As a business owner, few phrases trigger anxiety quite like "CRA audit." While audits are a reality of our tax system, proper preparation can transform this potential ordeal into a manageable process. The cornerstone of audit protection? A robust record-keeping system that adheres to the CRA's 6-year retention requirement.
Understanding the 6-Year Rule
The Canada Revenue Agency requires businesses to retain records and supporting documents for a minimum of six years from the end of the last tax year they relate to. This isn't just a suggestion – it's a legal obligation under the Income Tax Act.
But what exactly constitutes the "last tax year"? Let's clarify:
If you filed your 2023 return on April 30, 2024, you must keep records related to that return until at least December 31, 2030 (six years after the end of the 2024 tax year).
Real-World Scenario:James runs a consulting business in Edmonton. In 2018, he claimed significant home office expenses but only kept receipts for three years. When audited in 2023, he couldn't substantiate his claims, resulting in reassessment, denied deductions, interest charges, and considerable stress. Had he followed the 6-year rule, this situation would have been entirely avoidable.
Essential Records to Maintain
Your record-keeping system should include:
Financial Documents
Income records (invoices, receipts, contracts)
Expense receipts and documentation
Bank and credit card statements
Investment statements and trading summaries
Loan agreements and interest statements
Tax and Employment Records
Previous tax returns and notices of assessment
Payroll records and T4 summaries
CPP and EI contribution records
Contractor payments and T4A forms
GST/HST returns and supporting calculations
Asset and Investment Documentation
Property purchase and improvement records
Equipment and vehicle acquisition documents
Depreciation schedules
Investment purchase and sale confirmations
Pro Tip: For major business assets, retain records for six years beyond the year you dispose of the property, not just six years from purchase.
Building an Audit-Resistant System
Creating an effective record-keeping system doesn't require complex technology – consistency and organization are the keys to success.
Digital vs. Physical Records
The CRA accepts electronic record-keeping systems, provided they:
Maintain records in an electronically readable format
Ensure adequate controls to preserve record integrity
Provide sufficient detail to determine tax obligations
Many businesses implement a hybrid approach:
Scan paper receipts for digital backup
Maintain cloud storage with appropriate security
Keep original documents for major purchases and contracts
System Example:Sarah runs a small marketing agency in Toronto. Her system includes:
Monthly digital folders organized by expense category
Quarterly summaries linked to her accounting software
Cloud backup with encrypted protection
A simple naming convention: [Date]-[Vendor]-[Amount]-[Category]
This systematic approach allowed her to respond to a CRA review request within hours rather than days of stressful searching.
Common Record-Keeping Mistakes
Avoid these pitfalls that frequently trigger audit issues:
Inconsistent Record Organization
Random shoeboxes of receipts or disorganized digital files create red flags during an audit and make it nearly impossible to find specific documents when needed.
Mixing Personal and Business Expenses
Without clear separation, you risk having legitimate business deductions denied. Maintain separate accounts and clear documentation showing the business purpose of each expense.
Inadequate Automobile Records
Vehicle expenses remain one of the most frequently audited deductions. Maintain a detailed logbook tracking:
Date, destination and purpose of trips
Starting and ending odometer readings
Total kilometers driven for business purposes
Missing the Documentation Chain
Each deduction should have a complete trail: the receipt, proof of payment, and documentation of business purpose.
When to Extend Beyond Six Years
Certain circumstances require longer retention periods:
Business property records: Keep until six years after disposal
Insurance documents: Maintain for the coverage period plus six years
Employee records: Retain for six years after employment ends
Disputed assessments: Keep until resolved plus six years
Records relating to international transactions: Consider a 10-year retention period
Technology Solutions for Compliance
Modern record-keeping tools can simplify compliance:
Cloud accounting platforms: Systems like QuickBooks, Xero or Sage integrate receipt capture and storage
Receipt scanning apps: Tools like Receipt Bank or Expensify categorize and store receipt images
Digital document management: Systems with OCR technology make documents searchable
Automated backup systems: Ensure business records are regularly backed up
Preparing for an Actual Audit
If you receive an audit notice:
Don't panic – good records mean you're already prepared
Review the specific documentation requested
Organize materials chronologically or by category as requested
Consult with your accountant before submitting anything
Never provide more than what's specifically requested
At SKG Financial, we help clients implement audit-resistant record-keeping systems and provide audit support when needed. Our proactive approach focuses on compliance while minimizing unnecessary stress and business disruption.
Contact Us:
Email: info@skgfinancial.com
Phone: 416-984-4007
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