Keep Your Records or Risk Paying Excess Tax

Most business owners know that keeping their business records in good order is required to meet their legislative and legal tax obligations. But a commonly held assumption about just how long and under what circumstances you need to keep those records for has recently been overturned by the courts in decision made in favour of Canada Revenue Agency (CRA).

The widely understood mandate set by the CRA is to store all financial records for six years from the year to which the documents relate. As a business operator, it is very likely you will purchase new assets or upgrade, renovate or replace currently owned assets over the course of your operation’s lifespan. Going by most people’s interpretation of the CRA document retention policies, the backup for those purchases and renovations should be kept for six years from the date of the purchase / renovation.

In a recent court case however, it was shown that this popular interpretation of the CRA document retention policy is in fact incorrect. In this example, the taxpayer purchased certain assets and kept the documentation for the ‘required’ six years before disposing of them. After destroying the documents, the taxpayer sold the asset and claimed an adjusted cost base (ACB). CRA challenged the ACB and since the taxpayer did not have the documents to back up their claim, the CRA disallowed the ACB. This ultimately resulted in the taxpayer having to pay tax on what should have been a non-taxable ACB. The taxpayer fought the case and lost because they could not support the ACB with any documentary evidence.

There is definitely a lesson to be taken from this case. First, separate your financial documents for your business into two categories; one relating to the purchase of assets and the other to everyday operations. Second, keep the asset purchase documents until six years after the year in which the asset is sold and not for six years from when the asset is purchased. Your yearly operational documents can be kept for the standard six years from the taxation year to which they relate.

Keeping those documents relating to asset purchases could definitely pay dividends, should CRA challenge the ACB on a sale of one of your assets in the future.