Keeping Records CRA

1
Keeping RecordsCRAs presentation Whistler CGA
conference in September 2006
2
Topics

• Electronic Commerce Audit Program
• Keeping Records
• Elements of a good electronic record keeping
  system
• Self Certification Software Initiative

3
CRAs Electronic Commerce Audit Program

• Electronic Commerce Audit (ECA) provides computer
  related specialized audit services to support CRA
  in encouraging, assisting, verifying and
  investigating compliance with the legislation it
  administers
• Program has been around since the 1970s

4
What We Do

• Business Systems Evaluations (larger Entities)
• Electronic Record Evaluations (SME)
• The ECAS analyses computerized business systems
  to identify data that is relevant to the audit so
  that the auditor can perform the audit in an
  efficient and effective manner.
• The ECAS will examine the taxpayers record
  keeping system for adequacy to our record keeping
  requirements.
• If inadequate then the taxpayer will be required
  to make changes.
• Computer Assisted Audits (CAA)
• The ECAS will obtain those files identified
  during the Record Retention Review from the
  taxpayer and prepare them for a transfer to the
  auditor. The ECAS and the auditor will use
  Computer Assisted Audit Techniques (CAATs) to
  analyze the data in order to determine compliance
  with CRA legislation.

5
Electronic record keeping issues

• Owners are not concerned with historical records
  and as a result, prior versions of software are
  not maintained.
• Electronic Point of Sale Systems and Internet
  based systems are becoming more widespread.
• Software developers are focusing on future
  development, not concerned with looking backwards
  (newer versions cant always read past records).
  

6
Electronic record keeping issues

• CRA auditors face on-going challenges in readily
  accessing readable electronic books and records
• Deleted prior year data
• Changes in versions of software
• Upgrades to computer systems
• Perception that printed records suffice

7
Electronic Record Keeping Issues and the SBAC

• What are some of the challenges faced by small
  business regarding electronic record keeping and
  the requirements of tax legislation?
• What can CRA do to assist the Small and Medium
  Enterprises category of businesses in reducing
  challenges they face related to electronic record
  keeping?

8
Electronic Record Keeping Issues and the SBAC

• challenge faced by small business regarding
  electronic record keeping is primarily a lack of
  knowledge and awareness of CRA requirements
• education is important to accomplish this,
  develop publications that use plain language and
  offer clear explanations
• different formats, including CRA notices of
  assessment sent to businesses, could be used to
  deliver the message
• CRA should focus on the benefit to the small
  business clients that they serve and who are
  ultimately responsible for the books and records
• work with software developers to ensure that
  minimum standards on electronic record keeping
  are taken into consideration when they are
  developing their products
• whether software is compliant with CRA standards
  should be transparent to their potential
  customers. (self certification)

9
How do we get the message of proper record
keeping out to taxpayers

• Meetings with professional and industry
  associations
• ICs and GST Memorandums
• Brochure created
• T2 Notices of Assessment/ Reassessment short
  paragraph start October for one year.
• GST/HST summer newsletter
• Work with the provinces
• Create standards

10
Existing Publications

• Income Tax GST books and records publications
• IC7810r3
• GST memorandum 15.1 and 15.2
• Last updated in 1998 to reflect retention of
  electronic records
• The electronic record keeping world has changed
  tremendously since then
• Accounting Systems have evolved
• POS systems are computerized and more complex
• Internet WEB based sales systems are prolific
• CRA ability to handle e-records has evolved

11
New and Revised Publications

• Guides
•    RC4409 Keeping Records
• GST/HST Memoranda Series
•    15.1 General Requirements for Books and
  Records
•    15.2 Computerized Records
• Information Circulars
•     IC78-10 Books and Records Retention/Destructi
  on
•     IC05-1 Electronic Record Keeping
• These publications are available at
  www.cra.gc.ca/forms

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Keeping Records

• Records include
• Accounting and other financial information
• Including all ledgers, journals, statements,
  accounts, source documents, correspondence,
  charts, tables etc. (traditional paper
  documents/reports)
• Electronic
• accounting systems, point of sale systems,
  internet based systems, electronic purchasing and
  restocking systems, tax return preparation
  software, etc. (emails, log files, system files,
  transactions data files etc.)

13
Keeping Records

• Where and for how long ?
• Your records must be kept at your place of
  business or at your residence in Canada,
• unless we give you permission to maintain them at
  a different location
• Must be kept in either English or French.
• Must be retained for a period of six years from
  the end of the last tax year to which they
  relate,
• unless permission to destroy them is obtained
  from the Canada Revenue Agency (CRA).

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Keeping Records

• Adequate Books and Records contain
• Sufficient Information to enable determination of
  taxes payable or other amounts that should have
  been deducted, withheld or collected.
• Information related to the audit trail to enable
  tracing of documents up to financial accounts.

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Agency authority to audit

• The Agency may, at all reasonable time, inspect,
  audit or examine the books and records or any
  document of the taxpayer
• "record"
• "record" includes an account, an agreement, a
  book, a chart or table, a diagram, a form, an
  image, an invoice, a letter, a map, a memorandum,
  a plan, a return, a statement, a telegram, a
  voucher, and any other thing containing
  information, whether in writing or in any other
  form

16
Excerpts GST Memorandum 15.2

• Electronic record keeping refers to those
  electronic business systems that create, process,
  store, maintain and provide access to a persons
  financial records. It includes but is not limited
  to custom and commercial accounting software,
  Point of Sale systems and Internet based
  electronic commerce. (1)
• Similar in IC05-1

17
Excerpts GST Memorandum 15.2

• ..electronic commerce which can be broadly
  defined as the delivery of information, products,
  services or payments by telephone, computer, over
  the Internet or any other automated means. (4)
•  An electronic record is any information recorded
  in an electronically readable format. (6)

18
Excerpts GST Memorandum 15.2, Para 6 of 15-2

• Electronically readable format means, information
  supported by a system capable of producing
  accessible and useable copy.
• Accessible copy means that the person must
  provide a copy of the electronic records in an
  electronically readable and useable format to CRA
  auditors to permit them to process the electronic
  records on CRA equipment.
• A copy is useable if the electronic records can
  be processed and analysed with CRA software.
• The useable copy must be in a common data
  interchange format that is compatible with the
  CRAs software.
• Electronic files retained in an encrypted or
  proprietary back-up must be able to be restored
  at a later date to an accessible and useable
  state are to meet the CRAs requirements.
• Similar Para 7 of IC05-1

19
Excerpts GST Memorandum 15.2

• Place of Retention
• ..businesses that operate via the Internet and
  that are hosted on a server located outside of
  Canada should be cognisant of their
  responsibility of maintaining their records
  within Canada. Person with Internet based
  businesses have the same responsibilities related
  to record retention as all other business
  operations. (16)
• Para 13 of IC05-1

20
Excerpts GST Memorandum 15.2

• Third Party Service Providers
• A person who keeps records electronically is not
  relieved of any of the record keeping,
  readability, retention, and access
  responsibilities because the person contracts out
  the record keeping function to a third party such
  as a bookkeeper, accountant, Internet transaction
  manager, application service provider, an
  Internet service provider, through a time share,
  service bureau, or other such arrangements. (41)
• Working Papers
• Books and records may also be in the form of
  supporting documents (e.g., an accountants
  working papers), whether in writing or any other
  form, which assist in the determination of
  GST/HST obligations and entitlements. (42)
• Para 19 and 20 of IC05-1

21
Excerpts GST Memorandum 15.2

• The person is responsible for ensuring that all
  electronic records are retained for the period of
  time specified by the Act, and that the required
  data in an electronically readable format is
  available to provide to the CRA auditors when
  requested. A good practice is to have the third
  party service provider furnish the person with an
  acceptable copy of the information required by
  the CRA in an electronically readable format.
  (43)
• Para 21 of IC05-1

22
Excerpts GST Memorandum 15.2

• Audit Trail
• An audit trail, which is the information that is
  required to re-create a sequence of events, must
  include sufficient detail to substantiate
  summarized information. The electronic records
  must show an audit trail from the source
  document(s), whether paper or electronic, to the
  summarized financial accounts. In addition, the
  audit trail may include a number of links to
  other associated processes and events such as
  front-end systems (e.g., electronic commerce and
  point of sale), receipts, payments, and stock
  inventories, all of which may have their own
  system audit trails.Internet-based electronic
  commerce transactions,...web logs, emails
  when used as part of the transaction (e.g.
  invoice and confirmations) or security measures
  such as digital signatures.(34)
• Para 36 of IC05-1

23
Excerpts GST Memorandum 15.2

• Commercial and/or Customized Software
• A person who uses commercial and/or customized
  software to keep books and records electronically
  is not relieved of the responsibility to keep
  adequate electronic records because of
  deficiencies in the software. (40)
• Para 18 IC05-1

24
Excerpts GST Memorandum 15.2

• Inspections, Audits and Examinations
• . Such examinations include the audit of
  electronic records and, as a part of providing
  reasonable assistance registrants must allow CRA
  auditors access to their electronic records. (44)
• This access means that the registrant must
  provide an acceptable copy of the electronic
  records in an electronically readable and useable
  format to CRA auditors so that they can process
  the electronic records on CRA equipment. (45)
• Para 43 of IC05-1

25
Imaging

• 24. Imaging and microfilm (including microfiche)
  reproductions of books of original entry and
  source documents must be produced, controlled and
  maintained in accordance with the latest national
  standard of Canada as outlined in the publication
  entitled Microfilm and Electronic Images as
  Documentary Evidence (CAN/CGSB-72.11-930).

26
Imaging

• Electronic image means the representation of a
  source document that can be used to generate an
  intelligible reproduction of that document.
• Policy and procedure relating to the imaging
  systems have to be at a high level as outlined in
  the standard.
• This high level means that the image should meet
  the best evidence rule in order to be possibly
  accepted in court.
• 26. Paper source documents that have been imaged
  in accordance with the latest national standard
  of Canada (see paragraph 24) may be disposed of
  and their images kept as permanent records.

27
Excerpts GST Memorandum 15.2

• 22. To ensure the reliability, integrity and
  authenticity of electronic records, the pending
  national standards publication entitled
  Electronic Records as Documentary Evidence
  (CAN/CGSB-72.34-2005) will outline electronic
  record management policies, procedures, practices
  and documentation that will assist in
  establishing the legal validity of an electronic
  record.
• Note CAN/CGSB-72.34-2005 published January 2006
  by CGSB

28
Canada Evidence Act

• The following Standards Rulewas added to the
  Canada Evidence Act and to most provincial and
  territorial Evidence Acts
• "Standards may be considered ...for the purpose
  of determining under any rule of law whether an
  electronic document is admissible, evidence may
  be presented in any legal proceeding in respect
  of any standard, procedure, usage or practice
  concerning the manner in which electronic
  documents are to be recorded or stored having
  regard to the type of business, enterprise or
  endeavour that used, recorded or stored the
  electronic document and the nature and purpose of
  the electronic document."

29
Standards

• The standards are not a law, it is a guideline.
• Compliance with the standard is not mandatory.
• Compliance with the standard is a safe harbour,
  not a guarantee of any legal result.
• The standard is a statement of best practices.
• The Evidence Act says a court may
  considercompliance with the standard if party
  asks.

30
Electronic Commerce Auditing

• What happens when an auditor contacts you to set
  up an audit of your business, or,
• What happens when your client calls and says that
  he/she is going to be audited and the CRA want
  the electronic records.

31
Electronic Commerce AuditingAuditors Role

• Auditor makes contact and sets up the audit
• They will usually ask whether you maintain an
  electronic record keeping system
• Will mention that an Electronic Commerce Audit
  Specialist will call to arrange to discuss the
  electronic records
• Contact name to handle questions on the
  electronic records and accounting software
• What software do you use? Or did you use during
  the audit period?
• What version(s)?
• If the records are located at a different site
  I.e accountants, service bureau, other, they will
  need permission to talk to the third party. It
  would be best for taxpayer to contact the third
  party and make them aware.

32
Electronic Commerce AuditingECAS Role

• ECAS will make contact and arrange a meeting and
  ask some questions.
• ECAS will identify the files that are needed for
  the upcoming audit
• Ask for a copy of the files in a readable and
  useable format (not the originals)
• Readable and Useable Format
• Format that can be used with Agency software such
  as IDEA.
• ASCII Text, EBCDIC, DBF, ACCESS, Excel, Print
  file, etc.

33
Electronic Commerce AuditingECAS Role

• ECAS will take those files and load them onto
  Agency computers (laptops or PCs)
• Import them into IDEA
• Interactive Data Extraction and Analysis
• Analytical tool to allow ECAS and Auditors to
  extract and summarize the data provided.
• www.caseware-idea.com

34
Electronic Commerce AuditingECAS Role

• ECAS will verify that everything is included in
  the data and reconcile the data by creating
  summaries that can be reconciled to financial
  statements and reports such as
• Trial Balance, Financial Statements or other
  reports as needed.
• The data files are transferred to the auditor so
  that they can perform audit tests on the data in
  the normal course of their audit.
• Auditors are equipped with laptops loaded with
  the IDEA software.
• At the end of the audit and any appeal period the
  data is deleted from the ECAS computers and any
  Agency CDs with Taxpayer data are destroyed and
  the taxpayers CDs tapes etc are returned to the
  taxpayer.

35
Security

• Data that is stored on the CRA laptops and PCs
  are protected with Safeguard Easy.
• Encryption and Access Controls

36
Electronic Record Keeping Systems

• What are the elements of a good
• electronic record keeping system?

37
Electronic Record Keeping Systems
LPOS
MaitreD
Quickbooks
ACCPAC
BAAN
Newviews
Positouch
SMS
Solomon
Simply
Great Plains
Oracle
Peachtree
PixelPoint
Business Visions
Platinum
JD Edwards
Peoplesoft
MAS 90
MYOB
Navision
SAP
Squirrel
Micros
Many Other Accounting and POS Software and
Electronic Cash Registers
38
SME Issues

• Large businesses usually or should have robust
  internal control systems and procedures
• SME businesses can have significant compliance
  costs and difficulties in understanding and
  complying with tax requirements
• Ability of SME to create, record and maintain
  adequate transaction information data as part of
  their normal business operations is limited
• SMEs are engaged in cross border trade at an ever
  increasing rate

39
Elements of a Good Electronic Record Keeping
System

• Why??
• Good business practices
• From a CRA perspective we want to encourage
  voluntary compliance
• To increase efficiency and effectiveness of
  computer based auditing by the Agency and
  taxpayer external auditor

40
Elements of a Good Electronic Record Keeping
System

• Good business practices
• Good records will keep you informed about the
  past and present financial position of your
  business and keep you in control and give you the
  information needed to make good business
  decisions.
• Good record keeping increases a new business'
  chances of survival and an established business's
  chances of staying in business and earning good
  profits. (Canada Business Service Centre)
• Good records will satisfy Canada Revenue Agency,
  Canada Pension Plan, Employment Insurance,
  Department of Finance, Goods and Service Tax,
  Workers' Compensation Board, Provincial Revenue
  Authorities etc. and facilitate correct and
  timely remittances.
• From a CRA perspective we want to encourage
  voluntary compliance
• To increase efficiency and effectiveness of
  computer based auditing by the Agency and
  taxpayers external auditor

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Elements of a Good Electronic Record Keeping
SystemAgency Perspective

• Sufficient details captured and produced
• Accuracy and completeness of accounting records
• Transaction integrity and security
• Retention of files in a legible format
• Access to electronic records
• Adequate backup and export procedures

42
Sufficient details captured and produced

• The software should have the capacity to capture
  and produce sufficient detail to determine income
  and consumption taxes administered by the Agency.
• Details of each transaction should be captured
• An audit trail for each transaction should be
  created and preserved

43
Accuracy and completeness of accounting records

• The software should have the capacity to ensure
  that all transactions are recorded accurately and
  completely.
• Adequate internal controls should be incorporated
  in the software
• Zero balancing control total for general ledger
  transactions
• Transaction sequential number validation
• Transaction date validation

44
Transaction integrity and security

• Access controls to ensure that only authorized
  users can have access to a computer system to
  process data.
• Adequate internal controls should be incorporated
  in the software
• Controls that prevent the editing and deleting of
  recorded transactions.
• No single entry transaction correction should be
  allowed
• Changes to recorded transaction should be made by
  journal entry. Any changes to recorded
  transactions must be adequately documented and at
  least include the following
• 1.      Person making modifications
• 2.      Date of change
• 3.      Previous transaction details
• 4.      Current transaction details

45
Transaction integrity and security

• Adequate internal controls should be incorporated
  in the software
• Password protected access to information
  generated by the software
• Data processing batch control
• Transaction unique sequential numbering
• Access and activity log
• The software should produce and save information
  related to transaction integrity and security

46
Retention of files in a legible format

• The software should have the capacity to create,
  save and backup files and/or tables containing
  information required by the Agency in a legible
  format.
• All transactions and required information created
  or captured by the software should be saved to
  files and/or tables
• Legible format includes commonly used formats
  such as Comma Separated Value (CSV), ASCII /
  EBCDIC (flat file), DBF, Default (MS) ODBC and
  other.

47
Access to electronic records

• The software should allow Agency representatives
  access to electronic records and to the business
  system documentation.
• The software should have the capacity to retrieve
  or rebuild and export original transactions to
  legible format files accessible to Agency
  representatives.
• The software documentation should allow Agency
  representative to gain a better understanding of
  the business system.

48
Adequate backup and export procedures

• In order to facilitate compliance with data
  retention, accessibility and readability
  requirements, the software should provide user
  with adequate backup procedures and offer the
  capacity to export the required files in a
  commonly used format.

49
Adequate backup and export procedures

• It should also provide backward compatibility of
  data and backups.
• Backup files are not recommended as a method of
  record retention since the proprietary format of
  the files only makes them useable, readable and
  importable by the software version that created
  the file. As a result, taxpayers depending on
  backups as a method of record retentions method
  usually have problems with accessibility in years
  that follow.

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Self Certification Software Initiative
51
What is the Self Certification Software Initiative

• Multi-jurisdiction initiative led by the CRA to
  help software developers ensure that their
  software meets CRA and Provincial record keeping
  requirements for tax purposes.

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Record Keeping Obligations

• CRA requirements
• The provinces have similar requirements to
  maintain and retain proper books and records.

53
Who is Involved

• Initial collaboration with provincial revenue
  authorities
• Quebec
• Ontario
• British Columbia
• Working group formed

54
Working Group

• Canada Revenue Agency
• B.C Ministry of Small Business and Revenue
• Ontario Ministry of Finance
• Ministère du revenu du Québec
• Canadian Institute of Chartered Accountants
• Certified General Accountants Association of
  Canada
• The Society of Management Accountants of Canada

• Sage Software
• Intuit Canada
• Fortsum Business Solutions
• POSERA
• NCR Canada
• Small Business Advisory Committee to CRA
• Information Systems Audit and Control Association
  (ISACA)

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Working Group

• Adapt principles based on OECD Guidance to
  develop specifications for software
• Guidance on Tax Compliance for Business and
  Accounting Software
• Standard Audit File - Tax

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Working Group

• Create Canadian Guidance Document for Business
  and Accounting Software Developers
• Create Canadian Standard Audit File
  Specifications
• Accounting and POS systems

57
Why are these specifications being developed

• Improve reliability of business systems
• Improve adequacy retention of records
• Improve accessibility to transactions
• Improve efficiency of the audit process
• Governments seek to minimise their tax system
  operating costs while at the same time keeping
  taxpayer compliance costs as low as possible

58
Guidance Document for Business and Accounting
Software Developers

• Standards that should be applied to accounting
  and POS software in Canada (e.g.)
• Adequate internal controls
• Adequate audit trails
• Electronic export facility (SAF)
• Ready access to data for compliance testing (SAF)
• Archive procedures that ensure the integrity and
  readability of electronic records after an
  extended period

59
Adequate Internal Controls

• Software developers are encouraged to ensure that
  application software incorporates adequate
  internal controls to ensure reliability of entry
  processing

60
Audit Trails

• Software developers are encouraged to ensure that
  application software creates adequate audit
  trails to assist auditors gain audit assurance

61
Standard Audit File

• File containing reliable accounting data
• Detail level
• Standard layout and format
• E.g. XML
• Extensible
• Archive procedures that would allow auditors to
  retrieve the SAF as required

62
Benefits

• Improve record keeping of Businesses
• Records are reliable, complete and accessible
• assist in the management of the business
• Assist businesses in meeting their tax
  obligations
• Business owners will know that their record
  keeping software produces information needed
  during a tax audit thus less time could be taken
  for an audit

63
Benefits

• Developers of Software that meet the
  specifications will provide an attestation to the
  CRA that they meet the specifications
• Businesses, when purchasing or upgrading their
  software, will be able to access a list of self
  certified software on a CRA web page

64
Benefits

• Software vendors
• One uniform requirement makes product marketable
  in many jurisdictions
• Public accountants
• Simplify assignments of preparing accounting
  statements and of auditing prepared statements

65
When

• Specifications posted to the CRA Website by Sept
  2007
• Software available and listed after this date as
  software is developed and self certified