What does the Canada Revenue Agency mean by “adequate” books and records?
Your charity must keep books and records (located at the Canadian address that CRA has on file) adequate enough to verify official donation receipts issued, income received, and expenses made.
The CRA does not specify the records to be kept. According to subsection 230(3) of the Income Tax Act, however, the Minister of National Revenue may specify what records or books of account must be kept after a charity has been found to be keeping inadequate records and books of account.
Also, the Income Tax Act requires charities to keep information in addition to their books and records so that the CRA can determine whether the activities of the charity 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.
What happens if a charity’s records are inadequate?
Keeping inadequate records may risk your registration as a charity. If a charity’s records are considered inadequate, the Minister may
• issue a requirement that adequate records be provided
• suspend the charity’s tax-receipting privileges
• revoke the status of a charity that has not provided adequate records.
Under subsection 230(3) of the Income Tax Act, the Minister of National Revenue may require the registered charity to keep such records and books of account as the Minister may specify and that the registered charity shall thereafter keep records and books of account as so required.
Suspension is a new CRA sanction. Under new subsection 188.2(2) of the Income Tax Act, a charity may have its tax-receipting privileges suspended for a year if it contravenes any of sections 230 to 231.5 of the Act, which include providing information as required. While the CRA may generally use education and compliance agreements first, it anticipates instances where records are deliberately not compiled or are altered, destroyed or hidden in order to disguise a serious infraction. In such cases, the CRA will likely move directly to an intermediate sanction or even revocation of the charity’s registration.
See the CRA’s Income Tax Information Circular on Books and Records Retention/Destruction at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic78-10r5.html
Why is it so important for my charity to maintain adequate books and records?
There are many good reasons to maintain adequate books and records:
- You need adequate books and records in order to maintain a healthy happy donor base.
- You’ll operate more efficiently and effectively with good records.
- The CRA reviews financial records of registered charities for compliance, and you could be audited at any time.
- Certain federal, provincial, and territorial legislation demands it.
- Funding agencies may require it.
The public increasingly asks that registered charities they support be transparent and accountable. Maintaining adequate books and records and ensuring proper financial statements relates to this public awareness. Prospective donors to a charity may also wish to personally review the charity’s financial information prior to making a contribution.
The federal Canada Not-for-Profit Corporations Act and some provinces have legal requirements for charities to maintain proper books and records. Failure to comply with the requirements of federal or provincial legislation can result in penalties and possible director liability.
The Canada Revenue Agency reviews financial records of registered charities to make sure they comply with the requirements of the Income Tax Act. Audits are an important element of this process. Having all the books and records in order will lessen the burden on the charity’s staff and resources when a CRA audit occurs.
For all of these reasons maintaining proper books and records is essential. To assist with meeting the requirements of keeping proper books and records, the Canadian Institute of Chartered Accountants (CICA) has developed generally accepted accounting standards for charitable and not-for-profit organizations.
The CRA compliance continuum and auditing practices are described in more detail at https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/compliance-audits.html and
Are there penalties for failing to keep and maintain adequate books and records?
Failure to keep adequate books and records may result in the suspension of a charity’s tax receipting privileges, suspension of its status as a qualified donee or the loss of its registered status.
Our computer crashed and it looks like all our records may have been lost. What should we do?
Do all you can to retrieve them: ask a computer specialist to see if the records can be retrieved; load your back-up files; reconstruct missing pieces from your hard copies. When these routes have been used to the fullest and you’re still missing records, contact the Canada Revenue Agency who may be able to provide copies of your records held by the CRA.
The charity remains responsible for maintaining adequate books and records. Electronic records must be retained in an electronically readable format.
See the CRA’s Information Circular on Electronic Record Keeping