By Alexandra Tzannidakis
The failure to maintain books and records is ground for suspension of a charity’s tax-receipting privileges. Such a suspension can translate into the loss of big donations. This article is the second in a series on what “books and records” means and how to meet the requirements. Part I (An Introduction) is available here.
In the previous part of this series, we discussed what exactly comprises the ‘books and records’ that the CRA requires charities to keep, and why meeting these requirements is vital to the health of a charity. This month, we will address some of the confusion and common misinformation surrounding the where, how, and how-long of record keeping.
Note that the information below is based on what the Income Tax Act requires of registered charities, and does not apply to non-profit organizations (NPOs). Any charities and NPOs that are incorporated under the Canada Not-for-Profit Corporations Act will also need to follow the guidelines for records in that Act, which are beyond the scope of this article.
Even if a charity’s books and records are perfectly complete and immaculately maintained, they can’t just be stored anywhere; the CRA takes particular interest in their location. When an organization applies for charitable registration, it must provide on the application form (T2050) not only its physical and mailing addresses but also specifically the address at which its books and records are located. Any or all of these addresses can be the same, but the fact remains that you are committing specifically to keeping the books and records in a definite location. If you decide the move them somewhere else, you will need to notify the CRA of the change.
This is not to say that the charity has completely free rein on where to keep its records: the information relating to all of its activities must be kept in Canada, even for those activities that take place outside the country. Many charities operate overseas, and we suspect a frequent failure to follow this rule. The burden of this requirement is somewhat relieved by the ability to keep electronic records (discussed in the section below).
For charities that are also incorporated under the Canada Not-for-Profit Corporations Act, there is the added requirement that the records be open to inspection by the directors at all times. They must also be able to provide copies to directors or members upon request. This makes the giant mouldy boxes in the secretary’s attic a bad choice in record-keeping locations.
Paper vs. Electronic
The obvious method is to keep paper copies of all the books and records. The law also allows charities to take advantage of modern technology and keep them in electronic format, but there are some very important guidelines to be aware of.
First, electronic records must be kept for the same minimum periods described in the section below, and must be kept in an “electronically readable format”. This essentially means they must be accessible by auditors using CRA equipment, so avoid very outdated software versions and so on.
Second, for any records that were initially created in an electronic medium, like a database or emails, you must keep an electronic version of them accessible even if you also have paper printouts of them. Fortunately, there’s a safety backup to this rule: scans of printouts from electronic formats are all right as long as proper imaging practices are followed.
Third, books and records that are maintained outside Canada but are electronically accessible in Canada do not meet the requirement of being kept in Canada.
A charity is permitted to hire a third party to maintain its records (including bookkeepers, accountants, and electronic/internet information managers), but the charity is still always responsible for their proper upkeep. In fact, the charity always maintains all responsibility regarding the records, including the responsibility to make them available to CRA officials.
The Regulations to the Income Tax Act (the legislation under which charities are regulated) lay out a number of specific requirements as to how long certain types of records must be retained. The limitation periods for each type of record are listed below, but our advice would be to treat these as the minimums that they are and to make an effort to retain as much as possible for as long as possible. It is difficult to predict what will happen in the future of the charity. Not meeting the minimums can cause problems, but meeting only the minimum is not guaranteed to prevent other problems. For example, accusations of fraud can extend certain periods of limitation for assessment that the following periods are based on. Without records, it is difficult to rebut such accusations.
- Donation receipts – Keep copies of all official receipts (except for 10-year gifts) for at least two years from the end of the calendar year in which the donations were made. So, if you issue a receipt for a donation that was made in May 2010, you must keep a copy of it until the end of December 2012.
- Records for 10-year gifts – Due to changes in the law in 2010, this type of gift no longer has any tax advantage associated with it. However, if you do receive such a gift, you must keep record of it for as long as the charity is registered and, if the charity’s registration is revoked, for at least two years after the date of revocation.
- Minutes of Meetings of Directors/Trustees – Keep copies of these until two years after the charity is revoked and/or (if it’s a corporation) until two years after the corporation is dissolved – whichever is longer. These records can be crucially important to battling liability claims against individual directors.
- Minutes of Meetings of Members – Keep copies of these for as long as the charity is registered and, if the charity’s registration is revoked, for at least two years after the date of revocation.
- Governing Documents and By-laws – Keep the originals and all amendments to them for as long as the charity is registered and, if the charity’s registration is revoked, for at least two years after the date of revocation.
- General Finances – Keep general ledgers, summaries of year-to-year transactions, and verifying accounts for at least six years from the end of the last tax year to which they relate (while the charity is registered), and for two years after the charity is revoked and/or (if it’s a corporation) until two years after the corporation is dissolved – whichever is longer.
- Financial Statements, Source Documents, and Annual Returns – Copies of the financial statements that the charity presents to its members each year, along with the annual T3010 return (i.e. the information return that the charity files instead of a tax return) must be kept for six years from the end of the last tax year to which they relate, or, if the charity is revoked, for at least two years after the date of revocation.
Part III (What to do about Missing Records) is available here.