This is the second post in the series on auditproofing your restaurant from an unfair audit. Most restaurants and bars with weak internal controls (almost all independent establishments), will be audited by the Canada Revenue Agency (CRA) or a provincial tax authority using an indirect audit approach. In most cases, this approach will be the mark-up method, which seeks to project the sales level that was likely to have been generated based on the amount of alcoholic beverages purchased by the establishment. As we have seen in other posts, this audit method involves making a number of assumptions about the operation. Determining what these assumptions should be, can be quite complicated.
Today’s posting is the first in a series of articles about “auditproofing” your restaurant. By this, I mean taking proactive steps to help ensure that your restaurant or bar is not unfairly reassessed for sales and income taxes when it is audited by the CRA or provincial tax ministry. Please check back regularly for other methods of auditproofing your business. If you have any questions, please post comments to the articles, and I will do my best to respond. If you prefer, you can email your questions to me.
Most restaurants have a computerized point of sale (POS) system to keep track of items ordered by each guest, send orders to the kitchen or bar, and process guest check settlements. Most systems can keep track of many other important transactions, such as discounts given (by type and employee), voids (with reasons, by type and employee), ingredient usage, and many others. From a tax perspective, the POS system keeps track of every item ordered and calculates the appropriate sales tax. Just like your car, the POS needs to be maintained properly.
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.
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.