If someone asked you “where” your cloud storage is, would you know the answer? The “cloud” is the common term used when data is stored remotely but yet accessible (to your multiple devices) through the internet. Given that the data is now ‘remote’ we often receive questions from clients as to whether keeping books and records in this way meets their obligation under the Income Tax Act.
With respect to the Income Tax Act, accessibility is a key feature your data needs. Canada’s income tax system is self-monitoring and self-reporting. Whether you are an individual or organization if the Minister wants to check your documents and records, you have to be able to readily produce them, and “in an electronically readable format” (ss. 230(4.1) of the Income Tax Act), for inspection and auditing. (For a primer on Books and Records for Charities, here are links to our three-part series of articles: “An Introduction,” “How to Actually Keep Records,” and “What to Do about Missing Records.”)
Registered Charities are Qualified Donees, the Income Tax Act specifies further the where, what, and how books and records must be kept:
230 (2) Every qualified donee referred to in paragraphs (a) to (c) of the definition qualified donee in subsection 149.1(1) shall keep records and books of account — in the case of a qualified donee referred to in any of subparagraphs (a)(i) and (iii) and paragraphs (b) and (c) of that definition, at an address in Canada recorded with the Minister or designated by the Minister — containing
(a) information in such form as will enable the Minister to determine whether there are any grounds for the revocation of its registration under this Act;
(b) a duplicate of each receipt containing prescribed information for a donation received by it; and
(c) other information in such form as will enable the Minister to verify the donations to it for which a deduction or tax credit is available under this Act.
And so, when charities, or the lawyers or accountants who serve them, subscribe to any of the cloud services—many of which come with their software suites—precisely so as to be responsible in the safe, modern, and accessible storage of its data and information, and that cloud has its servers outside of Canada, is it in compliance with the Income Tax Act with respect to keeping of records and books of account?
The Canada Revenue Agency has issued two Income Tax Information Circulars with relevance to electronic record keeping: Electronic Record Keeping (IC05-1R1) (only available in electronic format), and Books and Records Retention/Destruction (IC78-10R5).
What is clear is that the CRA will not give permission to registered charities to keep records and books of account outside Canada. The CRA circular, “Electronic Record Keeping,” states:
Records kept outside Canada and accessed electronically from Canada are not considered to be records in Canada. However, where records are maintained electronically in a location outside of Canada, the CRA may accept a copy of the records, provided these are made available in Canada in an electronically readable and useable format for CRA officials and they contain adequate details to support the tax returns filed with the CRA.
The Charities Directorate confirms and reiterates the need to store that “copy” in Canada. Thus, a charity that wants to use a cloud with servers outside of Canada, should be regularly and fully backing up its books and records, in an accessible format, on a Canadian server, or hard drive.
If the electronic record-keeping is merely a duplication of the charity’s physical records/books of account kept in Canada, the charity is already in full compliance with the ITA through its physical records. However, if there are “transactions” that only appear in the electronic form of accounting, then it is these electronic records that must be “kept” in Canada. Hence, keeping a full copy of these electronic records on a Canadian server makes the charity compliant with the ITA.
Three are many in the charitable law community who thought that the 2008 Federal Court of Appeal case eBay Canada Ltd. v. Minister of National Revenue (eBay) would lead to a change in government policy relating to information stored on servers outside of Canada. It ruled that access “with the click of a mouse” to information readily and lawfully accessible to users in Canada meant that it was “located” in Canada. However, the Charities Directorate confirms that its policy remains unchanged.