Principal Issues
Whether taxpayers are required to maintain books and records sufficient to support amounts reported for income tax purposes, including income, expenses, and adjusted cost base (“ACB”) of capital property, and the implications where such records are not maintained.
Position
Taxpayers are required to maintain adequate books and records in accordance with subsection 230(1) of the Income Tax Act (the “Act”).
Such records must be sufficient to enable the determination of taxes payable and must be retained for the required statutory period.
Failure to maintain adequate documentation may result in reassessment, denial of claims, or the use of alternative methods by the Canada Revenue Agency (“CRA”).
Reasons
Subsection 230(1) of the Act requires every taxpayer carrying on business or required to pay taxes to maintain books and records in such form and containing such information as will enable the determination of taxes payable.
Subsection 230(3) of the Act requires that such records be retained for a period of six years from the end of the last taxation year to which they relate.
The term “record” is defined broadly under subsection 248(1) of the Act and includes books, accounts, vouchers, invoices, statements, and other supporting documents.
Books and records must support all amounts reported, including income, expenses, liabilities, and capital property.
In respect of capital property, records must support the acquisition cost, adjustments to adjusted cost base pursuant to section 53 of the Act, and the proceeds of disposition.
As confirmed in CRA technical interpretation 2010-0352971I7, costs incurred subsequent to acquisition, including interest expenses, maintenance costs, and storage fees, do not form part of the adjusted cost base of capital property where such property is treated on capital account.
Where supporting documentation is unavailable, the CRA may, in limited circumstances, accept reasonable estimates, provided such estimates are reasonable in the circumstances. As indicated in CRA document 2010-0380771M4, an estimated cost may be accepted where the taxpayer is unable to establish the original purchase price.
CRA administrative guidance, including IC78-10R5 and RC4188, outlines the requirement to maintain adequate documentation and the types of records that may be reviewed during an audit.
During an audit, the CRA may examine books and records, supporting documentation, bank records, and any other information required to verify compliance with the Act.
Where records are incomplete or unavailable, the CRA may reconstruct income, deny deductions, and impose penalties.
Limitations
Information derived from CRA publications, technical interpretations, and Dedicated Telephone Service correspondence does not constitute a binding determination of tax treatment.
Binding confirmation may only be obtained through an advance income tax ruling issued by the Income Tax Rulings Directorate.
