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.
Auditproofing – POS Housecleaning
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.
Restaurant Audit Assumptions
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.
Now is the Time to Protect Your Restaurant from a Sales Tax Audit
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.
Continue reading “Now is the Time to Protect Your Restaurant from a Sales Tax Audit”
Revenu Quebec Targets Restaurants
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.
Legalized Extortion?
I’m going to describe a real case study and let you decide if the title of today’s blog is true. This situation occurred several years ago at a client’s restaurant in Ontario.
My client operated a small, reasonably successful, restaurant in a fashionable downtown neighbourhood. She was the head chef, general manager and office administrator. She did everything but wait on tables. I found her to be scrupulously honest in every respect. One day she received notice that her restaurant had been selected for a retail sales tax audit. She wasn’t concerned, at all. In fact, she relished the opportunity to show the auditor her impeccably accurate and organized accounting records. She knew that she had always collected and remitted the correct tax from all of her sales transactions. She recorded every single sales transaction, even the few that were settled with cash. In short, she thought it would be an impossibility that the auditor could reassess her business for any unpaid taxes. She was about to experience the the impossible!
How do they do it (to you)?
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.
Is Your Restaurant Going to be Audited?
If you operate a restaurant or bar that serves alcohol, you can be certain that you will come face to face with one or more government auditors, about every four years.
Why? Provincial and federal tax authorities truly believe that under-reporting sales is rampant in the hospitality industry. Tax authorities are statute barred from reassessing returns more than four years old, in most jurisdictions. So, every few years, you can expect a visit from the provincial sales tax auditor, who will audit two to four years’ worth of sales returns during each visit. Canada Revenue Agency audits GST returns, but not nearly many or as often as the provincial authorities audit RST returns. Undoubtedly, this is because there are far more GST registrants than RST vendors, and the GST registrants are much larger tax collectors. However, with the coming harmonization of Ontario and BC sales taxes with the GST, both provinces’ licensed restaurants should expect a dramatic increase in sales tax audits (covering both taxes).
Welcome!
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 bartaxca@gmail.com. You can be assured that I will keep any private information in the strictest of confidence.