Staying legal is a critical function for organizational survival. The first order of staying legal is good bookkeeping and accounting, which begins with good record keeping. This isnt a sexy subject like sales or donor development, but in many ways, record management impacts the viability of your organization more so than any other function. Be aware that the Canada Revenue Agency can even audit your business systems to ensure they meet data and record-keeping requirements. This includes an audit of the content of electronic files, the reliability of internal controls, and the retention of records that support your transactions. As a result, it is vital to implement financial controls around record management to ensure best practices, as characterized by the CRA, are being followed.
Who Is Required by Law to Keep Records?
By law, organizations operating in Canada must keep records. Examples of these organizations include organizations that have to file a tax return, third-party record keepers, payroll service providers, trusts, nonprofit organizations, universities, colleges, school authorities, hospitals, and qualified donees such as registered charities, municipalities, and amateur athletic associations. Even holding companies and corporations that are legally inactive are required to keep records.
What Are Records and Which Records Do You Have to Keep
Records, as defined by the CRA, consist of a large group of accounting and financial documents that can support your transactions as they pertain to income, expenses, motor vehicles, and property. Records must meet four basic requirements:
- Be reliable and complete
- Include the information used to calculate your tax obligation
- Have supporting documentation
- Be kept in English, French, or a combination of English and French
Keep in mind the type of information you keep depends on your:
- Organizational type
- Record format, such as electronic versus paper
- Involvement in e-commerce
- Goods and services tax and harmonized sales tax registration
- Number of employees
These records can include everything from your typical ledgers, journals, financial statements, and income tax returns to your less typical meeting minutes, emails, cancelled cheques, delivery slips, and work orders. Any correspondence that supports your transactions can and should be considered a record. For example, corporations are expected to keep minutes of all major business and shareholder meetings, any information regarding shares of capital stock, and any special contracts or agreements including transfer pricing policies. Registered agents are expected to keep all records supporting monetary contributions. Qualified donees, including charities, are expected to keep all records related to donations and qualified donee status. You want to determine the appropriate set of records required for your organization.
How Long Do You Have to Keep Records?
In general, the CRA requires you to keep records for a period of six years, but there are exceptions. Some records involving long-term acquisitions and disposal of property must be kept indefinitely. There are also exceptions for records destroyed by a disaster. In general, if you file a late tax return, tax adjustment, objection, or appeal, you must keep records for six years prior to the tax year in which the adjustment, objection, or appeal is being made. When a nonincorporated business or organization ends, records must be kept for six years from the end of the tax year in which it ended. When a corporation ends, records are only required to be kept for two years after the dissolution.
Record Keeping for Electronic Records and Audit Trails
If your records are stored electronically, you want to make sure they are readable by CRA software and that backup copies are made at a location other than the primary location of your organization. Registered charities, registered Canadian amateur athletic associations, and other qualified donees are required to store backup copies at a location within Canada. Electronic files stored outside of Canada and accessed from Canada are not considered to be records kept in Canada. This underscores the importance of selecting accounting software that can support the specific needs of your organization, particularly as it relates to being able to create an audit trail. An audit trail is the data or supporting information required to recreate a business transaction. The trail should include links to associated processes. Process maps are often used as a way to visualize an audit trail from one end of the organization to the other.
Record Keeping for GST/HST and Payroll
One of the most important reasons for keeping good records pertains to GST/HST and payroll. This applies to you if you are conducting business or engaged in commercial activity in Canada. It also applies if you:
- File a GST/HST return for any reason
- Are applying for a GST/HST rebate
- Are applying for a GST/HST refund
You only need the records that assist in the calculation of the amount of GST/HST to be paid out, collected, refunded, rebated, or deducted. If you deduct income tax, Canada Pension Plan contributions, or employment insurance premiums, your records should include the hours worked for each individual employee, and the amount withheld for CPP contributions, EI premiums, and taxes. Good record-keeping practices not only keep you in good legal standing, they also help you stay organized and able to deal with any issues that might arise when filing taxes.