Resolution to purge the paper? Know the rules before getting into trouble with Canada Revenue

By George E. Dube, CPA, CA with Alexandra Witmer, CPA, CA

How many times have you made a New Years resolution to get organized? Part of that organization may be looking at those boxes and boxes of paper records you’ve been keeping around just in case and wondering when it’s OK to get rid of them. Or, even better, when its OK to scan them and shred the lot of it.

Straight from the horse’s mouth – the CRA states records have to be kept of a minimum of six years from the end of the last tax year to which they relate. The tax year is the fiscal period for corporations and the calendar year for all other taxpayers. For example, your 2013 personal tax return year-end is December 31, 2013. Six years later is December 31, 2019. So you may destroy supporting documents January 1, 2020, if you choose to do so.

But wait – be careful what and when you purge

This is not a green light to destroy everything! When contemplating a paper purge, you need to think about what is ok to destroy and what paperwork you should be kept indefinitely.

Keep in mind that older documents may be needed even today. We accountants like to call the documents we need to keep for longer periods of time the perm file (permanent file). For example, the courts have supported the CRAs position that documents related to the purchase of equipment or a building are required to support the capital cost allowance (tax depreciation) you currently deduct. We would classify this as permanent file material.

Furthermore, in personal tax issues, the CRA may administratively allow you to claim missed tax amounts for up to 10 years. The catch is, you need the documentation to support your request.

Our recommendation continues to be to keep your paper records for at least 10 years, and your permanent information 10 years after they cease being relevant.

Now, get the scanner warmed up

Ok, so you’ve figured out what you are going to keep – but you really don’t want a box of paper sitting around. It’s the 21st century for crying out loud, why can’t I keep everything electronically!

Good news, you can! Just buy a few flatbed scanners and get started! However, you need to take caution that the electronic copies are appropriate quality in the eyes of the CRA. Here is what they have to say:

• When the electronic copy is made to replace the paper source document, it must give the same information and any differences in resolution or colour must not obscure the document details.
• The CRA also has a process laid out of recording when you made these electronic copies. In a perfect world, the CRA would like you to:

a) keep a log book showing the date of the imaging
b) have signatures of the persons authorizing and performing the imaging
c) document descriptions of the records imaged
d) report whether the paper source documentation was destroyed or disposed of, and if it was, the date on which it occurred

At minimum, make sure that the image is legible and readable not only on your computer screen, but also if printed out onto hard copy.

Electronic records – they have rules as well

If we reverse the situation – you have all your source documents electronically; say spreadsheets, QuickBooks, emails, etc., you cannot simply print out a hard copy and then destroy your electronic records. These have to be kept for a minimum of six years too – which can prove challenging with what seems to be constant software and hardware updates (whether upgrading to the latest gadget or being forced to change when you spill chocolate milk all over your laptop).

The CRA says: a person who is required to keep records and who records them electronically must retain those records in an electronic readable format. This means that a person who uses computerized systems to generate books and records must retain the electronic records, even when a hard copy is kept. Electronically readable format means information that is supported by a system capable of producing an accessible and useable copy.

This may seem like a no-brainer, but make sure you have a back-up copy of your electronic records. If you’ve been putting this off, set a goal date to have it done by- January 31st for example. Whatever your method, just do it!

Now that you know the rules and guidelines to follow, its time to get started on that resolution to get organized for 2015!

For further details you can check out:

Information Circular 05-1R1 Electronic Record Keeping
http://www.cra-arc.gc.ca/E/pub/tp/ic05-1r1/README.html

Information Circular 78-10R5 Books and Records Retention/Destruction
http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r5/README.html

Who needs to keep records?

• Any person* carrying on a business
• Any person who is required to pay or collect taxes or other amounts
• Any registered charity or registered Canadian amateur athletic association
• Any registered agent of a registered political party or an official agent for a candidate in a federal election

*(person = an individual, a corporation, a trust, non-profit organizations)

George E. Dube, CPA, CA, LPA is a veteran real estate investor and accountant (CPA). He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at georgedube@dubecuttini.com.

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