Why Aren’t There More Court Cases?

There are about 80,800 restaurants in Canada (CRFA), and about half are audited every four years.  That’s a lot of restaurants being audited, and you just know that the majority of them receive reassessments at the end of each audit.

Rather interestingly, there are only about 10 significant court cases involving restaurants that had been audited using the mark-up methodHow can this be?

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Beware Harried Ontario Tax Auditors!

When the Ontario government repealed the Retail Sales Tax (RST) in favour of the new Harmonized Sales Tax (HST), it transferred audit and collection activities to the Canada Revenue Agency.  Unfortunately, that doesn’t mean Ontario restaurants can forget about the old RST!

Ontario is still responsible for auditing the old RST for periods up to June 30, 2010.  Under the Statute of Limitations, Ontario has up to four years to audit the RST.  Actually, they can go back more than four years, if they can show fraud or misrepresentation or if they obtain a waiver from the taxpayer.

Many of these Ontario auditors will be transferring to the CRA in 2012.  So, they are racing to complete audits of most Ontario RST vendors.  This is especially true for Ontario restaurants, which have always been a target of the Ministry of Revenue.

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Taxing Theft

We all know that some amount of alcohol will be pilfered.  Don’t you love that word?  Pilfered.  Sounds like a mere pittance.  It is anything but.  As a rule of thumb, the cost of the theft will be about three times the cost of the alcohol that is, ah, pilfered.

If you’ve been following recent posts on my sister blog, Canadian Restaurateur, you may have noticed a theme. Theft.  All restaurateurs know that theft is a significant issue that requires our constant vigilance.  The cost of the stolen product is bad enough, but if you also have to pay tax (plus penalties and interest) on the retail value of the stolen product,  it becomes a huge issue.  Everyone knows it isn’t right that a restaurateur should have to pay tax “as if” the stolen alcohol had been sold. Unfortunately, that isn’t the way it works in most tax jurisdictions.

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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!

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