COLUMN: Evading taxes will land you in hot water
Restaurants, fast food franchises and food trucks are known targets for Canada Revenue Agency (CRA) audits.
The restaurant business is a difficult gig fuelled by entrepreneurs’ passions and one that can be made even tougher when restaurant owners give in to the temptation of the underground economy. That’s like going from the frying pan into the fire.
Yet many restauranteurs give in to the temptation and join the sophisticated underground economy in order to realize larger profits or to stay afloat longer.
Electronic suppression of sales software (zapper software) is used to hide sales to evade GST and income tax. Zapper software selectively deletes or modifies transactions from the records of point of sale systems and businesses’ accounting systems.
The Income Tax Act was changed on Jan. 1, 2014, making it an offence to own or supply zapper software. This offence is in addition to tax evasion charges that would normally be levied and may result in jail time for a restaurant owner.
CRA estimates zapper use could account for $3.25 billion in unreported sales annually. Fighting zapper use is a priority for CRA and a major initiative in their underground economy strategy.
A 2012 CRA audit of income earned by 145 wait staff at four foodservice establishments in St. Catharines, Ont., revealed $1.7 million in unreported tips. Wait staff may earn double their wages in tips, but report, at most, 10 per cent of it (and in some cases, none). Statistics Canada estimated $1.3 billion in tips went undeclared in 2008.
The CRA also uses indirect verification techniques for restaurants to try to find unreported income. They will look at wholesale food and beverage purchases, estimate mark ups on those purchases and compute what they think should have been sales based on those purchases.
If there is a discrepancy with reported sales, the CRA will assess the difference as unreported income and will levy civil tax penalties and may also prosecute for tax evasion. While a discrepancy does not necessarily mean there was unreported income, the onus is now the restaurant owner to disprove the CRA assessment.
Restaurants can successfully be defended when faced with CRA audits by using a detailed analysis of menu ingredients, including alcohol used in food preparation, to demonstrate the CRA’s assumptions were incorrect. Be forewarned: this type of audit challenge must be meticulous and is time consuming on the part of the restaurant owner and head chef, as well as by tax professionals.
In Canada, the underground economy is estimated at $43 billion annually as of the latest report released in June 2016 and covering the years 1992 to 2013. Accommodation and foodservice is estimated to represent about 12 per cent of the total unreported income or about 2.4 per cent of Canada’s GDP.
Statistics Canada has estimated almost $444 billion of unreported income was earned in Canada from 1992 to 2008, excluding illegal activities. This also means tax revenue shortfall of between $10 and $20 billion annually that has to be met by the taxpaying public.
The CRA Underground Economy Advisory Committee includes industry partners such as Restaurants Canada and was set up by the CRA to help combat tax evasion through unreported cash transactions. The committee advises the minister and the Canada Revenue Agency and collaborates with members on measures to reduce the acceptability of and participation in the underground economy with a view to making under the table cash transaction socially unacceptable. Tax audits of the cash economy remain a CRA priority.
In 2014-15, according to the CRA Report to Parliament, the CRA investigated or audited almost 6,540 income tax and GST/HST underground economy files and identified more than $448 million in unpaid taxes.
Canadian tax lawyers can provide income tax assistance to restaurants that have engaged in unreported cash transactions and have decided proactively to correct their back tax filings. Provided they have not been subject to a CRA tax audit or investigation, they can submit a CRA voluntary disclosure to correct unreported GST/HST and unreported income tax.
By submitting a voluntary disclosure, there will be no tax evasion prosecution nor penalties, and there may be an interest rate reduction. The key is to approach CRA before they approach you, otherwise it’s too late to qualify for the program.
David J Rotfleisch is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With more than 30 years of experience as both a lawyer and chartered professional accountant, he has helped businesses and corporations with their tax planning, voluntary disclosure, and tax dispute resolution including tax litigation. For more information, visit www.taxpage.com or email firstname.lastname@example.org.