The proper maintenance of a business’ books and records is essential when dealing with an audit initiated by the Canada Revenue Agency (the “CRA”). Taxpayers should be cognisant of their recordkeeping obligations under the Income Tax Act (Canada) (the “Act”) and regulations made pursuant to the Act (the “Regulations”), and this article aims to highlight certain document retention requirements outlined in the Act with which readers may not be intimately familiar.
Which documents must be retained?
A corporation is required by the Act and the Regulations to maintain the following documents from its date of incorporation until two years following the date of the corporation’s dissolution:
- minutes of directors’ and shareholders’ meetings;
- share registers;
- the general ledger; and
- any contracts or agreements necessary to understand the corporation’s general ledger (collectively, the “Permanent Documents”).[1]
In the case of amalgamating corporations, the CRA takes the position that the amalgamating corporations must maintain their pre-amalgamation books and records on the theory that the new corporation is a continuation of the amalgamating corporations.[2] In contrast, an unincorporated business like a sole proprietorship or partnership must maintain its applicable Permanent Documents until six years after the last day of the taxation year when the business ceased.[3]
In addition to the Permanent Documents, subsection 230(1) of the Act requires businesses to include books and records containing “information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.” As a result, a business is not required to maintain all of its books and records, only those sufficient to enable the Minister of National Revenue (the “Minister”) to determine the business’ taxable income and tax payable. This is referred to as the tax determination standard.
The six year rule and exceptions
At first glance, the rule for document retention appears straightforward: both corporations and unincorporated businesses are generally required to keep documents relating to their books and records (other than the Permanent Documents) for a period of six years from the end of the taxation year to which they relate subject to certain exceptions (the “Six Year Rule”).[4] Unfortunately, the Six Year Rule is subject to certain exceptions, and there are circumstances in which the CRA is empowered to request a taxpayer’s books and records beyond the ordinary retention period. The following is a non-exhaustive list of such circumstances:
(i) Return never filed or late-filed
The Minister cannot assess the taxpayer until a tax return is filed. As such, until a taxpayer files a tax return, the relevant limitation period will not commence pursuant to subsections 152(3.1) and 152(4) of the Act. When a return is late-filed, the Six Year Rule will commence on the date the return was actually filed in respect of the books and records related to that taxation year. Accordingly, if a business fails to file its return in a timely manner, its books and records could be subject to inspection beyond the ordinary six year retention period.
(ii) Documents to be used in future tax returns
It is always prudent to retain substantiating documentation relating to property or expenses that the taxpayer intends to report in future taxation years. For instance, any documentation relating to the adjusted cost base of capital property or loss carry-forwards may apply to taxation years well beyond the six year record retention period. In this respect, CRA takes the position that the record retention period applies to the last year a record or document may be required for purposes of the Act, and not generally to the date of a particular transaction.[5] For example, records relating to long-term investments in capital property should be maintained until the day that is six years after the last taxation year which such a transaction could affect the taxpayer’s calculation of tax payable.
(iii) Provincial audits
Businesses should also be aware of the document retention policies required by their respective provincial or territorial ministries, which may not align with the Six Year Rule. For instance, Ontario’s Ministry of Finance takes the position that corporate taxpayers should retain their books and records for seven years, as opposed to six.[6] Taxpayers are encouraged to verify the retention period applicable to their respective jurisdictions.
(iv) Director’s liability
Subsection 227(10) of the Act enables the Minister to assess a director of a corporation if that corporation fails to deduct and remit payroll tax and certain amounts subject to withholding under Part XIII of the Act. In these instances, retaining a corporation’s books and records beyond the ordinary retention period may be helpful in assisting a director escape personal liability. Of note, the CRA may not commence an action against a director if more than two years have elapsed since the director last ceased to be a director of that corporation and that director is not otherwise a de facto director.[7]
(v) Transactions involving non-residents
Taxpayers who transact regularly with non-resident entities should be aware of their obligation to withhold and remit Part XIII tax in respect of certain payments made to non-residents. Paragraph 227(10)(d) of the Act enables the Minister to assess the taxpayer at any time on amounts payable under Part XIII of the Act by a resident of Canada. As there is no limitation period, the Minister is not statute-barred from assessing in respect of Part XIII tax, which will require the taxpayer to maintain relevant books and records beyond the ordinary six year record retention period.
Best practices
Although there are exceptions to the record retention period described above, there are compelling reasons for businesses to avoid retaining books and records indefinitely. The Act does not prescribe a uniform standard for a taxpayer’s books and records, nor does it impose a burden to maintain every single document in accordance with the tax determination standard. Accordingly, obsolete records, redundant documents and documents which are drafts may generally be disposed of in order to avoid unnecessary audit scrutiny. Of note, this opportunity to conduct a periodic review and disposal of superfluous documents does not apply once an audit has been initiated. That is, once the CRA makes a request for information during an audit or issues a “requirement”, the taxpayer will be prevented from culling any documents to which the audit relates.[8]
If you have any questions or would like any information regarding the most suitable record retention policy for your business, please contact a member of the Miller Thomson LLP Corporate Tax group.
[1] S. 230(4)(a) of the Act; Regulation 5800.
[2] Canada Revenue Agency, “IC78-10R5 – Books and Records Retention/Destruction” (June 2010) at para 27.
[3] Regulation 5800(1)(c).
[4] S. 230(4)(b) of the Act.
[5] IC78-10R5, supra note 2 at para 29.
[6] Ontario Ministry of Finance, “Retention/destruction of books and records” (April 6, 2022), online: <>
[7] S. 227.1(4) of the Act.
[8] IC78-10R5, supra note 2 at para 28.
