A while back, I wrote an article about tax auditors not knowing your business. In today’s post, we will look at the CRA’s appeal department’s knowledge of the restaurant business. I wish I could say that Appeals Officers are better equipped to deal with restaurant tax audit issues, but I can’t.First, let me say that there are some very knowledgeable and fair Appeals Officers. I have found most to be receptive to reasonable arguments and to find “fair” resolutions to most issues. However, there are a few, let’s say, “inexperienced” Appeals Officers, who seem to be unable to grasp the unique circumstances involved in running a typical restaurant.
Every restaurant audit appeal involves a dispute over the CRA’s “standard” allowance for loss rates. The CRA applies their standard allowances that are supposed to cover a typical restaurant’s losses from theft, over-pouring, spillage, spoilage and waste. In order to receive a higher allowance, the restaurant must show its unique operations require a more generous allowance.
Easier said than done. I have a client that operates a pub. After an audit they were reassessed for significant amounts of HST on alleged “unreported sales”. The auditor applied the standard allowance of 5% to projected wine sales. Few pubs sell much wine, and this establishment was no different. I reviewed sales item data and found that the pub sold about 1.3 glasses of wine per day. They only sold one red and one white wine.
You don’t have to be a seasoned restaurateur to understand that with this level of wine sales volume, there is going to be an awful lot of wine that spoils, or becomes tainted, before it can be sold. Actually, you just need a little bit of knowledge of wine and a smidgen of common sense!
Even though most wine would be “off” after the bottle had been open for a couple of days, I assumed that each bottle would only become tainted after four days. Even with this very conservative assumption, the actual wine allowance should have been about 30%. Still, the Appeals Officer did not consider this evidence sufficient to budge from the CRA’s standard allowance of 5%!
Another very interesting point came out of this appeal. It seems that when appealing at the Notice of Objection stage, the CRA is completely unwilling to consider any argument that shifts the onus of proof back to the Minister. Based on relevant tax court cases, once the taxpayer makes a prima facie case to “demolish” the Minister’s assumption, the onus shifts to the Minister to disprove the taxpayer’s claims.
One would have thought that if you are able to completely discredit the Minister’s assumptions at any level of appeal, the onus would be on the Minister to discredit the taxpayer’s position. Well, apparently the CRA’s Appeals Division is not equipped to handle this responsibility!
Tax Appeal Implications
The bottom-line is that when appealing restaurant tax reassessments, it may be better to bypass the Notice of Objection stage and go directly to Tax Court. If the amount of tax is under $24,000, you can appeal to the Tax Court (Informal Procedure), which does not require you to have a lawyer represent you at court.
If the amount of tax exceeds this amount, you may wish to go through the objection appeals process to get the reassessment below the level that will allow you do appeal to the Tax Court under the informal procedure.
For more information about restaurant tax audits and appeals, please visit my website.