Despite what has been published in the press and disclosed by the CRA and the Ministry of Revenue Quebec (MRQ), the use of zappers has not reached epidemic proportions in the restaurant industry. Zappers have been around since the mid-1990s, though most of the usage seems to have been confined to Quebec. In fact, the vast majority of the convictions for sales tax evasion have occurred in Quebec. For background on the use and abuse of zappers, please read this, this, and this. The unfortunate thing about all of this attention is that it may draw our attention away from a far larger threat to our operations. The indirect audit approach.
If you use a zapper to skim cash sales from your restaurant, you will get caught – eventually. Identifying and proving the use of a zapper to evade taxes is a very time-consuming process. Even though there have been large increases in the number of auditors, tax authorities do not have unlimited resources to ensure taxpayer compliance. Consequently, they needed to find an easier way to identify likely cases of unreported sales, and they found it in the use of indirect audit methods. The most prevalent indirect method used in the audit of restaurants is the mark-up method. I’ve written extensively on this subject – much of which may be found on this blog. For a quick review of a typical audit approach, please read this.
Recently, I attended a tax seminar put on by a tax lawyer. One of the interesting developments discussed was the huge increase in Retail Sales Tax audits in Ontario. As I discussed in an earlier blog, the transition to the HST on July 1, 2010 and the transfer of its collection and administration to the CRA, means that the Ministry of Revenue will be stepping up its efforts to do final audits for RST compliance for the four years ending June 30, 2010. These audits are taking place now and can be expected to increase dramatically over the next couple of years, eventually coming to an end in about five years.
It is going to be a tough period while the Ministry of Revenue extracts as much revenue from Ontario businesses as it can. After that, we can look forward to more HST audits, as every dollar of unreported sales will translate into 13% HST and approximately 20% income tax along with penalties and interest.
It’s going to get worse and it doesn’t appear that there is any light at the end of the tunnel. Scary times await. If your alcohol margins are out of line with what you expect, take action now to fix it. Not only will you enjoy the improvement in your bottom-line, you’ll also help ensure that your restaurant is not caught in the government tax grab.