by a taxpayer and for how long. It provides guidance to those required by law to keep books and records according to sections 230 and 230.1 of the Income Tax Act, section 87 of the Employment Insurance Act, and section 24 of the Canada Pension Plan. For electronic records, information circular IC05-1R1, “Electronic Record Keeping,” provides additional guidance for the taxpayer.
Keep in mind that there may be corporate and other provincial or federal statutes which require taxpayers to retain some documents for certain time periods. These are not addressed in these information circulars, and taxpayers should make themselves aware of the types of compliance concerns. A good place to start is by talking to a tax lawyer, tax accountant, or compliance expert.
1. The Importance of Maintaining Complete and Organized Records
There are a variety of reasons that should convince a taxpayer to maintain complete and organized records. There are laws enacted by Parliament that compel the taxpayer to keep such records in order to stay on the right side of the law. For example, I once had a client who should have kept his receipts as required to prove his expenses. About two years after his return had been processed the CRA chose to question a $1,500 receipt for a particular contractor. Since the taxpayer did not have the receipt in question, he was not able to produce it.
In most cases what would typically happen is that the auditor would deny the expense and reassess the taxpayer for additional taxes owing. In this case, however, the auditor was determined to obtain the receipt from the taxpayer — at any cost. When the taxpayer failed to provide the receipt through the auditor’s use of section 231.1 of the ITA, which entitles the auditor to inspect or examine records for the purpose of administration and enforcement of the act, the auditor used his powers under sections 231.2 and 231.6 of the act, to issue a “Requirement to Provide Information.” Differing from a general “Request” for information which is initially provided at the onset of the audit — and is expected to be voluntarily complied with to the best of one’s ability — a “Requirement” for information under section 231.2 of the act compels a taxpayer to provide the information or possibly be charged for unlawfully failing to provide it.
As my client did not have the receipt in question, he was not able to provide it, despite the requirement. I will never know if this receipt actually existed, or whether the expense was fabricated, but my client insisted that it was a legitimate expense and that he simply did not hold onto the receipt. In the end, the auditor recommended that my client be charged as a criminal, and a summons was delivered to his home by a police officer. This is when I was approached with the grim task of defending this taxpayer in the same courtroom with drug dealers and thieves. Had my client held onto the necessary documents as required in order to satisfy the law, he would not have been left in this particular predicament.
The following requires a taxpayer to maintain complete and organized records:
• Income Tax Act (ITA)
• Excise Tax Act (ETA)
• Excise Act, 2001 (EA 2001)
• Employment Insurance Act (EIA)
• Canada Pension Plan (CPP)
• Softwood Lumber Products Export Charge Act, 2006 (SLPECA)
• Air Travellers Security Charge Act (ATSCA)
Benefits for maintaining complete and organized records include:
• Helping the taxpayer to determine what taxes are owed.
• Making it easier for a person to identify his or her sources of income.
• Acting as reminders of tax credits to be claimed and expenses to be deducted.
• In case of future audit of returns, allowing the taxpayer to substantiate and prevent disallowances of his or her expenses, and prove his or her income.
Many people are not sure of what kind of records to keep, or how they should be kept. Regardless of how much a taxpayer knows about record keeping, in order to stay on the right side of the CRA, it is best to consult the CRA document RC4409, “Keeping Records,” for guidance. Everything a taxpayer could possibly want to know about record keeping is provided in this guide, and it is an invaluable resource for all businesses and self-employed individuals. It deals with paper and electronic record keeping, as well as record keeping for payroll and GST or HST.
If you keep electronic records, you may be asked to provide documents to support your entries, so it is important to also keep all of your receipts, bank statements, deposit slips, cancelled cheques, and all other important documents. Most importantly, don’t find yourself in the position in which a great number of my clients have found themselves — realize that computers crash, and hard drives are temporary. Back up your business records regularly. A crashed computer without a backup can cost you thousands in extra taxes. Your lack of data gives the auditor free reign to deny all your expenses that relied on the electronic data as proof.
2. Why the CRA Is Not Fond of the Self-Employed
With the economic decline over the last few years, a great number of jobs have been eliminated, which has resulted in an increase in the number of people who are self-employed. Industry Canada’s Small Business Quarterly shows that self-employment has increased 1.5 percent between 2008 and 2009, increasing the number of self-employed workers by 40,000 to a grand total of more than 2.6 million.
Simply put, it is easier for the CRA to keep tabs on the earnings of a taxpayer, and thus more likely for it to collect the appropriate amount of tax, if the taxpayer is not self-employed. The CRA is not fond of self-employed individuals because they are complicated and less likely to pay their fair share of taxes.
When an individual is employed, his or her employer typically makes all the necessary tax deductions at source and remits them to the CRA. Additionally, the employer provides a summary to the CRA indicating how much each employee has earned and how much tax has been withheld. As such, by the end of the year, an employee’s taxes have been paid, and in many circumstances he or she is due a refund. This makes the CRA’s job of administering and enforcing the ITA and collecting the taxes an easy task.
However, with self-employed individuals, the situation is never very easy or clear for the CRA. Self-employed individuals have deductions that are applied against their income, and their returns are far more complicated than simply providing and tabulating information slips provided to them by third parties. When such information slips are the sole source of a taxpayer’s information to the CRA, it is very easy for the CRA to verify that the taxpayer has fully and completely disclosed his or her income. The CRA simply cross-references the information slips provided by all third parties against information provided by a taxpayer. If there is a discrepancy or a missed information slip, the CRA will know right away. In the case of a self-employed individual, the CRA would have to perform an audit in order to determine the accuracy of a return, which in turn makes the job more difficult.
If you are an employer, in order to defend yourself during an audit, and to prevent being found offside during an audit with respect to the status of your workers, it is important to determine their employment status. The employment status directly affects a taxpayer’s entitlement to Employment Insurance (EI) under the Employment Insurance Act. It can also have an impact on how a worker is treated under other legislation such as the Canada Pension Plan (CPP), and the Income Tax Act. Along with income tax withheld from the employees, employers are responsible for deducting CPP contributions and EI premiums which must be
