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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When the Ontario government repealed the Retail Sales Tax (RST) in favour of the new Harmonized Sales Tax (HST), it transferred audit and collection activities to the Canada Revenue Agency.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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CRFA Publishes Licensee Pricing Calculators Using The New HST

Recently, the Canadian Restaurant and Foodservices Association (CRFA) published three calculators to help restaurateurs determine the effect on the new HST, effective July 1, 2010, on their prices.  The calculators cover wine, spirits and beer.  I’ve included the links, below.  You can read more and find a discussion on their use and potential effects on your menu pricing in July, here.

Wine Calculator

Spirits Calculator

Beer Calculator

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The Real Threat

Despite what has been published in the press and disclosed by the CRA and the Ministry of Revenue Quebec (MRQ), the use of zappers has not reached epidemic proportions in the restaurant industry.  Zappers have been around since the mid-1990s, though most of the usage seems to have been confined to Quebec.  In fact, the vast majority of the convictions for sales tax evasion have occurred in Quebec.  For background on the use and abuse of zappers, please read this, this, and this.  The unfortunate thing about all of this attention is that it may draw our attention away from a far larger threat to our operations.  The indirect audit approach.

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Restaurant Tax Fraud – Then and Now

Recently, we’ve begun to hear a lot more about tax evasion in the restaurant industry.  More specifically, we’re talking about technologically-assisted tax fraud, using zappers or phantom-ware.  It made the news, again this past week, when it was disclosed that the Canada Revenue Agency had found more than $40M of unreported tax in the restaurant industry attributed to the use of zappers.  Today’s post looks at the issue of tax fraud in the restaurant industry and tries to determine how “rampant” it might be.

While tax fraud can occur in many different ways, when we talk about the restaurant industry, it usually takes the form of cash sales “skimmed” off and not reported for tax purposes.

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Auditproofing – Average Costs

So far, I’ve discussed the POS system and how to maintain it for accurate reporting, how to document your sales mix for all audit periods, and the importance of maintaining an accurate history of your menu prices.  Taken together, these bookkeeping tasks are crucial in helping the restaurateur determine, and properly support, accurate weighted average prices.  This is a crucial component of the mark-up calculation performed during a typical audit.

Now we’ll take a look at the actual cost of the alcoholic beverages purchased for sale.

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Auditproofing – Tracking Menu Changes

As a restaurateur, you probably have a general idea how your menus and prices have changed over the last few years.  Unfortunately, only having a “general idea” can land you in a big pot of trouble when your restaurant is audited.  This post reviews a few of the methods of documenting key changes to your menu and prices.  When the time comes, you will have accurate, credible information to support your actual margins and document the reasons for variances from the expected margins.

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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.

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