CRA Record Keeping Requirements

Sections 230 and 230.1 of the Income Tax Act (“ITA”) set out taxpayers’ requirements to keep adequate books of account and records for tax purposes. Section 230(1) requires every person carrying on business or required to pay or collect taxes under the ITA to keep records and books of account at their place of business or residence in Canada. The books of account must also include an annual inventory kept in a prescribed manner. 

If a taxpayer wants to keep its records anywhere else in Canada or outside Canada, they must request permission from the Canada Revenue Agency (“CRA”) to do so. In general, the CRA’s policy is to allow books and records to be maintained outside of Canada, providing that the auditor has reasonable access to them and that the taxpayer bears additional costs required to review the books and records outside Canada. 

Nature of Records to be Kept

Generally, courts have held that taxpayers are not required under section 230 of the ITA to keep any specific forms of records or books for tax purposes. For instance, in the case of Labbe v. M.N.R., the Court held that “the Act does not require the taxpayer to keep a specific accounting system, but such accounts as are sufficient to give the amount of income taxable, and the amount of tax owing.” 

Understanding “Adequate” Records 

Under section 230(3), if the taxpayer fails to keep adequate records and books of account, the CRA has authority to require the taxpayer to keep such records and books of account as the CRA specifies. In the case of Empire House (London) Ltd. v. The Queen, the Court highlighted that the right of the CRA to require a person to keep such specified records only arises when the taxpayer has failed to keep “adequate” records and books of account. 

In Merchant (2000) Ltd. v. Canada (Attorney General), the Court held that

the word “adequate” means “sufficient to enable the taxes payable under the Act to be determined.” In this case, the Court found that the CRA had failed to establish that the taxpayer’s records were not adequate and quashed the requirement. 

In Sidhu v. M.N.R., the Court set out that failure to meet the record-keeping requirements under section 231 of the ITA is an offence under section 238(2). However, the Court also held that such a failure to meet the record-keeping requirements does not mean that courts will not accept the transactions claimed by the taxpayer. Rather, it is the responsibility of the trial judge to determine, on a balance of probabilities, whether such transactions actually took place. Therefore, if the taxpayer has failed to keep adequate records, the taxpayer must show other documentary evidence to substantiate its claims. 

Retention Periods for Records

Section 230(4) to 230(8) of the ITA set out the mandatory retention periods for books and records. The general rule is that taxpayers must keep all records and supporting documentation for six years from the end of the last taxation year that they relate to. There are certain exceptions to this general rule which require taxpayers in specific cases to keep their books and records for a shorter or longer period. 

Exceptions to the General Retention Rules 

The following are some of the exceptions to the general six-year retention period rule: 

• If a taxpayer files their taxes late, the books, records, and supporting documentation relating to the tax year must be kept for six years after the date the return is actually filed.
• If a taxpayer files an objection or an appeal, they must keep the required books, records, and supporting documentation until the latest of the following dates below: 

            – the date the objection or appeal is completed; 

            – the date for filing a further appeal has expired; 

            – the date the six-year record-keeping period ends.

• The books and records of a deceased taxpayer or a trust can be destroyed on receipt of a “clearance certificate” regarding the distribution of property.

Generally, most books and records (except for “permanent” records and books of corporations and businesses) can be destroyed by taxpayers at the expiration of the six years. In order to destroy books and records before the expiry of the six years, the taxpayer must get written permission from the CRA. 

If you need assistance with the CRA, don’t hesitate to book your free consultation or contact us. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.