CRA's position on Cloud Computing

More and more ERP providers are pushing their clients to move into the “Cloud”. It’s so convenient and trendy to become paperless and to store all of your accounting records electronically. But with the ERP software moved on the Cloud, business owners do not even know where physically their accounting records are. According to the Canadian Income Tax Act all records have to be in the same place as where the business is conducted by the taxpayer or any other place known to the CRA and in Canadian jurisdiction. So what is the CRA’s position on Cloud Computing and this new reality of keeping electronic records “in the Cloud”? CRA reacted on it issuing Information Circular IC05-1R1. In many words it states that taxpayers can use electronic records instead of paper. This is very good. But the main question is still in the air – is it possible to store it somewhere outside the place of business? In places which are not even known to business owners? Let’s delve into this Information Circular.

In Section 9 it states:

• “…where records are maintained electronically in a location outside of Canada, the CRA may accept a copy of the records, provided these are made available in Canada in an electronically readable and useable format for CRA officials.”

So it looks like it is allowed for taxpayers to store their records wherever they want. Not so fast.

In the following Section 10 it states something contradicting:

• “All retained records must be clearly labelled and stored in a secure environment in Canada. Authorization to maintain records elsewhere may be granted, subject to such terms and conditions as the Minister may specify in writing.”

It means that in addition to the ERP Cloud solution which is providing all essential records for the possible CRA audit, business owners have to have another storage where “all retained records must be clearly labeled and stored in a secure environment in Canada”. This significantly decreases the value of any Cloud solution, because alternative storage of documents has to be maintained.

If business owners decide to follow CRA recommendations to obtain written permission to keep their records outside of Canada this raises the next question – how to obtain this written permission?

• The document states – “in the nearest Tax Office”. As usual the devil is in the details. There are no clear instructions on the CRA website in terms of what have to be done in order to satisfy the CRA. So business owners have to figure out the details on their own..

Leaving Tax Compliance issues aside, there are more questions that arise with data storage outside of your place of business. If a particular ERP publisher is hiring a third party to provide IT Infrastructure, how reliable is this third party? What happens with all the records if this IT provider goes bankrupt?

Additional concerns will arise in cases where particular businesses are public companies. How will auditorsprovide their unqualified opinions without checking data storage procedures? And what will be the additional cost for business owners if auditors subcontract IT audits to third parties?

So for now…it looks like the best solution, considering all the advantages and considerations for businesses to go on Cloud…think twice! Think twice before jumping on the Cloud…