Your Accounting Records & The CRA

What are they?

Your accounting records evidence how you run your business and how your business is doing. For example, when you make a purchase, your vendors issue you a bill, and you pay them with an e-transfer. The vendor bill and your e-transfer confirmation are the proof of your incurred expenditure, which you may deduct and claim the GST credit on. The information on these records should logically reflect the nature of the transaction.

Other examples of records include the business bank statements, copies of contracts and other legal documents, employee timesheets, automobile mileage forms, revenue reports, etc.

Why are they important?

The tax law has specific provisions that require taxpayers to keep books and records for a certain period for the Canada Revenue Agency (CRA) to examine and verify your claim of deductions and GST credits. Therefore, without records retained, you could run into problems with CRA when defending your claims, because the burden of proof lies with you and the right to audit your business lies with the CRA.

Further, note that taxpayers are not exempt from this requirement because they do not have the expertise in keeping their records. Also, the CRA can apply expensive gross negligence penalties for such non-compliance. This would sound unfair, and some taxpayers did argue this with CRA in the courts, but unfortunately, the taxpayers did not win.

On the flip side, you can also benefit from keeping better records: your advisors can better handle your financial and tax matters with them. They can construct meaningful and valuable advice for you to make decisions, monitor your business’ vital signs, identify and minimize risks, and capture opportunities. Other financial information users, such as your lender, your regulatory body of the industry, and even the buyer of your business, would also appreciate you for keeping records well.

How do I keep them?

Your e-version of records works for the CRA, but they have not given up their right to access the hard copies. When you have shared your soft copies with your advisors, make sure you also have kept the hard copies in a location in Canada where you can retrieve them upon the CRA’s request. .

The general rule for record-keeping is 6 years following the tax return filing, but extra 1 or 2 years would be a good judgment call. Also, note that certain documents are required to be retained permanently, such as long-term contracts, minutes of director and shareholder meetings, central securities register, etc.

Nonetheless, the tax law prevents the CRA from examining certain documents protected under client-solicitor privilege. Such privilege exists when you seek your lawyer’s advice. You can also ask your lawyer to “re-engage” your accountant to protect the accounting records with this privilege if needed. Note that client-solicitor privilege is not automatic, and certain detailed conditions must be met.

Greg’s experience in record-keeping – a common “tragedy”

Greg runs a busy brokerage corporation, and he claimed $50,000 of bona fide automobile expenses on the last year’s tax return for the corporation. A few months later, the CRA asked to review the supporting records for these expenses claimed. Having looked everywhere, Greg was only able to provide 3 months of the mileage records. Since all expenses are real, Greg requested CRA to consider the remaining 9 months of mileage records based on the 3-month records available.

The CRA rejected this approach and assumed there is no mileage driven for the remaining 9 months. They disallowed $37,500 of the total automobile expenses ($50,000*9/12) and created additional corporate taxes of $4,125, plus interest charges of $230. The CRA then reassessed the corporation’s GST return on the same assumption and created an additional GST payable of $1,875, plus interest charges of $105. Fortunately, this time the CRA did not choose to apply the gross negligence penalty, which is approximately another $2,000 for income tax and $500 for GST, plus interest charges.

Being stressed about coming up with a total payment of $6,335 in a few weeks, Greg called his accountant and tax lawyer. He understood from them that although the tax law does not have provisions requiring all expenses to be supported by records, it has been CRA’s longstanding assumptions of “no records, no claim”. Greg further understood that the laws of evidence would be considered by the Attorney General (CRA’s lawyer) and the trial judges, so missing records may not be the end of the world when he appeals to the tax court.

In the end, Greg doubted the benefit of continuing fighting would justify the legal costs—let alone the amount of stress he would take. He paid what the CRA wanted and took a note in his file: “the interest charges of $335 are not deductible for tax.”

To avoid having the same tragic scenario that Greg had to face, it is critical for you to plan ahead with a qualified advisor.

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