In a recent spate of income tax information circulars and Goods and Services Tax releases, the Canada Revenue Agency seems to be paying closer attention to the record keeping habits of small businesses.
The law requires detailed financial records. The CRA prefers to promotes the benefits to your business of keeping good financial records. Records help track expenses to be deducted from income and GST input tax credits to claim. Records also help you make good business decisions and assist with banking relationships. Good records make it easier to sell a business or attract new business partners.
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Such positive messages aside, good record keeping in CRA’s eyes means keeping paper or electronic books and records and supporting source documents in a manner that will make it easier for the agency to do a financial audit of your business. Failure to keep records in the manner CRA thinks appropriate will work against you in an audit and could possibly result in a fine.
In any tax assessment, CRA is right and you are wrong unless your records prove otherwise. If your records are missing or incomplete, that’s too bad. CRA can assume that your net income was higher if you cannot produce documentation to support business income and expense transactions.
CRA gets its clout for enforcing good record keeping from five pieces of legislation: the Income Tax Act; the Excise Tax Act, which is the umbrella for the GST and Harmonized Sales Tax; the Canada Pension Plan; the Employment Insurance Act, and the Air Travelers Security Charge Act.
According to CRA documents, the following items constitute complete records:
- Ledgers, journals, financial statements and accounts and income tax records.
- Source documents such as sales invoices, purchase receipts, contracts, guarantees, bank deposit slips, cancelled cheques, credit card receipts, purchase orders, work orders, delivery slips, e-mails and general correspondence to support transactions.
- If incorporated, minutes of directors and shareholders meetings as well as share ownership and transfer records and special contracts, agreements or other documents needed to understand book and record entries.
If you operate more than one business, separate records must be kept for each one. Even if a business is wound up or fails, certain records must be kept.
Businesses must keep records for six years dating from the end of the last tax year to which they relate.
Businesses can keep books and records in paper or electronic format.
Electronic format includes documents first produced on paper and later converted to electronic format or documents initially produced and then stored on a computer.
Electronic documents, however, have to be electronically accessible and readable by CRA. The taxpayer is responsible for reconstituting, as soon as possible, any electronic documents that may have been lost or inadvertently erased.
Taxpayers are also responsible for keeping, maintaining and safeguarding their records. This is true even if the records are left with a third party such as a bookkeeper or accountant. Should the third party undergo a change that might affect your records, ultimately you are still responsible for safeguarding those records. Such changes could include software or hardware conversions or upgrades, mergers or acquisitions of the third party, and bankruptcies.
Although fines for bad or incomplete record keeping are not common, the Quebec revenue department recently levied a fine of $2,000 against a small restaurant for not keeping sales receipts for the required six-year term, undoubtedly as a warning to other small businesses. You can be certain that CRA took notice of the fine.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. His views do not necessarily reflect those of The Western Producer. Roche can be contacted at fbc@fbc.ca or call 800-860-7011.
