If you operate a restaurant or bar that serves alcohol, you can be certain that you will come face to face with one or more government auditors, about every four years.
Why? Provincial and federal tax authorities truly believe that under-reporting sales is rampant in the hospitality industry. Tax authorities are statute barred from reassessing returns more than four years old, in most jurisdictions. So, every few years, you can expect a visit from the provincial sales tax auditor, who will audit two to four years’ worth of sales returns during each visit. Canada Revenue Agency audits GST returns, but not nearly many or as often as the provincial authorities audit RST returns. Undoubtedly, this is because there are far more GST registrants than RST vendors, and the GST registrants are much larger tax collectors. However, with the coming harmonization of Ontario and BC sales taxes with the GST, both provinces’ licensed restaurants should expect a dramatic increase in sales tax audits (covering both taxes).
The harmonized sales tax (HST) is expected to generate a frenzied wave of provincial sales tax audits during the next four years or so, as the Ontario and BC tax authorities conduct their final audits, covering the period up to June 30, 2010. If they miss this opportunity, they will be forever barred from trying to reassess these taxes in most circumstances.
Selling Your Restaurant?
When you sell your restaurant, this will trigger a provincial sales tax audit. The government wants to make sure that they received every penny of taxes that should have been collected by you and remitted up to the date you sold your restaurant. You will not have access to your sale proceeds until the audit is completed and you have paid any additional taxes, penalties and interest. Even if you disagree with the reassessment, you will be required to pay the additional tax, penalties and interest.
Type of Establishment
Licensed establishments attract the vast majority of tax audits. Establishments that sell food and non-alcoholic beverages will rarely, if ever, see a tax auditor. Why? The costs of trying to audit food sales is high compared with the potential finding of under-reported sales. The reasons are many, but include: frequently changing food menus, subjective or informal food recipes, and an inability to ensure complete and accurate food purchases. Also, the RST on food sales is 8% in Ontario (versus 10% on alcoholic drinks).
In contrast, alcohol purchases are easily verified through LCBO and Brewer’s Retail purchases under the establishment’s license. Alcoholic drink recipes are fairly standard and primarily based on the volume of the alcohol served. This makes it relatively easy to estimate alcohol usage, based on sales. Alternatively, it is relatively easy to project likely sales based on actual usage of purchased alcohol. By the way, this is the premise underlying the tax auditor’s approach to auditing your sales tax returns.
The type of establishment you operate will affect your odds of being audited. The more likely your establishment is to receive cash sales (as opposed to credit cards), the more likely it is that you will have frequent audits. Clearly, bars, nightclubs, lounges, sports bars and pubs will generate significantly more cash sales than fine dining restaurants, where most patrons pay by credit card.
If establishments like yours typically generate significant cash receipts, expect to be audited regularly, even if your operation takes in little cash. You may have heard about “zappers” that can be used to remove cash sale transactions from a POS system. Tax auditors are onto this tax evasion ploy.