Canada Planning New Penalties for Retailers Hiding Sales: Taxes

Canadian officials are seeking new penalties to deter retailers from using “zapper” software to hide electronic transactions and avoid paying their full tax bill.

The push targeting so-called electronic suppression of sales software, known as ESS, follows a pilot program that focused on the underground economy in the hospitality industry, Bloomberg BNA reported. That effort led to the successful prosecution this year of two Manitoba corporations that operated restaurants and their directors for tax evasion.

While officials can’t gauge the extend of “zapper” software usage in Canada, even if it accounted for just 0.5 percent of the C$65 billion ($62.9 billion) generated each year by the nation’s restaurant industry, that would represent millions of dollars, said Garth Whyte, president of Canadian Restaurant and Foodservices Association.

The software selectively deletes or modifies data in point-of-sale systems such as electronic cash registers, eliminating all trace of the original transaction. Businesses with systems that accept cash are particularly susceptible to sales suppression, said Mylene Croteau, a spokeswoman for the Canadian Revenue Agency.

Helping Chains

The proposed penalties, which must be approved by the Canadian Parliament, are designed to keep ESS software usage from providing a competitive disadvantage to major restaurant chains such as Tim Hortons Inc., Wendy’s International Inc. and McDonald’s Corp., as well as mass retailers including Wal-Mart Canada Corp. and Target Corp., which is scheduled to start retail operations in Canada Sept. 17.

The crackdown sought by Prime Minister Stephen Harper’s government includes adding to the Income Tax Act and the Excise Tax Act monetary penalties that officials can assess, as well creating new criminal offenses for ESS software use.

A first infraction for the use, possession or acquisition of the software would result in an administrative fine of C$5,000 ($4,850), with subsequent violations costing C$50,000.

Individuals who manufacture, sell or offer for sale the software would face a first penalty of C$10,000 and fines of C$100,000 for additional offenses.

Criminal Penalties

Under the proposed changes to the criminal code, those found guilty of using or manufacturing the software would face larger fines and jail terms of up to five years.

Legislation to establish these sanctions will be introduced “in the near future” said Kathleen Perchaluk, a spokesman for federal Finance Minister Jim Flaherty.

“While Parliament determines when legislation is passed, we hope for timely passage,” Perchaluk said.

Revenue agency officials are publicizing the measures to make businesses more aware of proactive steps they can take to prepare for them, Croteau said.

The agency is encouraging businesses that have ESS software to delete it and to correct their records to undo previous deletions of sales, she said. Businesses purchasing a new point-of-sale system also are being urged to obtain assurances from their software provider that it doesn’t contain ESS programming, she said.

Voluntary Program

Under the agency’s Voluntary Disclosure Program, businesses that fully disclose inaccurate tax returns before any investigation into their software use may only have to pay the owed taxes plus interest, rather than also face penalties and possible prosecution, Croteau said.

The agency detected evidence of ESS software use among restaurants during a two-year pilot project. The two Manitoba restaurants prosecuted as part to the project pleaded guilty to evading federal income taxes and goods and services taxes. Fines levied in the case totaled C$731,986, the agency announced on May 1.

The restaurant and foodservices group welcomes the new enforcement initiative. “We’re very pleased the government listened to our concerns and is targeting the underground economy rather than the above-ground economy,” Whyte said. “The vast majority of restaurant owners operate in full compliance of the law.”

He praised the penalty proposals for focusing on manufacturers and sellers of the software as well as users.

“I like that precedent,” he said, adding that the association will encourage its members to report approaches by ESS software suppliers.

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