Principal Issues:
(1) What is the meaning of the term summaries within Reg. 5800(1)(a)(iv)?
(2) What is the required retention period for the general ledger or other book of final entry?
(3) What is the required retention period for every account and voucher necessary to verify the information contained in the general ledger or other book of final entry?
(4) What constitutes a special contract or agreement for purposes of Reg. 5800(1)(a)(v)?
Position:
(1) Based on a textual, contextual, and purposive approach to interpreting the meaning of the word "summaries" in subparagraph 5800(a)(iv) of the Regulations, it is our view that the term summaries refers to the summary of all individual transactions posted from the journals to the general ledger.
(2) Question of fact. A corporation is required to retain the general ledger or other book of final entry for two years following the day of dissolution. The summaries of all individual transactions are generally posted to the general ledger. We are of the view that where individual transactions are posted to subsidiary ledger and not to the general ledger, such subsidiary ledger should generally fall within the ambit of subparagraph 5800(a)(iv) of the Regulations.
(3) Accounts and vouchers necessary to verify the information contained in the general ledger or other book of final entry are generally "non-permanent" records and therefore are to be retained for six years from the end of the last taxation year to which the records and books relate pursuant to paragraph 230(4)(b) of the Act.
(4) It is a question of fact whether a lease would be considered a special contract or agreement pursuant to subparagraph 5800(a)(v) of the Regulations.
Reasons: Wording of the Act and the Regulations.
XXXXXXXXXX 2022-095427
Simon Morin
July 5, 2023
Subject: Retention of books and records
XXXXXXXXXX,
This is in response to your email of October 25, 2022, in which you requested our advice regarding certain questions concerning the application of section 230 of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.), as amended (the "Act") and regarding section 5800 of the Income Tax Regulations, C.R.C., 1978, c. 945, as amended (the "Regulations"). We apologize for the delay in responding to your request.
Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
Your Questions
1. What is the meaning of "summary" for the purposes of subparagraph 5800(1)(a)(iv) of the Regulations? Do the accounting entries for consolidated postings covering a particular period constitute a "summary" for the purposes of subparagraph 5800(1)(a)(iv) of the Regulations, or does the term "summary" require more details, such as the names of the parties and the dates of the transactions?
2. Does subparagraph 5800(1)(a)(iv) of the Regulations require a corporation to maintain a "general ledger" in addition to “other book of final entry containing the summaries of the year-to-year transactions"? To the extent that a corporation maintains a general ledger and certain subsidiary journals that contain details of transactions, what is the retention period for (a) the general ledger and (b) the subsidiary journals?
3. What is the retention period for accounts and vouchers relating to information presented in the general ledger?
4. Subparagraph 5800(1)(a)(v) of the Regulations provides that "any special contracts or agreements necessary to an understanding of the entries in the general ledger or other book of final entry" must be retained for a period ending on the day that is two years after the day that the corporation is dissolved. What are the "special contracts or agreements" referred to in this provision? Is a lease entered into in Quebec and that has been terminated since 1980 a "special contract or agreement" that must be retained for the period ending on the day that is two years after the day that the corporation is dissolved under subparagraph 5800(1)(a)(v) of the Regulations? Does paragraph 5800(1)(a)(v) of the Regulations require the retention of all "agreements" or only "special agreements"? If so, what constitutes a "special agreement"?
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
QUESTION 1
Subsection 230(1) of the Act requires a taxpayer to keep records and books of account ("Books and Records") in such form and containing such information as will enable the taxes payable under the Act to be determined. Subsection 230(4) of the Act sets out the retention period for the Books and Records.
Paragraph 230(4)(a) of the Act prescribes the length of time that so-called permanent Books and Records must be kept, as well as the accounts and vouchers required to verify the information contained therein. Paragraph 5800(1)(a) of the Regulation provides that these so-called permanent Books and Records must be kept for a period of two years following the date on which the corporation is dissolved. As stated in subparagraph 5800(1)(a)(iv) of the Regulations, these so-called permanent Books and Records include "the general ledger or other book of final entry containing the summaries of the year-to-year transactions of a corporation".
Paragraph 230(4)(b) of the Act, on the other hand, provides that so-called non-permanent Books and Records must be kept for six years following the end of the last taxation year to which they relate.
The Act does not define the word "summary" referred to in subparagraph 5800(1)(a)(iv) of the Regulations. It is therefore necessary to rely on its ordinary meaning, taking into account the overall context of the text in which it is used, so that the interpretation adopted is consistent with the spirit of the Act and Parliament's intent.
We are of the view that the ordinary meaning of the word "summary" in the expression "containing the summaries of the year-to-year transactions of a corporation" must be interpreted in light of the accounting terms in the expression "general ledger or other book of final entry" that precedes it.
The Dictionnaire de la comptabilité et de la gestion financière defines the term "general ledger" as follows:
"Bookkeeping. An accounting book that contains all of an entity's asset, liability, equity, income and expense accounts.” [TaxInterpretations translation]
The same dictionary defines the term "general ledger" as follows:
"Bookkeeping. A book or file of accounts to which the entries initially made in the journals are transferred.” [TaxInterpretations translation]
The definition of "journal" given in the same dictionary sheds light on the transfer of entries to ledgers:
"Bookkeeping. A book or file in which transactions are recorded individually and chronologically before being summarized, if necessary, and transferred to the ledgers.” [TaxInterpretations translation]
In light of the above definitions, we are of the view that the term "summary" refers to the summary, with respect to each of the transactions considered individually, posted from the journals to the general ledgers. We are therefore of the view that the term "summary" refers to an abbreviated version of the entries for each transaction rather than to the consolidation of transactions over a given period.
QUESTION 2
Pursuant to paragraph 230(4)(a) of the Act and subparagraph 5800(1)(a)(iv) of the Regulations, "the general ledger or other book of final entry containing the summaries of the year-to-year transactions" must be kept until two years after the day that the corporation is dissolved.
Generally, the summary of each transaction recorded in the journals, considered individually, is transferred to the general ledger. However, in some cases, the general ledger may present only a total for several transactions otherwise presented individually in another book of final entry, such as a subsidiary ledger. In such a case, it would be necessary to refer to the subsidiary ledger in order to obtain a summary of each of the transactions considered individually, and we are therefore of the view that both such a subsidiary ledger and the general ledger will be subject to subparagraph 5800(1)(a)(iv) of the Regulations.
Journals are generally not books of final entry, unlike general ledgers, and should therefore generally not come within subparagraph 5800(1)(a)(iv) of the Regulations. Accordingly, journals, including subsidiary journals, are generally subject to the retention period set out in paragraph 230(4)(b) of the Act and must therefore be retained for six years following the end of the last taxation year to which they relate.
QUESTION 3
Paragraph 230(4)(a) of the Act sets out the retention period for certain "records and books of account referred to in this section in respect of which a period is prescribed, together with every account and voucher necessary to verify the information contained therein, for such period as is prescribed”.
Subparagraph 5800(1)(a)(iv) of the Regulations provides that the retention period for the "general ledger or other book of final entry" is two years after the day that the corporation is dissolved.
Notwithstanding the wording of subsection 230(4) of the Act, we are of the view that the vouchers and accounts required to verify the information contained in the general ledger or any other book of final entries are generally covered by the retention period provided for in paragraph 230(4)(b) of the Act and must therefore be retained for six years following the end of the last taxation year to which they relate.
QUESTION 4
Pursuant to paragraph 230(4)(a) of the Act and subparagraph 5800(1)(a)(v) of the Regulations, " special contracts or agreements necessary to an understanding of the entries in the general ledger or other book of final entry" must be retained until the day that is two years after the day that the corporation is dissolved.
In our view, the word "special" in this expression refers to both the words "contract" and "agreement". Generally speaking, we are of the view that a special contract or agreement is one that includes particular provisions or conditions that are not generally found in a contract or agreement of a similar nature.
We are of the view that the question of whether a lease agreement qualifies as a "special contract" or "special agreement" "necessary to an understanding of the entries in the general ledger or other book of final entry" is a question of fact that can only be resolved following an exhaustive analysis of all the facts with respect to a given situation. This determination can only be made after examining the relevant contracts or agreements and the entries in the general ledger or other book of final entry to which they relate. We hope you find our comments of assistance.
Best regards,
Sophie Larochelle, LL.B., M. Fisc., MBA
Section Manager
For the Director
Specialized Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch