What Are Canada’s Section 23 Tax Record Rules?

In Canada, the legal framework for taxation mandates that individuals and entities maintain comprehensive records as a legal duty. The purpose of these rules is to ensure that the information necessary to calculate tax obligations and entitlements is available for verification by the Canada Revenue Agency (CRA). Adherence is fundamental, as the law provides the CRA with the authority to inspect these records. This foundation of detailed record-keeping supports the integrity of the country’s self-assessment tax system.

Who Must Keep Records

The requirement to maintain books and records under Section 230 of the Income Tax Act extends to a wide array of taxpayers. Anyone who carries on a business is subject to these rules, regardless of size or structure. This includes sole proprietorships, partnerships, and corporations, as the definition of “business” covers any profession, trade, or undertaking.

Beyond business operators, the rules also apply to any person required to pay or collect taxes. This captures individuals earning rental income from real estate. It also includes employers responsible for remitting payroll taxes and businesses required to collect Goods and Services Tax (GST) or Harmonized Sales Tax (HST). Registered charities and other qualified donees must also keep records to verify donations and ensure there are no grounds for revoking their registered status.

Types of Records to Maintain

The law does not prescribe a specific accounting system but mandates that records must be sufficient to determine taxes payable. For income, this includes a variety of documents that substantiate amounts received, such as:

• Sales invoices
• Cash register tapes
• Contracts
• Bank deposit slips
• Fee statements

Expense records are equally important as they support claims for deductions. Taxpayers must keep all original receipts and invoices for purchases and expenses. For every expense claimed, there should be a source document that details the vendor, the date, the amount, and a description of the goods or services purchased.

Records related to property and assets are also a focus, particularly for calculating capital gains or losses and capital cost allowance. When a property is acquired, all documents related to the purchase must be kept to establish the cost base of the asset. Records of any improvements that add to the property’s value should also be retained. When the asset is sold, the sale agreements are necessary to calculate the final gain or loss.

An annual inventory count is another specific requirement for many businesses, which involves physically counting and valuing the inventory on hand. Other records may be necessary depending on the circumstances, including shareholder meeting minutes, partnership agreements, and key contracts.

Record Retention and Storage Rules

The general rule for record retention is that all required books and records must be kept for six years from the end of the last tax year to which they relate. For example, if a business has a fiscal year-end of December 31, 2023, the records for that year must be kept until the end of 2029. This six-year clock starts from the end of the tax year, not from the date of the individual transaction.

There are important exceptions to this standard six-year rule. Corporate records, such as minutes of meetings and the general ledger, must be kept until two years after the corporation dissolves. Records related to the acquisition of property should be kept until six years after the taxation year in which the property is sold. If a taxpayer files a notice of objection or an appeal, all related records must be kept until the matter is fully resolved.

Records must be kept at a person’s place of business or residence in Canada. If a taxpayer wishes to store records at a different location or outside the country, they must obtain written permission from the Minister of National Revenue. If a return is filed late, the six-year retention period for the records related to that return begins on the date the return is actually filed.

Managing Electronic Records

When records are maintained in an electronic format, they are subject to specific requirements. The Income Tax Act stipulates that if records are kept electronically, they must be retained in an electronically readable format for the entire retention period. Simply having paper printouts is not sufficient; the original electronic files must be preserved.

The CRA’s policy requires that electronic record-keeping systems be reliable and complete. The system must capture all relevant data and prevent unauthorized alteration of records. There must be a clear audit trail that documents any changes made to the electronic records, including who made a change and when.

Taxpayers must have proper backup and recovery procedures to protect against the loss of electronic records. Documentation of the accounting system, including software details and file formats, must also be maintained and made available to the CRA upon request. Scanned images of paper documents are acceptable if they are legible and complete.

Penalties for Inadequate Records

Failure to comply with record-keeping requirements can lead to significant consequences. The legislation includes a specific penalty for not keeping adequate records, and a person who fails to comply can be found guilty of an offense and may face a fine, imprisonment, or both.

Beyond legal penalties, there are practical financial consequences. During an audit, if a taxpayer cannot provide adequate records to support the claims on a tax return, the CRA has the authority to disallow them. This results in a higher taxable income and, consequently, a larger tax bill.

When the CRA disallows expenses or credits due to a lack of records, the taxpayer is not only required to pay the additional tax but is also charged compounding daily interest. The CRA may also levy gross negligence penalties if it determines that the failure to keep records was part of a deliberate disregard for the law.