Successful Tax Appeals
Bar Owner Saved Over $500K
Sean came to me after his bar had been reassessed for additional HST after an audit. Most bar and restaurant audits result in reassessments, often for very large amounts of tax, penalties and interest. This case was no different.
During these audits, the CRA estimates the "unreported sales", based on the amount of alcohol purchased and the actual sales reported. Following a detailed review of the auditor's working papers, I came to the conclusion that my new client had done absolutely nothing wrong.
I found and documented numerous errors and incorrect assumptions the auditor had made. Much of this was possible, only because I had a thorough understanding of restaurant and bar operations combined with an excellent understanding of the tax law. I prepared a comprehensive Notice of Objection providing sufficient proof that the bar did not have any unreported sales.
CRA issues New Reassessments
About a year later, as the appeal was about to be heard, the CRA tried to add new reassessments for personal and corporate income taxes, based on the original HST audit findings.
I was able to quash one of the personal tax reassessments, as the tax year had become statute barred. I got the CRA to hold off on the other tax year, pending the outcome of our appeal. Unfortunately, the CRA went ahead with the corporate income tax reassessments, necessitating another Notice of Objection.
Tax Reassessments Reversed
I was successful getting the HST and income tax objections reviewed at the same time. Tax appeals can take a long, long time. About four months later, just before Christmas, we learned that the CRA was reversing all reassessments against my client. You can read more about this case on my restaurant tax blog.
Learn more about tax audit representation and tax appeals here.
Tax Audit Defense
A Restaurant Tax Audit Gone Wrong
I received a call from Jack, late on a Sunday night. He had been reading my Canadian Restaurant Tax Advisor blog, trying to find some information that would help him deal with a CRA audit of his restaurant. He had a bad feeling that he was about to get hit with a tax reassessment. I met with him a couple of days later.
During our meeting, I gathered appropriate information to prepare a defence to the expected reassessment proposal. Sure enough, the proposal letter arrived one week later, and it alleged significant “unreported sales”, resulting in a $45,000 HST tax liability for a two-year audit.
Jack had been audited before, and it didn’t go so well, but he did learn to keep records of his staff drinks, customer comps and his own drinks. I went to work assembling the proof that would be credible to the auditor.
I performed a thorough review of the tax auditor’s working papers, finding numerous errors. I documented the proof, to ensure that the auditor would accept the corrections.
I found that the CRA auditor had failed to account for the difference between Imperial and US ounces, which significantly reduced the auditor’s calculation of “unreported sales”. This was one of the earliest cases where this issue was raised during restaurant audits. The CRA had been blissfully unaware of the issue, until then. Now, they do consider US vs. Imperial ounces during audits.
I discussed the menu with Jack and found that several popular items used alcohol in the recipes. Using the recipes and sales data, I was able to estimate the amount of alcohol used in cooking. Most auditors overlook this use of alcohol in restaurants, leading to higher "unreported sales" findings.
Finally, I reviewed all court cases that dealt with indirect audit methods used in restaurant tax audits. I found that the allowances for shrinkage used by the auditor were significantly lower than those set by case precedents. The auditor wasn’t following the law!
The Proposal Meeting
We were ready to meet with the auditor. She brought along her Team Leader, perhaps knowing that she was in for a “fight”. I presented my case to overturn the auditor’s proposed reassessment in its entirety. I should note that, had the CRA not backed down, I had gathered sufficient evidence to attack the auditor’s use of the mark-up method to audit the restaurant, which would have been argued on appeal.
CRA Audit Proposal Demolished
It took about a month, but we finally received notice from the auditor that the CRA was abandoning their proposed reassessment of the restaurant and its shareholder.
All told, it was about two months from the initial phone call. While the result was excellent, Jack could have saved a lot of time and money by having me prepare for the audit before the auditor arrived. He would have gone through an awful lot less stress too!
I should note that Jack kept better records of discounts and own-use than most restaurants, and that played a part in getting the proposed reassessment quashed. All restaurateurs are strongly advised to keep similar records. If in doubt, request my Proactive Tax Audit Check-up, which will ensure that your restaurant keeps credible evidence to support these amounts during upcoming audits.
To learn more about tax audit defense strategies, tax dispute resolution and tax appeals, visit Tax Services.
Personal Income Tax - Investor
Buy High, Sell Low
One of my clients came into a fair bit of money from an inheritance. He had dreams of turning his nest egg into a fortune by investing in the stock market. It didn't turn out very well.
He chose a few very high risk investments and ended up losing most of his money. Normally, the losses on such investments would be considered to be capital in nature, only deductible against capital gains. He was distraught, and I wanted to make sure I had investigated all legal means to mitigate his losses.
I researched the tax law and relevant court cases and came to the conclusion that a good case could be made for treating each of his investments as "adventures in the nature of trade". If successful, the losses would be treated like business losses and would be deductible against his other income.
We filed his tax return on this basis, but the CRA disallowed the deduction. All of the research had already been done to file an appeal, so we did. A few months later, the appeals officer called simply to say that he agreed with our position and the deduction would be allowed in full.
Learn about other personal income tax services at Tax Services.
Personal Income Tax - Capital vs. Income Loss
Beating the CRA at their own game
A client had purchased a house as a rental property. Unfortunately, he bought the house near the top of the market. For three years, he claimed rental losses on the property. Then, the real estate market took a turn for the worse. The value of his rental property dropped by over $100,000.
I convinced my client to move into the rental property and make it his principal residence. Upon doing so, there was a deemed disposition of the rental property at the fair market value. We obtained real estate appraisals to support the fair maret value. When filing his return for the year, we claimed a loss on the disposition of the rental property and deducted this from his other income. The CRA disagreed, claiming that the loss was capital in nature and could only be deducted against capital gains.
I appealed, citing the facts of the case and several court cases in support of the loss being fully deductible. I should note that the CRA reassessed many taxpayers, when the real estate market was rising, treating almost all real estate gains as income . This caught a lot of people who were "flipping" houses. Back then, the CRA won about 99% of the cases that went to court over this issue.
For my client, I turned the tables on the CRA. If it was income when the market went up, it was a loss when the market came back down. They couldn't have it both ways. On appeal, we were successful and my client got a very large deduction, helping to cover his loss on the value of his property.
Learn more about personal income tax and tax appeals at Tax Services.
Personal Income Tax - Disability Amount
Home Visits Pay Off
During my annual home visit to discuss my client's personal income taxes, I noticed that she needed a walker and was walking very slowly, the result of an unsuccessful operation.
I recognized that she might be eligible for the Disability Amount when filing her tax return. I prepared the necessary application form and helped arrange for her doctor to certify her condition and get CRA approval for the claim. As a result, my client will be saving more than $2,000 per year.
This is one of the reasons I always visit my clients during the year and at tax time. To learn more about personal income tax visit Tax Services.
Mining for Dollars
I was brought in to help a very successful mining exploration company reconstruct their accounting records and file corporate income tax returns. The company was in danger of losing its charter, which would have prevented them from enforcing many valuable contracts.
The company purchased land claims, that entitled them to mineral rights, should anything be discovered, in return for a promise to undertake exploration activities. Rather than conduct the exporation themselves, they would enter into contracts to have other companies pay for it, giving up the mineral rights, but retaining a royalty percentage. In most of these agreements, a nominal amount of $1 was exchanged by the parties.
This was an important consideration. It meant that the bank accounts had to be reconciled to the dollar, to ensure that no contracts had been missed. Many of the mining claims were successful, making the contracts very valuable. I verified every contract to land claim records and minutes held by the company's corporate secretarial management company.
Within six months, all financial statements and corporate tax returns were filed and the company's charter was protected. Learn more about accounting at Accounting Services.