Have you ever wondered what records you need to keep for your taxes and how long you should keep them for?
If you answered "yes" to that question, then this guide is for you.
We will walk you through how long to keep tax records in Canada and what documentation should be in your records. Let's dive into it.
Keeping Tax Records
How long you need to keep tax records is determined by the Canada Revenue Agency (CRA). Tax records that you need to keep are any organized financial or accounting documents that record your transactions and any documents that support these transactions.
Who Has to Keep Records
While this is not a complete list of everyone who must keep records by law, here are some examples:
- Anyone who has to file a tax return
- Anyone engaged in commercial activity or running a business
- Anyone who pays or collects taxes
- Payroll service providers and third-party record keepers
- Non-profit organizations
- Universities and colleges
- Municipal corporations
- Qualified donees such as registered charities, Canadian amateur athletic associations, housing corporations, etc.
In addition to the list above, any holding companies and corporations that are no longer active must also keep records.
What to Keep
In general, any accounting or financial documents that record your transactions are documents you must keep. Here are some examples of these documents:
- Books, ledgers, or journals
- Charts and tables
- Income, excise, and GST/HST tax returns
- Sales invoices and purchase receipts
- Vouchers, contracts, and guarantees
- Financial statements and statements of accounts
- Cash and credit card receipts
- Bank statements, deposit slips, and cancelled cheques
Why You Should Keep Records
The primary reason to keep tax records is for tax savings. By keeping complete and organized records, you will have documentation of your deductible expenses and the input tax credits (ITCs) you may claim.
Complete records will also save you time if the CRA decides to audit your income or GST/HST tax returns. If auditors cannot determine your income or taxable revenue, they will need to use alternative methods to determine these amounts.
Proper record retention is vital in case the CRA audits you. Let's go over what to do if the CRA decides to audit you.
Preparation for a potential audit begins when you are filing your tax return. If you are claiming any expenses, deductions, or credits, be sure to have all documentation that supports your claims.
Ideally, you will have all of the required documents organized in a safe location, which we will discuss further below.
The CRA's Audit Powers
While the CRA has expansive auditing power, there are some limitations.
- The CRA must conduct the audit within the standard assessment period of three years for income tax returns and four years for GST/HST returns
- You will not have to provide any documentation subject to legal privileges, such as communication with a lawyer
- You should request a written account of who is being audited, and the years included in the audit should be requested from CRA to ensure the audit terms are clear to all parties involved
- A record of all communication with the auditor, the documentation provided to the auditor, and the time you provided the documentation should be kept in case there is ever an allegation that documentation was not provided or has gone missing
During the audit process, be sure to inform the CRA representative if you need more time to provide the requested documentation and the reason you cannot meet the original agreed-upon deadline.
Where to Keep Your Records
As determined by the CRA, you must keep your records at your residence or place of business in Canada unless the CRA provides you with written permission for them to be held elsewhere.
If you would like to request permission to keep your records elsewhere, you will need to write to your local tax services office. Should the CRA grant their written permission after reviewing your situation, the documentation will specify any applicable terms and conditions.
After the CRA permits you to keep your records outside of Canada, you must have them available for review by the CRA when requested.
Not everyone is allowed to keep records outside of Canada; these entities are as follows:
- Registered charities or amateur athletic associations
- Canadian municipalities
- Housing corporations exempt from tax
- Public bodies performing government functions
You are allowed to keep records in an electronic format. However, unless the CRA has permitted you to keep your records elsewhere, they must still be stored in Canada.
Suppose the CRA does permit you to keep electronic records outside of Canada. In that case, they may accept copies if they are made available to CRA officials in a readable format by CRA software.
Missing or Destroyed Records
The burden of proof lies with the taxpayer for any claimed tax deductions. That is why you must keep complete records and take all reasonable measures to safeguard them.
Deductions Without Supportive Documentation
The CRA will likely deny your claims if you cannot produce the appropriate documentation to support your deductions when the CRA requests this documentation.
The only time the CRA may consider your claims without supportive documentation is if there is evidence that the records were stolen or destroyed. Examples of such evidence include copies of police reports, reports of a fire, or photographs of the damage.
If the CRA finds that your records are inadequate, they will request a written agreement for your documents to be maintained as required. They will follow up on this request with a letter or in-person visit to ensure compliance.
If they find that there has not been compliance with their request during their visit, the CRA will issue a formal requirement letter. This letter will describe all of the information you must record and document the legal consequences of failure to comply.
As mentioned above, because the burden of proof lies with the taxpayer, it is vital that your records are safeguarded and maintained. We highly recommended that you keep back copies on backup media, cloud storage, or in a safe physical location.
How Long to Keep Tax Records in Canada
In general, you need to keep all required records and supporting documentation for six-years from the end of the last tax year that they pertain to. The tax year is defined as the calendar year for individuals and the fiscal period for corporations.
For trusts, the tax year varies based on what type the trust is. All non-testamentary or graduated rate estate (GRE) trusts are typically required to use a tax year-end of December 31st. The only exception is for mutual fund trusts that elect December 15th as their year-end.
In the case of a GRE, the year-end date will be the day the estate is no longer considered a GRE. This date is determined to be no later than the thirty-six-month anniversary of the decedent's passing. For example, if an estate was created in July 2017 will have a year-end date in July of 2020.
Legislations that determine the record retention period are as follows:
- Excise Act, 2001
- Excise Tax Act (including GST/HST)
- Income Tax Act
- Employment Insurance Act
- Air Travellers Security Charge Act
- Canada Pension Plan
Appealing a Tax Judgment
If you are filing a tax objection or appeal, the CRA recommends that you keep your records until the issue is resolved and the time limit for any additional appeals expires. This may mean maintaining these records for longer than the standard six-year period.
Closure of Business
If you close a business, the amount of time you must keep your records depends upon the type of business that you ran.
Incorporated businesses must retain their records for two years after the dissolution date of the corporation. However, any unincorporated businesses (sole proprietorships or partnerships) must maintain their records for six years after the end of the last tax year.
Exceptions to the Rules for Record Retention
The CRA may request that you keep your records for longer than six years and notify you of this in-person or by registered mail. However, there are some situations where you may need to keep your records for a different period of time, with or without the request of the CRA.
These are some examples of such situations:
- Records concerning the share registry, long-term acquisitions or disposal of property, or historical information that affects the start-up, liquidation, or sale of a business should be maintained indefinitely
- When an income tax return is late, you should keep the records for six years from the date of filing
- When you have not filed a GST/HST tax return for a reported period that ended more than six years ago, you must file the return and maintain the records for six years from the date of filing
- If you file a tax adjustment note for GST/HST to a pension, you must keep the records for six years from the note's issuing
- If there is an objection or an appeal filed, you must keep all the required records until the resolution of the issue, the date to file a further appeal has passed, or the six-year period has ended, depending on which date is the latest
- When multiple corporations merge, the new corporation must keep records for each of the merged entities for six years
- Suppose you are the legal representative for a trust or deceased taxpayer. In that case, the records may only be destroyed after you receive a clearance certificate to distribute the assets under your control
- A registered donee must keep donation receipt copies for two years from the end of the year in which they received the donations
- If an incorporated charity dissolves, they must keep records for two years from the date of dissolution
- If a registered charity or amateur athletic association has its registration revoked, it must keep records for two years after the CRA revokes its registration
When to Destroy Your Records
As we've discussed, you must keep most records for six years from the year they relate to before you can destroy them. As a safety precaution, most individuals and businesses should keep their records for seven years to avoid any confusion as to when you can legally destroy your documents.
Requesting Permission to Destroy Records
In order to destroy your records or books, or account before the specified retention period, you must get the written permission of the CRA. You can acquire this permission by writing your local tax services office or by completing Form T137.
This request will only pertain to records that you must keep as designated by the Income Tax Act. The form must include:
- A list of the documents you wish to destroy
- The reason for the request
- All other pertinent information that supports your request for the destruction of the listed records
Keep in mind that the CRA's permission does not authorize the destruction of any records that you must keep under any other federal, territorial, municipal, or provincial laws. Anyone who destroys paper or electronic documents without the permission of the CRA may be subject to prosecution.
Your Questions: Answered
We've covered all the ins and outs of how long to keep tax records in Canada, what records to keep, and the exceptions to the rules.
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