Introduction
An audit trail definition is essential for Canadian businesses because it explains how financial information is tracked, verified, and supported. An audit trail is a record of all the changes made to a company’s financial records. It links each transaction back to its source documents, showing how money entered or left the business and ensuring transparency for bookkeeping, tax reporting, and financial audits.
For Canadian business owners, understanding the audit trail definition—along with where to keep records, how long to keep them, and how to request permission to destroy them early—is crucial for CRA compliance.
What Is an Audit Trail?
An audit trail is a chronological record that shows every step of a business transaction from start to finish. It must include enough detail to allow the CRA, accountants, or internal staff to trace:
- What the transaction was
- When it occurred
- Who initiated or approved it
- Where it originated
- How it was processed in the accounting system
Audit trails typically connect to:
- Source documents (invoices, receipts, contracts)
- Bank statements
- Point‑of‑sale systems
- E‑commerce logs
- Emails used to issue invoices or confirmations
- Accounting system entries
- Stock inventory records
A strong audit trail definition includes both paper and electronic documentation and ensures all data is complete, readable, and retrievable.
Why the Audit Trail Definition Matters
Accurate audit trails help Canadian businesses:
- Support deductions, income, and GST/HST filings
- Pass a CRA audit more easily
- Detect fraud or errors
- Maintain internal controls
- Recreate financial events at any time
- Meet legal record‑keeping requirements
CRA expects a complete audit trail from source documents → financial statements.
Maintaining an Audit Trail for Electronic Records
Under CRA rules, electronically kept audit trail records must:
- Be readable by CRA software
- Be reliable and complete
- Show no loss of information during format conversions
- Include related system logs if they affect transactions
If electronic documents were originally created digitally (e.g., emailed invoices), they must be stored digitally, even if paper copies also exist.
Where to Keep Your Records (CRA Rules)
CRA requires you to keep your audit trail records:
- At your place of business in Canada, or
- At your residence in Canada
You cannot store records outside Canada unless you receive written permission from the CRA.
Important note
Records stored outside Canada but accessed electronically from Canada do not count as being kept in Canada.
CRA will NOT approve record‑keeping outside Canada for:
- Registered charities
- Registered Canadian amateur athletic associations
- Canadian municipalities or public bodies
- Housing corporations exempt under Part I of the Income Tax Act
How to request permission to store records outside Canada
Write to your CRA tax services office.
If permission is granted, CRA will provide:
- Written approval
- Conditions you must follow
If granted, you must still ensure:
- Records remain accessible in Canada
- CRA can read them electronically
- Copies are true and complete
How Long to Keep Audit Trail Records (CRA Retention Rules)
In general, you must keep all records—including audit trail documentation—for six years from the end of the last tax year they relate to.
Examples
- Corporations: six years from the end of the fiscal year
- Individuals: six years from December 31
- Trusts: varies by trust type
Situations with different retention periods
You must keep records indefinitely when they relate to:
- Long‑term acquisitions
- Historical data affecting future sales, wind‑ups, or liquidations
- Share registers
You must keep records longer than six years if:
- CRA sends written notice requiring extended retention
- You file a return late (six years from the filing date)
- You have unfiled GST/HST returns
- You issued tax adjustment notes to pension entities
Records during appeals or objections
Keep all records until the latest of:
- When the objection or appeal is resolved
- The deadline for further appeal passes
- The normal six‑year period ends
When businesses end
- Non‑incorporated business: keep records six years from the final tax year
- Corporations dissolved: keep records for two years after dissolution
- Amalgamations: new corporation must retain old records for six years
When acting as legal representative
You may destroy records after receiving a CRA clearance certificate.
Source Documents Required for an Audit Trail
CRA requires that businesses retain original source documents, such as:
- Sales invoices
- Purchase invoices
- Receipts
- Contracts
- Bank statements
- Credit card slips
- Delivery notes
- Deposit slips
- POS slips
- Emails used for invoicing, confirmations, or transaction approvals
Paper records may be retained digitally via:
- Microfilm
- Microfiche
- Electronic image format
If a record is created electronically, it must be kept electronically.
How to Request Permission to Destroy Records Early
If you want to destroy documents before the retention period ends, CRA must approve this.
You can request permission by:
Option 1 — Submitting Form T137
T137 — Request for Destruction of Records
Option 2 — Writing to your CRA tax services office
Include:
- Your business number
- Tax years affected
- Types of records
- Reason for early destruction
Important
Destroying records early without CRA approval may result in prosecution.
CRA’s permission applies only to records required under laws it administers—not records required under other federal or provincial legislation.
Key Takeaway
An audit trail definition describes the complete record of financial transactions and related documentation that allows CRA and auditors to verify your books. Canadian businesses must keep audit trail records in Canada (unless granted permission otherwise), maintain them for the required retention period, and request CRA authorization to destroy them early. Strong audit trails protect the business, support compliance, and simplify audits.
