More on the Taxation of Tips

A little while back, I was the main source for an article in a Globe and Mail about the taxation of tips in Canada.  I’ve written about taxing tips before, here and here.  In this post, I’ll give an update and discuss two problem areas that most restaurateurs need to know about.

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Percentage Discounts

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.

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Groupon Taxes

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.

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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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How to Get Caught Using Zappers

This post concerns the use of zappers in restaurant operations.  It is not a “how to” guide in their “proper” use, nor is it, in any way, an endorsement of their use.  In fact, if you are even thinking of employing a zapper to fill your pockets with cash stop and read this post.  It is not worth the risk.  You will get caught, eventually, and here’s why.

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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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Zapper Update

Today’s Toronto Star ran an article about restaurants hiding cash income.  You can find it here:  Restaurant probe finds $40M in ‘phantom’ sales.

Until recently, most detective work surrounding the use of zappers had been focused in Quebec.  Now, we find out that the CRA has been involved in a two year, national probe of the restaurant industry.  So far, they’ve found about $40 million of unreported income, though they expect to find much more by next March when the study is completed.

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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 – Know Your Mix

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.

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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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