Many clients are itching to get rid of tax records once the typical six-year retention period has passed.
But this can cause issues down the road. Documents may be needed years later, particularly if requested by CRA. So, tell clients to keep them within reach.
Gifts and inheritances
Clients may think the tax cost of a property is the $1 consideration noted on a legal document. However, when a gift is given, the donor is deemed to have realized proceeds equal to fair market value. This amount will be the tax cost to the gift recipient. Similarly, when a person passes away, they are deemed to dispose of their capital property at the fair market value on the date of their death (unless the property is left to a spouse). If a client inherits property in these circumstances, the fair market value becomes their cost amount for tax purposes. While not mandated, it’s best practice for clients to keep a copy of the schedule from the donor’s or deceased’s return indicating the reported proceeds for as long as they own the property.
Adjusted Cost Base
Clients may not realize that old documents can become relevant many years later. For example, a purchase agreement for a property purchased in 1985 and sold in 2015 should be kept until the end of 2021 (six years after the sale), since the sale proceeds affect tax calculations for 2015. Clients may also not realize that adjustments can be made to the tax cost of a property for items like capital improvements. So, they should keep renovation and construction receipts.
Similarly, T3 slips, which show a return of capital, contain relevant information for calculating a capital gain or loss on a future disposition.
Clients should maintain a continuity schedule (ideally in a spreadsheet or other digital format) for investments and other assets, along with supporting documents that prove the original purchase amount and adjustments to the cost amount for tax purposes.
Tax elections filed in the past can affect your taxes in the future. For example, a one-time election (Form T664) could be made for the 1994 tax year to allow a person to bump up the tax cost of property by a maximum of $100,000. If Form T664 was previously filed with respect to a property, and a client later wants to claim that property under the principal residence exemption, CRA requires that she file Form T2091 (even if no tax would be payable). Without the bump-up information, a client could report an incorrect capital gain. It is wise to keep a copy of a tax election filed until all properties related to the election are disposed of.
These benefits are based on a person’s pensionable earnings. Before your client pitches her tax returns, she should consider confirming her contribution history online with Service Canada. Clients can make sure all contributions have been counted towards their future pensions.
Allowable Business Investment Losses (ABILs)
If a client has made a loan to, or an investment in, shares of a small company and the company is now insolvent, she may be able to claim half of the loss on her tax return as an ABIL. These claims are coming under increased scrutiny by CRA and are likely to be audited. Clients should retain all documentation relating to the investment or loan for at least six years after the claim. This includes items such as promissory notes, loan agreements and share certificates, but clients should also keep financial statements, press releases and other supporting information regarding the company.
Taxpayer relief provisions
It’s possible to ask CRA to waive interest and penalties, permit a late-filed election, accept an amended return or issue a refund beyond the typical three-year period (for individuals and testamentary trusts only). So, a client should keep supporting documentation for 10 years (the limitation period for relief claims). For example, if a client missed a deduction for 2007, she has until December 31, 2017 to ask CRA for a refund.
Corporate capital gains
Capital gains realized after 1971 are subject to tax, so it is often helpful (even critical) to keep corporate tax returns from 1972 onwards. Consider the capital dividend account: under certain circumstances, an election can be filed to pay out the tax-free portion of capital gains realized by a private corporation to its shareholders. All of the capital gains and losses realized after 1971 must be detailed on a schedule attached to the election form. Or, consider that certain transactions between corporations can be subject to income tax, except to the extent of safe income, which is conceptually equal to after-tax retained earnings (the actual calculation can be complex).
As safe income is cumulative (and corporate tax returns have many inter-related schedules), financial statements and tax returns for corporations should be kept for all years after 1971. Safe income can be calculated on a consolidated basis, so keep this information for all companies in the corporate group as well.
- Records, along with source documents, must be kept to enable a person to determine their tax obligations.
- Records may be kept on paper or an electronically readable format. If records are generated by a computerized system, electronic records must still be maintained, even if a hard copy is kept.
- Records must be kept for at least six years from the end of the latest year to which they relate. For example, records relating to your 2015 tax return must be kept until the end of year 2021.
- For a late return, the six-year period starts the day the return
- Records relating to a Notice of Objection or appeal must be kept until the Objection or Appeal is completed or expired.
- Certain records must be kept by corporations until two years after the day a corporation is dissolved, such as minutes of meetings, share ownership, general ledgers, and special contracts or agreements.
Detailed guidance on record-keeping can be found in CRA publication IC78-10R5.
by Stephanie Dietz, CPA, CA, CFP. She specializes in tax and estate planning at Stephanie Dietz Professional Corporation.
Originally published in Advisor's Edge