Michael Hlinka: Tax evasion by restaurants a sign of deeper problems in system
- November 12, 2009 9:17 AM |
- By Michael Hlinka
Money Talks is a business column from CBC radio.
By Michael Hlinka, CBC business columnist:
Nobody likes to pay taxes. That’s pretty obvious. However, if there is one group in Canadian society that is most likely to be hostile about it, it’s the entrepreneurial class.
As an owner, you bear 100 per cent of the business risk. You’re the one who gets paid last – all of your suppliers and employees get what they’re owed before you see one lousy dime. Then at the end of the day, if you turn a profit, the government steps in and takes a third off the top.
Well, according to the Canada Revenue Agency, the restaurant industry is fighting back using technology … with software known as zappers and phantom-ware.
This software is added to the electronic cash registers that are standard equipment in Canadian restaurants. Phantom-ware is installed at the factory; zappers are added on after the machine has left the shop floor. And what they both allow is the restaurant owner to delete sales after the fact.
The ordering systems that most restaurants use place the orders in the kitchen and at the bar. This allows the establishments to serve customers efficiently. But this means that the sales are recorded by the cash registers. Zappers and phantom-ware let the restaurant owner delete some of those sales at the end of the evening. This understates the revenues that were actually generated – all in an effort to evade paying taxes.
There is an important difference between avoiding tax, which is legal, and evading tax, which is illegal. The two-year investigation by the Canada Revenue Agency has uncovered at least $40 million in undeclared cash sales. However, when you consider the comments by a CRA spokesperson, “Preliminary work indicates that it is prevalent,” it makes you think that this is the very thin edge of an extremely wide wedge.
According to Statistics Canada, operating revenues for the restaurant industry are in the neighbourhood of $16 billion. Therefore, if prevalent implies, say 5 per cent, we’re talking about $800 million of undeclared profit and over a quarter of a billion in unpaid taxes.
What to do about it? If you think the problem is the software, then go after the businesses that are providing it. This summer, the Quebec government went aggressively after a Laval-based cash register supplier accused of installed phantom-ware in its machines.
If you think that the problem is restaurant owners, then it implies that lots more enforcement is necessary.
However, if like me, you think the problem is a tax code that penalizes business unfairly by taking one-third of what it makes, then the remedy is a simple one: Eliminate taxes on corporate profits, replacing the lost revenue with higher consumption taxes… including higher taxes on restaurant meals. Because even though no one likes to pay taxes, everyone recognizes that they’re necessary.
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Comments (35)
Wrong! Taxes are not necessary. Efficient markets would eliminate the need to tax the population base. Taxes destroy business incentive not to mention business activity. Properly run markets eliminate the need for taxes to prop up healthcare, education, roads and highways, and last but not least, eliminate taxes and you eliminate the need for politicians.
Are the taxes necessary??? why ? to bail out another industry that did poorly, or to support our awful transit system.
Enough with the leaching and big government
The government is a mafia, its always looking to take as much as they can and the provide soooo little, and so ineffeciently.
But people will never get it,
Ron Paul for Canada!
If we reduce taxes than we reduce health, social, and care services that are free to Canadians. That is why we pay higher taxes than other countries. Think about that!
Because even though no one likes to pay taxes, everyone recognizes that they’re necessary.
Some taxes yes. The problem is that there are far too many taxes. They are far too high and they are not being used for the purposes they were originaly intended. There is far too much corruption in government which is just blowing money down the road. The McGuilty government is a prime example. Billions gone,and what is their action plan? Raise taxes! This is what is frustrating so many people to the point where they have just had enough! If you think it's bad now, wait until he shoves this hated HST through. The underground economy is going to flourish like never before.
If Private enterprise payed it;s fair share of taxes, Canada would not have to borrow as much money from Private banks at high interest rates to recover those losses at the expense of all taxpayers.
I am sick and tired of corporate whiners, and those who support them.
Great idea on the consumption tax Michael! Not only will the restaurant owners pocket the sales, but the consumption tax too! The government will never see any of the money. You are so niave to think that restaurant owners will comply.
Michael, I agree with your proposal in principle, but there are two problems. The first is political; look at the spectacular failure of Stephane Dion’s “green shift” and the vitriol spewing against the BC and Ontario HST right now. The public only sees the increase, and is willfully blind and uneducated to any possible reductions. The other problem is that entrepreneurs generally see the consumption taxes as also “part of their income” being taxed. It does not matter that it appears separately on the bill and is meant to be held in trust, the cash flows into the general revenues and then when they pay it looks to them like a tax bill.
"Eliminate taxes on corporate profits, replacing the lost revenue with higher consumption taxes… including higher taxes on restaurant meals. Because even though no one likes to pay taxes, everyone recognizes that they’re necessary."
Funny how it seems to be unfair for businesses to have to pay taxes when all they do is use things paid for by taxes. This is really utterly unjust and we need to quickly tax the consumer (read, individual) more in order to not offend those poor businesses who just try to make a profit as large as possible for the owner / shareholder.
Seriously, you do think that businesses shouldn't be taxed? Canada already has one of the lowest corporate tax rates (yes, even in large parts lower than the US) and you still want to shift more of the tax burden to the average citizen?
Who paid you to write that OpEd?
I agree with your consumption tax solution.Some will state that this is an unfair tax because it is considered a regressive tax.I believe that the consumption tax is the only tax that catches all.The underground economy has to pay its fair share.I am for a higher consumption tax and a much higher tax free area in both personal and corporate taxes.Perhaps personal incomes could be tax exempt up to 30K and business tax could kick in over 250K.
This compromise would allow for risk/reward for small business and more choice/control for low income families.Other tax credits could be available for those earning under 30K.
Cheaters should be aggressively pursued.
By consumption tax, I assume you are refering to GST. So if the GST is increased, the restaurant owner will still zap sales to reduce his GST liability, so the only solution is more enforcement.
I agree - taxes are in place for the Govt. to be able to provide services and run the country - why do you think the restauranters are driving BMWs and Accuras and the average employee/ serviceperson takes the bus to work - because we pay to eat the food and pay the tax and the government does not get any of the tax collected. Go CRA.... get the slimy cooks that cook the books....
Personally, I don't think our tax system is bad. People complian about paying 1/3 of their income to taxes, but never mentioned that they did not have to pay for education until univeristy; they did not have to pay to see a doctor; they did not have to sell their house to pay for bi-pass surgery on the heart... We have so many free benefits in Canada becuase of our tax system. Have you ever thought this: if there are no cheaters or tax evadors, tax rate may drop for the rest of us? Right now we are paying taxes on behalf of these cheaters that you call them "entrepreneurers".
...hmmmmmmmmmmmmm... tax evasion by restaunters... how enlightening...
...what about the tax evasion that happens daily--and has happened for decades among all carpenters, drywallers, electricians, plumbers... wake up Gov of Canada...smell the roses and figure out a way of making these criminals pay their fair share... let the rest of us!!!
All the anti-tax posters amuse me. They'll be the first in line with their hands out looking for help if they get hurt, laid off, fired, or lose their home to a flood or other natural disaster. Where do they think the government will get the money to pay them?
@conrad
Except you replace politicians and government with theifs and tyrants the "market" is an abstraction, those with the most money would make the rules for society and I really don't think wall street that just got bailed out by government to the tune of trillions of dollars is any better then government.
The problem is human beings and the flawed and inherently unstable nature of capitalism itself.
There's a lot of things that the government does and provides us all that I consider worth the money I'm putting into the system. I understand that not all of us see each and every one of those goods and services provided by government in the same way as I do. To see taxes as a "necessary evil" as opposed to simply necessary to the running of a country fit to live in strikes me as self-sabotaging. The former POV encourages us to obsess on the "evil" part, to justify the resentment...and by extension, the self-sabotage that results from tax evasion.
Certainly, though, the ways in which we pay for the proper running of the country are open to debate. If there is an unjust burden placed on specific groups as a result of those ways, then we do need to address that problem.
It is a simplistic view of your article. Not to insult anyone, even banks themselves evade tax with different means, realistically, restaurants profits are generally very thin, a lot would have folded anyway even with tax evasion, the choice is not easy or simple, half of the restaurants are gone tomorrow if we calculate every dollar they make to tax them. I was in catering before & I can testify that.
It's commmon knowledge here that if you can pay in cash, no GST is paid at restaurants of a certain ethnicity. Of course, you have to go to the back of the restaurant, and speak the language if you want the "discount". (If I were to mention which ethnicity this is, I'm sure I'd somehow be labelled as being racist, so I won't.) The customer saves the GST, the restaurant saves paying any kind of tax -- everybody wins! ...except the poor suckers who don't do the wong thing and pay their fare share of tax -- they end up taking it on the chin.
Dishonesty and Corruption in the restaurant business is still flourishing and controlled by the MOB(mafia)in Montreal - everybody gets paid off and the People, City, Province and Canada suffer.
I think this tax evasion is a sign that taxes are way too high in this country and we're seeing the onset of a bigger revolt somewhere down the road. Whoever says that our social programs are free is out of touch with reality. Our taxes fund them. The problem is, they are going to get more expensive in coming years because of the aging boomer population so don't be surprised if there's more tax increases then. So, if you don't want your taxes to go up, it's not possible unless the money comes from somewhere else. One way is by user fees. In fact, in BC where I live you have to pay an MSP premium every so often.
I still agree with this phrase: taxes punish those who produce and reward those who don't.
Tax evasion by restaurants is only the tip of the iceberg for tax evasion in the service industry in Canada.
Revenue Canada should survey Canadians about how many times he/she has been appoached/offered lower price contracts for cash payments by service related companies.
Maybe like the US, Revenue Canada should offer financial rewards (a percentage of back taxes collected,ie 10%) to individuals or companies that report tax evaders.
From my personal experience dealing with only one company, based on a reward of 10% of back taxes collected by Revenue Canada, this amount would have been equivalent to my salary earned in one year!
Wrong! Wage earners pay tax OFF the TOP - with no opportunity to write off personal expenses before net. Why shouldn't small business owners pay their share? They benefit from government more than wage earners - once as private individuals, and again as business entities. No doubt the tax system needs improvement, but what is needed is fairer treatment of people, not businesses!
So Michael Hlinka would have all Canadians band together to pay the rightful tax share for the restaurants. His line of reasoning is why our tax rates are so high. If everyone paid their fair share, then all of the honest taxpayers would have to shoulder less of the tax burden.
I don't buy the suggestion that small business people should be given a break because they take the risk of not earning a profit. Even though I am an employee, I have no guarantee that I will have a job tomorrow, therefore using Mr. Hlinka's logic, I'm taking a risk and I shouldn't have to pay taxes either.
We need to encourage all Canadians to pay their fair share of the taxes so the tax bill isn't unfairly shouldered solely by wage earners and large business.
An entrepreneur who skims money is doing it for personal, not corporate, gain. If a business owner wants more of their fair share of their business's income, let them pay themselves larger incomes. Since corporate taxes are on profit, not revenue, there should be no objections to paying them (except by those who have a philosophical issue with any type of tax -- usually because they have deep enough pockets to cover their own needs).
The governments both provincial and federal are already collecting far more taxes than they need to. when the auditor general makes his annual report and says he has nothing to report & that all is well I will never again complain about excessive taxes.Politicians who through stupidity or corruption waste tax payers money should be fired or jailed immediately
Michael I generally agree with most of your "ideas," however, this one sounds a bit naive, and incomplete. First of all, restaurant entrepreneurs can be either corporations or individuals. As an individual, if the restaurant business fails and the owner loses $100,000, he or she would be able to claim it as a business loss and deduct it against other income (e.g. salary income) in the preceeding three years, or carry it forward for 2o years. Yes the government gets their 30%, not off the top but after all expenses, including some really questionable ones. Furthermore the owners and their famalies get free food which is never properly treated as a taxable benefit. That same government (read taxpayers)is there to help when the business fails, as many restaurants inevitably fail. For corporations, the loss rules are a little more restrictive, but with good tax advice, the losses are also generally deductible in prior and subsequent years.
To conrad b: Have you been living in a cave for the last couple of years? We have just witnessed the greatest market failures since the Great Depression. These so called "efficient markets" were bailed out by our inefficient and wastefull governments. Wake up man and get you head out of your idealogical hole>
"Eliminate taxes on corporate profits, replacing the lost revenue with higher consumption taxes… including higher taxes on restaurant meals.
Bright idea - Not! How will this stop restaurants from using zapper software? They'll still zap the sales and keep the consumption taxes to themselves!
"Because even though no one likes to pay taxes, everyone recognizes that they’re necessary."
Agreed.
Simplify the damn tax code. There is absolutely no reason to have such a complicated system. The only beneficiaries of the present code are the unproductive who add nothing to the bottom line of the country. The resultant downsizing of government, particularly the army of revanoors would make people less angry about the waste that is government.
How can there be any meaningful discussion about taxes and tax evaders when half the tobacco consumed in Ontario is now smuggled and contributes absolutely nothing in the way of revenues while thousands of people are hospitalized or die every year at huge costs to our health-care system. Our governments both provincial and federal are whistling past the graveyard only because it involves our first nation communities and they think it is much safer and easier just to make up the shortfalls by screwing the honest taxpayers. So much for politics and politicians!!!!
They're going to have to do something to help small businesses because they are closing up at an ever increasing rate, at least here in over-priced Vancouver. If it's not municipal taxes, it's fees on various permits or un-wieldly income taxes. In a recession the last thing you need to be doing is raising taxes on businesses. If businesses are hiding revenue it's because otherwise they would be simply out of business. Before trying to recoup all that supposedly unpaid tax CRA needs to ask if it's worth destroying a business that is paying SOME tax, just to recoup a few thousand in avoided tax payments. But governments don't seem to realy care about the economy or people's livelyhoods. They just want to keep their banker friends happy...
Go to Mexico if you want to see how a country without taxes functions. Taxes are not only necessary but they are the price you pay for citizenship. As for business, well, business does not pay tax. They collect tax. As a business person, I have never paid taxes. I always pass it on to the consumer. I'm in business with the government. It's like being in business with the mafia except they work on a percentage so if I don't earn any money neither does the government. The tax that I pay on my property is deducted from my income. Can you do that? Every penny that I spend is deducted from my income before being taxed. Can you do that?
Oh sure blame and penalize the customer for the dihonest owner.
Most people have no issues with paying taxes because they recognize and are willing to pay for the freedom from fear (read bombs and other violence being experience by some middle eastern and african countries, to name a couple) we enjoy. They also recognize the need to promote trade with other countries. However, most people take umbrage with the abuses and waste they see from governments and big businesses.
Taxpayers have long memories of events like the Sponsorship scandal, Radwinski-gate, E-health records doling out untendered contracts worth millions to friends who turned around and claimed coffee expenses, limos to take the CEO kids to sports practice/school, and the list goes on.... all paid for by tax dollars.
Maybe the first step to resolve this is for CRA and gov't, at all levels, to clean their own "house".
Why do restaurant owners think it is "unfair" that the government takes a third of their profit? We ALL pay taxes, business owners shouldn't be exempt - especially since they derive a greater benefit from tax revenues than the rest of us.
See, business owners would have a much harder time making a profit if they didn't have roads connecting their businesses to other places, police and fire departments to protect their investments, educated people looking for jobs to do the work, and a health care system that keeps employees able to work.
I can understand wanting government to spend money more efficiently (via lower taxes) or more effectively (with less waste), but when people claim that they shouldn't have to pay taxes it makes me feel like they shouldn't be allowed to benefit from taxes, either. Their customers end up paying their taxes for them anyways, so that money wasn't theirs to begin with.
I walk by these small restaurants in my neighbourhood and see the $80,000 cars that the owners park outside. These guys are not paying their taxes you can be sure. They live like Fortune 500 CEO's. Mom and Pop! Give me a break. I would also like to see how many have money stashed in tax shelters overseas. CCRA should get cracking like the IRS in the US which has got 14,500 taxpayers this year to own up to over $15billion in hidden assets abroad. What are the Canadian authorities doing???