Wealth Strategies: BEWARE - Tax record retention rules

BEWARE: Tax record retention rules

It’s tax time again, and some of us may be thinking that we can therefore discard a prior year’s tax records that we no longer need to retain. You likely recall being told at some point that we need to hold onto tax records for six years in the event that CRA were to reassess etc. and then feel free to toss at your leisure. This rule appears to be somewhat of a myth and can potentially cause issues years later in certain circumstances.

Situations such as gifts and inheritances are a prime example of such circumstances, as noted in the March 2016 Advisor.ca article by Stephanie Dietz of Stephanie Dietz Professional Corporation. “Clients may think the tax cost of a property is the $1 consideration noted on a legal document. If a client inherits property in these circumstances, the fair market value becomes their cost amount for tax purposes. While not mandated, its 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”.

Determining the adjusted cost base (ACB) is another example; a property may have been purchased many years ago and cost base information will be needed for future capital gain tax calculations once the property has been sold. Previously filed tax elections and verification of CPP benefits are also instances where one may require prior tax records, whether requested by CRA or to protect your own interests.

Allowable business investment losses (ABIL’s) can also trigger the need for prior tax records. “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”.

Information on tax payer relief provisions, such as waiving interest, penalties, etc. can also be prudent tax details to retain, with some of these having specific timeframes “For example, if a client missed a deduction for 2006, she has until December 31, 2016 to make a request to CRA for a refund”.

Lastly, corporate capital gains, specifically those “realized after 1971 are subject to tax, so it is often helpful (even critical) to keep corporate tax returns from 1972 onwards”.

In short, carefully review any tax documents or affiliated items that could potentially be needed for future income tax calculations or CRA requests before they hit the shredder. If you’re unsure about an item(s), as always check with a professional.