In an age where technology is rapidly changing how we manage our information, record keeping has evolved from dusty paper files and folders to cloud-based solutions. Today, effective record keeping is essential for compliance and supports informed financial decision-making. For business owners and entrepreneurs, keeping accurate and organized records goes beyond statutory requirements. It's about gaining insights, improving processes, and planning ahead.
Why Do We Need to Keep Good Records?
The most common reason for keeping records is to ensure that a CRA audit goes smoothly and that you can justify every expense deducted. Ironically, the Income Tax Act does not explicitly require taxpayers to have an original receipt to claim a business expense. The need for a receipt is an invention of the auditors.
Receipts showing what has been purchased is crucial to support the deduction. In the event of a CRA audit where only secondary proof is available (such as a Visa statement or taxpayer affidavit), auditors tend to take a conservative approach and disallow the expense entirely. While taxpayers have the option to object to the auditor's decision or take the case to Tax Court (if the objection fails), where a judge may consider secondary evidence more favorably, the costs involved in this process can be prohibitive, leading most taxpayers to simply pay the additional tax in the even of the reassessment.
This is why proper record keeping can be seen as audit insurance. While it requires time and effort, it can save you a significant amount of money and stress in the event of a CRA audit.
Legal Compliance: Meeting CRA Requirements
In Canada, the CRA requires businesses to retain records for at least six years. This six-year period starts at the end of the tax year to which the records relate. For corporations, this means the fiscal year, while for individuals (including sole proprietors), it means the calendar year.
It should be noted that certain documents must never be discarded, including those related to significant acquisitions or disposals. For instance, Purchase or Sale Agreements, Stock Transactions, and Share Registries are crucial for substantiating the calculation of capital gains or losses upon eventual disposition.
In certain situations, taxpayers must retain records for longer than the standard period. For example, if you are objecting to a tax reassessment, you must keep the records until the matter is resolved. If a tax return was filed late, records must be kept for six years from the date of the Notice of Assessment. A complete list of special circumstances is beyond the scope of this article and can be found on the CRA website.
Meeting Manitoba RST requirements
Manitoba's Retail Sales Tax (RST) has slightly different record-keeping requirements compared to CRA. For example, Manitoba RST mandates that general ledgers be retained indefinitely, unlike the standard six-year retention period applied to most other records. For more information, please refer to the attached document:
What Documents Must a Business Keep?
To ensure compliance and be prepared for potential audits, clients should keep the following documents:
Invoices and Receipts: Keep all invoices and receipts for expenses related to the business, including purchases of goods, services, and supplies.
Bank Statements: Retain all bank statements, including those for business accounts, credit card accounts, and loans.
Contracts and Agreements: Keep copies of contracts with customers, suppliers, and employees, including lease agreements and employment contracts.
Payroll Records: Maintain records of employee wages, deductions, and other payroll information.
Tax Filings: Keep copies of filed tax returns, including income tax, GST/HST, and other relevant filings.
Supporting Documents: Any supporting documents that relate to income or expenses, such as deposit slips, cancelled cheques, and sales records.
Fixed Asset Records: Keep records of any fixed asset purchases and related depreciation schedules.
This is not necessarily an all inclusive list, refer to CRA website for more information.
The Shift to Digital Solutions
Digital solutions make compliance easier to manage. Searchable digital archives help quickly locate documents when audited or when verifying past transactions. Many software tools also include audit trails, which provide logs of changes made to financial records helping maintain accountability and transparency.
The modern era has introduced a variety of digital record-keeping tools, from cloud-based accounting software like QuickBooks Online to secure document storage solutions such as Google Drive and Microsoft OneDrive. These platforms offer the convenience of accessibility from anywhere, enabling businesses to keep financial records updated in real time. They also support collaboration, allowing accountants, bookkeepers, and business owners to work together seamlessly.
Digital solutions also improve the accuracy and security of record keeping. Automation features like bank feeds and transaction matching help reduce manual errors and ensure data consistency. Additionally, data encryption and multi-factor authentication enhance the security of sensitive information, which is crucial given the rise of cyber threats.
Backing up records is a important part of a comprehensive record-keeping strategy. Businesses should ensure that their financial and operational records are regularly backed up to prevent data loss due to system failures, cyberattacks, or other unforeseen events. Utilizing cloud storage solutions offers an excellent off-site backup option, ensuring that data is kept secure and can be accessed even in the event of physical damage to local hardware. Regularly testing backups can further enhance data security and business continuity.
What We Can Do For You
Jenkyns Smith CPA's LLP is well-equipped to assist businesses in modernizing their record-keeping processes. We can help transition your record-keeping function to QuickBooks Online (QBO), which includes features like Receipt Snap with OCR (Optical Character Recognition) capabilities. This feature scans and extracts information from receipts and is able to match it to transactions downloaded from bank feeds, making the process efficient and accurate. The scanned receipt is attached to the transaction in the General Ledger, making it easily searchable.
We can also assist you in setting up a QBO email mailbox, allowing you to forward vendor invoices directly into your QBO file for review. This process minimizes data entry and streamlines adding invoices to your Accounts Payable subledger, ensuring you keep track of the vendors you owe.
As an ELITE QBO Partner, we have extensive experience in helping many businesses successfully make this transition, ensuring a smooth process and effective use of modern tools. Reach out to our office today to learn more about our exclusive wholesale prices on QBO subscriptions.
This blog has been prepared to provide general guidance and should not be considered specific advice. It may not address individual situations, and the information contained should not be used as a basis for action or inaction without seeking professional advice tailored to your circumstances. For personalized assistance, please contact Jenkyns Smith CPA's LLP.
Related Posts
