Tax Survival for Canadians. Dale Barrett

the Crown has obtained information in confidence from taxpayers on a voluntary basis and for a specific and defined purpose, it may not subsequently make use of that information for a different purpose, namely the reassessment of other taxpayers, in circumstances where such use will almost inevitably result in a breach of the Crown’s undertaking of confidence.”

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      RECORD KEEPING: WHAT TO KEEP AND FOR HOW LONG

      Legislation allows the Canada Revenue Agency (CRA) to reassess personal and corporate tax returns for up to three years following the initial date of assessment. For GST or HST returns, the CRA has up to four years. Once these deadlines have come and gone, taxpayers should not have a sense of comfort that they can purge their records. In certain cases, where there is believed to have been fraud or gross negligence on the part of the taxpayer, the CRA can examine and reassess returns outside of these time periods.

      Taxpayers must keep any documents that will prove how much they earned from all sources and to substantiate their expenses. This could include receipts, credit card statements, bank statements, financial records, emails, purchase and sale agreements, legal documents, etc. Generally, records and supporting documentation needed to determine taxpayer >obligations and entitlements must be retained by the taxpayer for a period of six years. As per the Income Tax Act (ITA), the six-year retention period begins at the end of the tax year to which the records relate. For corporations, the tax year relates to the fiscal period, and for individual taxpayers, the tax year relates to the calendar year.

      Further, there are times when records and documents must never be disposed, such as those related to the disposal of property (e.g., real estate, investments, and shares in companies) or long-term acquisitions (e.g., purchase of an apartment building for rental income or shares in a company that will be held for many years). The taxpayer must be able to prove what he or she paid for the property or acquisition so he or she can pay the correct amount of tax when it is sold. Such records and documents may include purchase and sale agreements, stock transactions, share registries, and other historical information that would have an impact on the sale or liquidation of property. Without access to such documentation at the time of a sale, the taxpayer may have to pay more than his or her fair share of taxes.

      For example, if you purchase stock at $100 per share today and sell the stock at $150 per share in 20 years, you will need to prove to the CRA the price at which you initially purchased the stock so the CRA can assess capital gains based on a $50 gain per share instead of a $150 gain per share. The CRA will assume that you paid nothing for the stock (without your documentation), and that your entire sale price is profit. This is a huge departure from reality, which will cause a large difference in the tax payable, and unless you have kept all the relevant paperwork, it will be impossible to prove to the CRA that it has overassessed you.

      Special circumstances trigger an additional retention period. In some situations the CRA will demand taxpayers to retain records beyond the standard retention period, either by requests made in-person by CRA officials, or by registered letter.

      The following are examples of special circumstances:

      • If an assessment is being objected to the CRA’s Chief of Appeals, or appealed to the Tax Court of Canada following an unsuccessful objection, all records which may be necessary as proof should be kept until the six-year period has passed, or until such time as the matter has been finalized.

      • If a taxpayer files a late income tax return, his or her records should be kept for six years from the date the return is assessed following filing.

      • If your business or organization is unincorporated and operations have ceased to exist or operate, your records must be kept for a six-year period beginning at the end of the tax year in which operations ceased to exist or operate.

      • If the taxpayer is deceased, his or her legal representative should maintain all necessary records until such time a clearance certificate is obtained from the CRA, which would then allow the distribution of property under his or her control.

      • If there is a corporate merger or amalgamation, the resulting or acquiring corporation must retain business records as if the original corporations were in continuation.

      • If dissolving a corporation, following the dissolution certain records must be maintained for two years, and long enough such that if the corporation is audited within the normal reassessment period (three years for income tax returns and four years for GST or HST returns), that it is able to prove its figures during an audit:

      • Any record or document of the corporation that may be used to verify corporate tax entitlements or obligations.

      • All other corporate documents (e.g., minute books, share registries).

      CRA information circular IC78-10R5, “Books and Records Retention/Destruction,Æ is a good source for information as to what information must be retained 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)

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