensure compliance. Non-compliance
could result in legal consequences, penalties and prosecution, including
fines and possibly imprisonment. In addition, if you are ever subject to
a tax audit, inadequate documentary support may lead to a costly
assessment through denied expense claims.
What constitute records
The literature published by the CRA does not provide an
exact definition of what constitutes books and records, other than to
specify that they should:
-Support the measurement of taxes payable or withheld
-Support the organization's ability to qualify as a charity
or athletic association
-Allow the activities to be verified
-Be supported by source documents
Location- in Canada
The regulations specify that the books and records must be
kept in Canada. Any records required to support a foreign investment must
be brought to Canada on the request of the CRA.
Responsibilities with respect to electronic records
The regulations are very clear- If you use electronic means
to prepare your accounting records, then you are required to keep them
available in electronically readable format. Paper printouts are not
adequate. More significantly, the regulations state that the electronic
data must be in a format that is "readable and usable by CRA
auditors". The CRA can offer advice on the formats acceptable to
them, but you will be fairly certain to comply with this requirement if
you use a popular commercial accounting package. If you are in doubt, it
would be a safe bet to export and archive copies of your data into
popular computer formats such as text, Acrobat© or Excel©. These archives
should be subject to the same protections that you put in place for your
backups, including duplicate offsite storage.
Imaging
To avoid the cumbersome task of storing paper records,
taxpayers may choose to use electronic imaging systems to keep electronic
copies of their source documents. These records are acceptable to the CRA
as long as they comply with the standards published by the Canadian
General Standards Board. Many software packages allow you to append
scanned images of source documents to a transaction, but this in itself
may not comply with the standards. If you choose this course of action,
be sure to review the information circular and consult with the
publication "Microfilm and Electronic Images as Documentary
Evidence" available for $9.50 from the Canadian General Standards
Board.
Retention Period
The rules for retaining books, records, and supporting
documents are clear but, as with most tax issues, are subject to
interpretation. The specifics of each situation must be examined before
arriving at a recommendation, but the following example should fairly
illustrate the types of retentions that a corporation must comply with:
The following types of records have a retention period of 3
years after dissolvingthe corporation (see note 1) :
-The general ledger
-The minute books
-The shareholder register
-Any special contracts or agreements that are needed to
understand the general ledger entries
The following types of records have a retention period of 6
years from the end of the related tax year:
-Sales journals, if separate from the GL
-Purchase journals, if separate from the GL
-Payroll records
-Sales invoices
-Vendor invoices
-Bank statements and cancelled cheques
Note 1: Earlier destruction may be obtained through special
permission from the CRA. Unincorporated entities have less stringent
requirements in this regard.
Note 2: "Six years from the end of the related tax
year" basically means seven years. If you have filed tax returns
late, you must start counting from the date when the tax return is filed.
More tips:
Asset purchase documents
Assets with a long life are usually subject to tax treatment
many years from the date they were purchased. In such a case, you will
need the source document to prove the cost of the asset. Too often, these
are filed with the year of purchase, making it difficult or impossible to
prove your cost basis. This can be avoided if you segregate the documents
that support the purchase of longer term assets and retain them until the
asset is sold. Once sold, match the purchase document with the sale
document and treat the pair according to the entity's standard retention
period. A similar circumstance could arise with certain liabilities such
as loan agreements and leases.
Thermal paper
Thermal paper can lose its contrast over time and become unreadable.
When this happens in an audit situation, you may find it hard to support
your claim for expenses. To avoid this risk, you may choose to photocopy
thermal paper documents or scan and retain them electronically.
Credit card voucher support
Too often, organizations claim expenses on the basis of a
credit card statement. This has been determined inadequate by some tax
auditors who look for the actual purchase document to support the
transaction.
Restaurant vouchers
Tax auditors have taken exception to restaurant vouchers
that are not supported by details of the meal date/time and the items
actually served. For example, if paid by credit card, the summary page
with the amount, tip and signature has been considered by some auditors
to be inadequate to support the expense. These should be checked to see
if they are matched with the detailed list provided at the time of
payment.
Your company name on vendor invoices
For GST/QST purposes, input tax credits have been disallowed
if the vendor has not correctly identified the customer claiming the tax
credits. In some situations, closely related companies have paid vendor
invoices that were issued to another entity in the same group, and these
purchases were disallowed Input Tax Credit treatment for GST/QST
purposes. It is your responsibility to make sure that the entity paying
the vendor invoice is accurately shown on the invoice itself. Errors
should be corrected by the vendor before you agree to pay the bill.
More information
More information about document retention can be obtained
from the CRA website, specifically the information circular IC78-10R4.
The link to this document can be found here:
http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r4/README.html
Conclusion
An organized approach to storing your documents, segregating
longer-term retention items and marking the year of destruction on your
archives will go a long way to ensuring compliance with the CRA's
document retention policies, and could save a lot of time and money in
the long run. Be certain that your electronic archiving and storage
policies are reviewed regularly so that the data can be accessible years
after its creation.
About the author
John Shamash, CA-IT has been practicing as a chartered
accountant with an information technology focus since 1986 in the
Montreal area. He is a partner with Ruby Stein Wagner, a mid-sized firm
that focuses on meeting all the needs of the owner-managed business, from
the selection of an accounting system to maintaining a banking
relationship, and maximizing the value of owner-managed businesses
through a unique transition planning process. For more information:
John Shamash, CA, CA-IT, Partner Ruby Stein Wagner Chartered
Accountants S.E.N.C.R.L. / LLP 300 Leo Pariseau, suite 1900 Montreal,
Quebec H2X 4B5 Tel: 514-842-3911 ext 243 Fax: 514-849-3447 Email:
jshamash@rswca.com
Copyright 2008 John Shamash CA-IT, Ruby Stein Wagner LLP
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