When it comes to taxes, Canadians have a responsibility to keep accurate and complete records. Knowing how long to keep these tax and financial records is essential to comply with the Income Tax Act and avoid penalties or other consequences. In this blog post, we’ll discuss the rules for keeping income tax records in Canada so you can stay up-to-date on your obligations and protect yourself from any tax issues that may arise. We’ll cover topics such as how long you should keep the tax records, when to destroy them, what documents need to be kept and more. By understanding the rules around document retention, you can ensure that your financial and tax records stay organized and secured while avoiding any unnecessary complications down the road.
How Long to Keep Tax Records in Canada
As a taxpayer, you are required by law to keep tax records for six years because the Canada Revenue Agency (CRA) may request them for tax audits in the future. Failure to retain these supporting documents may result in penalties or a delay of tax refunds. For instance, if you have filed your 2022 tax return, any associated tax records must be kept until the end of 2028. The record-keeping requirement applies to both individuals and corporations (including GST/HST).
Exceptions to Keeping Tax Records for Six Years
Most taxpayers must keep their income tax records for at least six years in case of an audit. However, there are a few exceptions to this rule.
When You File After the Deadline
When taxes are filed late, the six-year rule for retaining tax records depends on the tax year and when the tax return is submitted. This six-year period begins from the time when the tax return is filed.
For example, a corporation with a December 31, 2022 tax year-end is required to file the corporate tax return (T2) by June 30, 2023. If the corporate tax return is filed by June 30, 2023, the six-year period will span from January 1, 2023 to December 31, 2028. However, if the corporate tax return is filed after June 30, 2023, say July 20, 2023, then the business documents relating to the tax records must be kept until July 20, 2029.
Similarly for individuals, the 2022 personal tax return is required to be filed by April 30, 2023. If the personal tax return is filed by April 30, 2023, the six years for tax records retention will run from January 1, 2023 to December 31, 2028. However, if the personal tax return is filed after April 30, 2023, say May 25, 2023, then the tax records must be kept until May 25, 2029.
When Your Records Pertain to the Future Disposal of Assets
The six-year period records retention policy does not apply to information necessary for calculating a person’s tax obligations in the future. For example, if you bought a rental property in 2010 for $500,000 and renovated the basement in 2014 for $50,000, the adjusted cost base for the property would be $550,000. If the property is sold in 2023 for $1,000,000, you would need to report a capital gain of $450,000 ($1,000,000 minus $550,000 cost base). However, suppose you did not keep invoices or receipts for the renovation because the property records are more than six years old. In that case, the CRA could deny the additional costs incurred, which results in higher tax liability on the capital gain. In fact, the six-year retention period for the renovation invoices would start at the end of 2023.
When You Filed an Objection or an Appeal
If you have filed an objection or launched an appeal against the decision of the CRA, it is vital to keep all relevant supporting documents related to the case until completion, even if the regular six-year record-keeping period has elapsed. The completion happens when the objection or appeal has been settled, or when the window to submit additional appeals has closed. Keeping these records is essential for being able to effectively address any future issues related to the dispute.
When You Have Dissolved a Corporation
When a corporation has gone through the process of dissolution, it is obligated to retain records and documents on its tax responsibilities for two years after the date of dissolution. These supporting documents should include all financial documents, ledgers, invoices, receipts and other documentation that can be used to authenticate that all taxes due were paid in full. Additionally, records and other supporting documents that demonstrate proof of valid tax deductions should also be kept on file for two years following the dissolution.
Can I Destroy Tax Records Before the Six-Year Retention Period?
If you want to dispose of your books and records before the six-year period prescribed in the regulations, it is necessary to obtain written permission from the CRA. This can be obtained by one of two ways: filling out and submitting Form T137, Request for Destruction of Records, or applying in writing to your tax services office. Attempting to destroy records earlier than the prescribed time could lead to legal action taken against you by the CRA.
It is important to note that the CRA’s permission only applies to those records required for tax purposes and does not apply to other types of record-keeping, such as those regulated by other federal, provincial, territorial or municipal laws.
What Tax Records Do You Need to Keep?
You can keep paper or electronic records. The tax records you need to keep would depend on your situation.
For personal tax records, you may need to keep records for tax credits and deductions pertaining but not limited to: childcare, medical, adoption, RRSP contributions, moving expenses, charitable donations, union dues and professional fees. You must provide proof of your expenses to be eligible for these personal tax credits and deductions.
For business records, business owners are required by law to maintain business documents of all financial exchanges in order to support the income and expenses claimed.
Income records involve tracking the business’s gross income, as it indicates the total revenue earned before deductions, including those related to the cost of goods sold. It is necessary that income records include the date, amount and source of income, regardless if they were paid in cash. All entries must be supported with original documents such as sales invoices, receipts, cash register tapes, bank deposit slips, and contracts. This helps to ensure the accuracy and integrity of all business documents relating to income records maintained by the business.
Regarding business expense records, it is crucial to ensure that you obtain a receipt or invoice for every purchase made. These supporting documents should display the transaction date, the name and address of both the buyer and the seller/supplier, as well as a detailed description of what was bought. Additionally, if the seller/supplier is a GST/HST registrant, their business number should also be included. If no receipt or invoice is provided, you should make sure to write down the transaction details in your expense journal. Following these steps will help ensure that all business documents relating to expenses are properly accounted for.
Why Do You Need to Keep Proper Records?
Keeping accurate, comprehensive records is essential for a number of reasons. Not only does it help you keep track of your finances, but it can also be immensely beneficial in the event of a CRA audit. In such cases, having organized and complete records helps ensure that all sources of income and expenses can be accurately determined. If your records are incomplete or disorganized, then you run the risk of having some claims denied and taking more time to resolve any potential issues.
Conclusion
When it comes to keeping income tax records in Canada, it’s important to be aware of the rules and regulations that apply to both personal tax and corporate tax. It is essential to understand what documents should be kept and for how long. By taking proactive steps towards maintaining accurate records, you can ensure full compliance with Canadian tax laws as well as access valuable information when needed. Additionally, having a system in place will make filing taxes simpler each tax year and help avoid potential penalties associated with incorrect record-keeping practices. Taking these precautions now can save time, money, and stress in the future!