Good records are the unglamorous foundation of every successful business, and they matter most at the two moments founders least want to think about: when the Canada Revenue Agency audits you, and when you sell. Whether you want an audit to go smoothly or you want to show immaculate books to a buyer, you will need not just good records but great ones. The frustrating reality is that the law and the audit practice do not quite line up — and the gap between them is where unprepared businesses lose money they should never have lost.
The receipt paradox
Here is the paradox at the heart of record keeping. There is no requirement in the Income Tax Act that a taxpayer hold an original receipt in order to claim a business expense. Yet if an auditor asks for the original receipt and all you can produce is a photocopy, a scan, or a credit card statement, the auditor may disallow the expense altogether. The Excise Tax Act and the Income Tax Act do not demand perfect documentation, but auditors routinely deny expenses when the documentation is imperfect, and the practical recourse is limited.
The lesson is to keep everything an auditor might want to see — and that includes original receipts. Because some receipts fade over time (auditors understand this), it is wise to keep a copy or scan in addition to the original. The single biggest reason to maintain complete records is defensive: if you are audited, you may draw a junior, inexperienced, or time-pressed auditor who will not perform a thorough job and will disallow expenses by default. Only complete records let you push back effectively.
How long to keep records
As a general rule, keep your records for six to seven years. Under the Income Tax Act, the six-year retention period runs from the end of the tax year to which the records relate — the fiscal period for a corporation, the calendar year for an individual such as a sole proprietor. The Canada Revenue Agency may ordinarily reassess income tax returns for up to three years and GST/HST returns for up to four, but keeping records a year or two longer than the bare minimum is prudent, because if an auditor suspects fraud or gross negligence, they can reach back beyond the normal reassessment period. Being ready for that possibility costs little; not being ready can cost a great deal.
Records you should never throw out
Some records should be kept indefinitely. Anything tied to the acquisition or disposal of property — purchase and sale agreements, stock transactions, share registries — should be retained for the life of the asset and beyond. Without these documents, it becomes impossible to compute the correct capital gain when the property is eventually sold, which can lead to paying more tax than necessary simply because you cannot prove your original cost base. The cost base, paid-up capital, and stated capital created when a business is structured can matter decades later, on a sale, a reorganization, or a death.
Special retention situations
Several circumstances change the standard timeline:
- Objections and appeals. If you have objected to the Canada Revenue Agency's Chief of Appeals, or appealed to the Tax Court of Canada, keep all records until the six-year period has passed or the matter is concluded, whichever is later.
- Late-filed returns. If you file an income tax return late, keep the records for six years from the date the return is assessed after filing — not from the original year-end.
- A business that has ended. If an unincorporated business ceases operations, keep records for six years from the end of the tax year in which operations ended.
- A deceased taxpayer. The executor should keep all records until a clearance certificate is granted.
- Amalgamation or merger. The resulting or acquiring company must retain the corporate records as if the original business still existed.
- Dissolving a corporation. After dissolution, keep records for two years and long enough that the business can prove its figures if audited within the normal reassessment period.
The Canada Revenue Agency's own guidance fills in the detail: Information Circular IC78-10R5 on books and records retention and destruction, IC05-1R1 on electronic record keeping, and document RC4409, "Keeping Records," for those unsure what to keep in the first place.
Electronic records and backups
If you keep electronic records, you may be asked to produce documentation to support them, so keep your receipts, bank statements, deposit slips, and cancelled cheques organized and accessible. Above all, back up your business records and keep a copy offsite. A computer crash that wipes out your data leaves you with your back against the wall, and an auditor can use missing records as a reason to disallow expenses — a loss far more expensive than the price of a backup drive. The note about input tax credits and charitable contributions is worth flagging here too: those are areas where actual receipts are effectively required, so they should be retained with particular care.
Records and the audit targets that follow from them
Three expense categories draw auditor attention because they are so often poorly documented: vehicle use, meals and entertainment, and home-office expenses. The common thread is that taxpayers tend to estimate rather than document. For a vehicle, keep a log recording each business trip — destination and start and end odometer readings — plus odometer readings at the start and end of the year, so you can prove the business-use percentage. For meals and entertainment, keep the original receipts and note the client and purpose of each (and remember only 50% of a client meal is deductible). For a home office, measure the actual percentage of the home used for business and keep the supporting bills, plus photos and a floor plan in case you move before an audit. Our guide to common startup tax mistakes goes deeper on these traps.
How the work gets done
Records are your defence in an audit and your asset in a sale, and getting the system right early is far cheaper than reconstructing it under pressure. Barrett Tax Law can advise on what to keep and for how long, help defend expenses an auditor has challenged, and represent you through objections and Tax Court appeals where records have been unfairly disregarded. The first consultation focuses on your situation and the realistic options.
This guide draws on Dale Barrett's book, A Quick and Dirty Business Start-Up Guide. It is general information, not legal advice, and reading it does not create a lawyer-client relationship.