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.
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”.
I’m often asked by my clients and fellow restaurateurs how the tax auditors arrive at their reassessments for unreported sales.
It is a pretty simple approach, though the calculations will boggle the minds of those who don’t know how to use Excel! In a nutshell, the approach is the same, regardless of whether it is an audit for PST, GST or income taxes.
Welcome to my new blog that should be a ‘must read’ for restaurateurs and their financial advisors. My primary focus is on the audit procedures and practices used by Canada Revenue Agency (GST and income taxes) and the various provincial tax authorities (Retail Sales Tax & income taxes). I am particularly concerned about the very significant risk that these practices present to your restaurant. To my knowledge, there are no other blog (or web) sites addressing this vital topic. At the present time, I will remain anonymous, to avoid possible recriminations that may result from my comments.
As a successful restaurateur, I have been audited by CRA and the provincial government several times. As a Chartered Accountant, I have been involved, helping other restaurants through their audits and subsequent appeals of their reassessments. It can be an extremely frustrating, time-consuming, and expensive experience dealing with government auditors and the inevitable reassessments. And it is getting worse!
In this blog, I will explain the various practices employed by tax auditors and how you can avoid an unjust reassessment. Not only can you expect to save thousands of dollars in additional taxes, you may be able to significantly reduce your professional fees incurred to fight these insidious tax reassessments. In Ontario, to obtain or renew your liquor license, your sales tax account must not be in arrears. An audit will usually result in a reassessment for additional taxes, along with penalties and interest. In most cases, the reassessment comes as a complete shock to the restaurateur. Whereas CRA reassessments can be appealed, resulting in a suspension of immediate collection efforts, there is no such provision for Ontario taxes. They will aggressively pursue collection efforts as soon as the reassessments are issued. If your license is up for renewal, you must pay the entire amount of reassessed taxes, even though you will be appealing them.
In July, 2010, Ontario and B.C. will be “harmonizing” their provincial sales taxes with the federal GST. This has a number of implications for restaurants and other businesses. Provincial auditors will be out if full force during the next four and a half years, as they attempt to audit as many businesses as possible before the sales tax years become statute barred from subsequent reassessment. This will be their last kick at the cat, so to speak. All indications are that they will not let this opportunity go by. After that, you can expect to see more frequent visits from CRA auditors. When they make a reassessment, it won’t be for 5% GST shortfalls, it will be for 13% HST shortfalls (Ontario).
With over 30 years’ experience as a CA, and 15 as a restaurateur, one can feel that he has seen it all! But, I know that I haven’t. I’m sure there are many new horror stories that would be of interest to my readers. If you have such a story, please do tell us about it, so that we can all learn from the experience. Obviously, you should write these stories anonymously. If you are more comfortable sending the details to me in an email, please send them to firstname.lastname@example.org. You can be assured that I will keep any private information in the strictest of confidence.