What are "Books and Records"?
Arthur Drache, February 20, 2008

There is a general requirement for all taxpayers (and charities fall into this generic category) to keep books and record for various tax purposes. However, the vast majority of charities do not face issues relating to books and records until hit with an audit, at which time they may well discover that in the eyes of the CRA auditor they are in breach of the requirements dealing with record keeping.    In a "pamphlet on the subject which deals with both the general rules of record keeping and some specific cases, the CRA says that charities must keep the following records:    . that confirm that they qualify for registration under the ITA;   . that allow the CRA to verify all charitable and athletic donations that give donors tax credits or deductions;   . of donations of property to a registered charity when the donor directed that the charity keep the property for at least 10 years;   . of the minutes of meetings of their executives;   . of the minutes of meetings of their members; and   . of the documents and by-laws that govern them.     But it is far from clear that this is "law" rather than an administrative wish list.    We have written about this subject before but return to it now because it is increasingly clear that the "books and records" issue is becoming an almost standard hallmark of every audit report. We would also point out that charities which operate abroad, especially those who do so through agency agreements are finding CRA audit demands becoming not only more onerous but often unreasonable, requiring data which would not be required from domestic operations.   The term "books and records" is not defined in the Income Tax Act. One of the regulation, which deals with record retention does give some minor clarification as to what is meant by the phrase. Regulation 5800 deals with the length of time records must be retained. In do doing, it refers to four types of documents and we may infer something from that.    The documents are    "(i) any record of the minutes of meetings of the executive of a registered charity or registered Canadian amateur athletic association,  (ii) any record of the minutes of meetings of the members of a registered charity or registered Canadian amateur athletic association"  Stopping there, the use of the term "any record" seems to suggest that keeping minutes is not mandatory. Most officials and legal advisers, of course will strongly recommend that minutes be kept of all meetings but the wording of this provision does raise questions.    This "permissive" approach may be contrasted to the next two categories  "(iii) all documents and by-laws governing a registered charity or registered Canadian amateur athletic association, and  (iv) all records of any donations received by a registered charity that were subject to a direction by the donor that the property given be held by the charity for a period of not less than 10 years."    Obviously, it is mandatory to maintain these types of records.    In the newsletter, the CRA sets out the statutory basis for record keeping.    Subsection 230(2) reads:    "Every registered charity and registered Canadian amateur athletic association shall keep records and books of account 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."    While paragraphs (b) and (c) present no real problem, paragraph (a) may create almost insuperable difficulty. Because the legislation does not spell out what is required, what we have discovered is that the CRA auditors can demand just about anything with impunity. And the failure to produce data which is demanded is a major ground for revocation of status.    What has surprised us is that no charity has as yet challenged the validity of paragraph (a) on the grounds that it is too vague and therefore of no legal effect. How can an organization comply with the law if it is not aware of what data it must provide?    We have been assured by constitutional experts that the rules in the Charter against self-incrimination in criminal matters do not apply with regard to charities and the requirement of paragraph 230(2) (a) is valid. But as we said many years ago when this provision was first enacted, it is an outrageous requirement which would last a year if it applied to any other class of taxpayer.    In newsletter #26 , the CRA has this to say:  "As a general rule, the CRA does not specify the records to be kept. However, in accordance with subsection 230(3), the Minister may specify what records or books of account shall be kept when a person has failed to keep adequate records and books of account.  (Editor's note: A requirement under subsection 230(3) must be prospective from the time the order is made. Further, a simple letter from the auditor does not suffice as there are specific powers delegated to particular bureaucrats.and the auditor who comes to your office is not likely to be such a designated person.)     Your charity must keep adequate books and records (located at a Canadian address we have on file) so that we can verify official donation receipts issued, as well as income received and expenses made.    Also, the Income Tax Act requires charities to keep information in addition to their books and records so that we can determine whether their activities continue to be charitable. This additional information will vary from charity to charity but should include, for example, copies of minutes of meetings, correspondence, publicity brochures or advertisements, and details of charitable program activities including program reports."    Thus even the "explanation is vague and imprecise.     It is worth looking at the penalties which the newsletter refers to.  "Under subsection 230(3) of the Act, ". the Minister may require the person to keep such records and books of account as the Minister may specify and that person shall thereafter keep records and books of account as so required." If a charity's records are inadequate, the Minister may:  . issue a requirement that adequate records be provided;   . suspend the charity's tax-receipting privileges; and/or,   . revoke charities that have not provided adequate records.     Suspension is a new sanction. Under new subsection 188.2(2), a charity may have its tax-receipting privileges suspended for a year if it contravenes any of sections 230 to 231.5 of the Income Tax Act, which include providing information as required. While we expect generally to use education and compliance agreements first, we anticipate instances where records are deliberately not compiled or are altered, destroyed or hidden, or in order to disguise a serious infraction. In such cases, we will move directly to an intermediate sanction or even revocation of the charity's registration. "    The final part of the discussion in the newsletter refers to language and says that the records must be kept in English or French. No authority is given for this statement. Charities which carry on activities abroad are often forced to spend significant amounts of money translating documents which were written with their client base in mind. We have seen regularly the demand that foreign bank accounts (such as those of an agent working abroad) be translated into English.    In all fairness, where there is a big translation job to be done, you can demand the CRA handle it themselves (if you trust the translators they pick) because the demand from English or French documents is not based on law.    But the real problem is 230(2(a) which more and more charities are finding is a moving target. Each time there is an audit, the auditor comes up with something else which he or she says is required under 230(2) (a). Sooner or later, the problem of vagueness will have to be resolved by either some statutory pronouncement or a legislative change. As it stands, this paragraph of the Income Tax Act makes compliance by charities a matter of an auditor's whim, which is simply not acceptable.