To shred or not to shred – that is the question.
The Income Tax Act requires every taxpayer carrying on a business to keep records and books of account so that the Minister may verify the validity of the expenses claimed and thus establish the amount of tax payable. Therefore, to the extent you are claiming automobile expenses, meals and entertainment costs, or any other business expenses, you should retain the documents or invoices that support your expense claims. To the extent automobile expenses are incurred in part for personal purposes, a record documenting total distance travelled and distance travelled in the year to earn income needs to be maintained.
Records include minutes of meetings, accounting records, and source documents such as invoices, receipts, cheques, bank statements, etc. The books and records must be sufficient for the Canada Revenue Agency (CRA) to confirm revenue, expenses and taxes paid. They must also be stored at a Canadian location available for audit.
Without these documents, you might not be able to support claims that would otherwise be valid business expenses against your source of income. In addition, if you are ever subject to an audit, good accounting records will save you time and money in dealing with Canada Revenue Agency (CRA).
The failure to keep adequate records is also an offence that can result, on conviction, in a fine or imprisonment, or both.
You are generally required to retain the records supporting your business expense claims for at least six years after the end of the year to which the records relate. Some records must be kept for at least two years after the day a corporation is dissolved or six years after the year in which a business ceased. In addition, the CRA may specifically require you to keep records for an additional period of time. As well, you may wish to retain your records for a longer period, for example to support a net loss that is carried forward and claimed in a much later year.
If you use a computerized record-keeping system, there is a requirement to maintain an electronic backup and there are penalties for failure to do so. In addition, any paper records that you retain must be legible in the future. This means that you may need to copy certain receipts and invoices on paper that will not fade. Also, it is important to keep the detailed original invoices, not just the credit card slip and the monthly credit card statement, to document the nature and amount of the expenses.
As records over six years old might contain information that is still relevant for tax purposes, you might wish to consult a Chartered Professional Accountant or the CRA prior to destroying your records. You may destroy your books of account and records at an earlier time than outlined above if you receive written permission from the CRA. To get such permission, you (or an authorized representative) can complete Form T137, Request for Destruction of Books and Records, or apply in writing to your Tax Services Office.
If you would like more information regarding the maintenance of adequate accounting records for the purposes of complying with income tax legislation, seek the advice of one of our knowledgeable Chartered Professional Accountants.
(Did you know? RHN archives our clients’ records electronically and uses a secured online portal to receive and send financial information to our clients. This is just one more way we aim to provide extraordinary service so you can get back to doing things that are important to you, instead of worrying about filing paper.)
For more really useful tax tips, visit https://www.bccpa.ca/CpaBc/media/CPABC/News_Events_Publications/Publications/TaxTipsandRRSP/Tax-Tips-2015.pdf .