I started writing this blog in September, 2009. At that time, there was very little useful information about restaurant tax audits in Canada (or anywhere). In the 42 articles that I have written so far, I have tried to fill this gap with practical information geared towards restaurateurs. Based on the comments I’ve received from a number of readers, I think I have succeeded. There still isn’t much useful information about restaurant tax audits, other than what you will find in this blog. That’s a shame, but it keeps me motivated to continue helping as many restaurateurs as I can.
It was kind of fun trying to come up with a decent headline for today’s article. Tips are in the news a lot, lately. Servers, and others who receive tips, don’t like handing out a portion of their tips to other co-workers and especially not to the “house” (management). Now, we find that they don’t like “tipping out” to the big house, either! It’s not like we didn’t know this, but apparently, the CRA is just starting to take notice!
A few months ago, Dining Date Night began offering customers a 30% discount at various restaurants in Toronto. In order to get the discount, a customer books a reservation on a website and pays a $10 fee to Dining Date Night. When the customer visits the restaurant, 30% of the total bill (before taxes) is deducted as a discount. This type of promotion is relatively good for both the consumer and the restaurant that provides the discount, because the restaurant can restrict the hours when reservations may be taken.
I’ve written a couple of articles about Groupon on my sister blog, Canadian Restaurateur. This is part of a series that will cover accounting for Groupon certificates, setting up your Point of Sale (POS) system to properly track coupons and discounts, using QuickBooks to enter Groupon transactions, examining the tax treatment of Groupon certificates (this one), and finally, determining whether your restaurant should consider Groupon.
I’m certainly not saying that all, or even a significant number, of CRA’s tax auditors are corrupt, but this story in the Montreal Gazette highlights some very interesting issues surrounding restaurant tax audits.
The corrupt tax auditors seemed to focus on restaurants, knowing that they could “justify” large reassessments, unless the owners paid them bribes. In at least one case, the auditor asked for the bribe before auditing the restaurant! Finally, the auditors could just as easily make a restaurant appear to be reporting all of its income as it could make it look like they were evading large amounts of tax.
An RCMP investigation of Canada Revenue Agency employees has resulted in three former auditors being accused of shaking down restaurant owners for cash.
Many restaurant owners think they’re protected from the tax auditors, simply because they have a good accountant. While that’s true in some cases, just about every restaurant that gets hit with a tax audit reassessment (and usually a large one at that) had a “good accountant”!
In Canada, every restaurant that appealed tax audit reassessments in court had an accountant. In the U.S., many states publish details of tax appeals by restaurants (informal tribunal appeals, roughly equivalent to Canadian appeals by Notice of Objection). There are literally thousands of cases and virtually every one had an accountant. In the vast majority of cases, the restaurants lost their appeals. I’m sure most of these restaurants thought that their accountant would protect them from these tax reassessments.
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.
Here’s a bold statement: tax auditors don’t know your business.
It’s true! You know it, I know it, even the tax auditors know it!
As a result, you may think you have an advantage over the tax auditors. Unfortunately, you don’t. What tax auditors lack in knowledge they make up for by making assumptions about your restaurant. Often, these assumptions are nothing more than the tax authority’s decisions to use certain “standards”. For example, the “industry average” shrinkage allowance for draft beer (or liquor, or wine). Here’s a surprise: there isn’t one! In almost every case, the tax auditor makes assumptions that are not favourable to your tax position, leading to large tax reassessments.
- Understands your restaurant and uses this knowledge to offer strong advice for improving your operations and finances;
- Analyses sales, expenses and margins to identify problems and improve profitability;
- Provides sound tax advice to legitimately maximize your deductions and minimize your taxes;
- Ensures that you comply with all tax laws, and
- Knows how to document and prove your margins to a tax auditor.
The last point deserves a bit of an explanation.
While this story originates in the United States, it is just as applicable here, in Canada.
Reuters’ David Cay Johnston noted today that IRS auditors “assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year.” [bold italics are mine]
A few things to note.