When the auditor arrives to audit your bar or restaurant, he or she will review your internal controls to ensure the accuracy and completeness of your recorded sales and the taxes thereon. If the documentation is not available to determine that appropriate controls were effective throughout the audit period, the auditor will conclude that the controls were lacking and that the books and records may not be relied upon to support the sales taxes collected by the restaurant. Most independent restaurants will fall into this category. As a result, the auditor will proceed to apply an indirect audit approach to estimating the amount of sales that were likely to have been generated, based on your purchases of alcoholic beverages. Several key assumptions are used in this method, which I will describe in the remainder of this post.
If you have been following the posts on this site (and several others on the internet), you know that your restaurant or bar business faces a serious risk when it is audited by CRA or the provincial auditors. In most cases, your licensed business will be audited, it is just a matter of when.
This post concerns customer comps or promotional drinks served by restaurants and bars. The issue is: how much is too much?
Most restaurants and bars offer promotional drinks to their customers from time to time. Sometimes it is to acknowledge frequent visits, high spending or special occasions. Other times it may be to “compensate” a customer for a service or quality issue. In either case, the customer receives a free (complimentary) drink. All restaurateurs know that this is an effective method of promoting and growing a restaurant business. However, if you don’t keep track of these types of promotions properly, customer comps could be your downfall.
In a National Post article last December, CRA warns business owners on Tax Cheating Software, it disclosed that the CRA has dedicated 5,000 employees to the task of finding unreported income and ensuring that sales taxes are remitted properly, “even when sales records are missing.” This is a thinly disguised warning to restaurants (and other cash businesses) that CRA is about to descend on your business, using indirect audit methods to identify unreported income and the sales taxes that should have been remitted. The reference to tax cheating software refers to sales suppression software, also known as “zappers”.
According to the Revenu Quebec website, there were approximately 17,600 restaurants selling $9.5 billion of food and alcoholic beverages in 2007. As in most other provinces, the restaurant industry is a significant and vital sector of the economy. While the industry may not be particularly profitable, it does play a significant role in the collection of retail sales taxes on behalf of the federal and provincial governments. Rather than be appreciative of the taxes that are collected and remitted by the restaurant industry, Revenu Quebec (along with all of the other tax authorities in Canada, the US, and the OECD countries) believe that tax evasion in the restaurant industry is widespread. Studies in the US indicate that as many as half of all restaurants fail to report all sales revenue.