Apart from the CRA tax audit, there are legal requirements for keeping your financial records pertaining to the tax returns. All paper and electronic documents kept on a computer disk have to be retained in Canada at the request of the CRA. The records have to be either in English or in French. There are several types of records that are kept in the electronic format today.
If you are living outside Canada, you can retain these documents after taking written permission from the CRA. The big question is – What records should you keep for a CRA tax audit? You have to act in partnership with your tax accountant and keep all records in an orderly manner of all sources of income. You have to keep all the receipts, invoices, cancelled cheques and vouchers which indicate an outlay of money.
The outlays will include operating expenses like your rent, advertising and capital expenditure; salaries or wages and other miscellaneous items like charity donations. In case of importing goods into Canada, your financial records have to substantiate the tariff you have paid for those goods and you will have to provide the certificate of origin for those products with full description. All the documentation has to be kept concerning the accounting of those goods, the reporting and the release of the imported goods. You also have to keep the records of the payments made towards duties and taxes.
All these records have to be stored or kept at your place of business in Canada unless you have a written permission from the CRA to keep them anywhere else. The records have to be made available to the CRA in case of a CRA tax audit.
There are many reasons why keeping of clear records will benefit you during the CRA tax audit. The main reason is that good maintenance of records will help the CRA auditors to identify your sources of income quickly. It is possible that you may be receiving cash from different places and you may be earning rental income on your property assets. If you do not keep records that show the income sources, you will not be able to prove that some of your sources may be non-business and, therefore, non-taxable.
When the records are maintained well, it can translate into tax savings besides coming in handy for the CRA tax audit. Well kept records can be a good reminder of deductible expenses and also of input tax credits. If there is no proper record of your transactions, there is a tendency that you may forget some expenses or input tax credits when you prepare your GST or HST returns. If the records are well kept, they can help avoid most of the problems that people encounter during a CRA tax audit. When you keep your records in an incomplete state, the CRA tax auditors will not be able to establish your income from them. It will cost you time and when your records will not be supporting your claims, they are likely to be disallowed during the CRA tax audit.