A revenue projection method is a technique that may be implemented during the audit of a taxpayer. Briefly, IVI techniques are used in an attempt to determine the income of a taxpayer where the taxpayer's books and records are deemed unreliable. For a more in-depth article on IVI techniques, please click here.
One type of IVI technique is the revenue projection method whereby a method of projecting a business' revenue is formulated, the result of that projection is compared to the business' reported revenue, and, if the projected revenue is greater than what the taxpayer reported, that projection may be used as the basis of a subsequent reassessment.
One industry where we have seen the revenue projection method implemented is in the restaurant and food service industry.
Audits of restaurants typically begin with an unannounced visit at the restaurant's place of operation. During this initial visit, point-of-sales ("POS") data will be requested and the first full-day of on-site observations may be conducted. To the extent that the POS data is unavailable for the time period requested, or an anomaly is identified in the POS data, the restaurant's books and records may be deemed unreliable and a revenue projection method may be implemented to determine the accuracy of the restaurant's tax returns.
Following the initial visit, further full-day observations (generally 3-5 days in total) will be conducted at the restaurant's place of operation. These observations may be used as support for any subsequent reassessment issued following the audit, if a reassessment is issued.
There is no uniform method of projecting a restaurant's revenue. The CRA has employed several methods including where a restaurant's purchases of raw ingredients are analyzed, and a formula is subsequently constructed to calculate/project revenue based on those purchases of raw ingredients. To the extent that this calculation results in projected revenue greater than that reported by the restaurant, this may be used as a basis to issue a reassessment.
A second method employed is when an anomaly is identified in the POS data, for example, an increase in sales over a specified period, or inconsistencies between live POS data and backup POS data, and this anomaly is extrapolated over the entire audit period. For example, we have seen the revenue generated by a restaurant during a two (2) week period, during which the restaurant generated higher than normal revenue, extrapolated over three (3) entire income taxation years. The basis for this reassessment included an allegation that this two (2) week period was a more accurate reflection of the restaurant's revenue over the entire three (3) year audit period.
In any instance, the revenue projection method is an inaccurate method of determining the true revenue of a restaurant, or any business for that matter. The result is dependent on a number of assumptions, which vary on a case-by-case basis. These assumptions often demonstrate a lack of understanding of the taxpayer's business, and can lead to reassessments that do not reflect economic reality.
If a reassessment is issued as a result of such an audit, it is not uncommon for a related reassessment to be issued to the shareholder(s) of the corporation pursuant to subsection 15(1) of the Income Tax Act. In that circumstance, the alleged unreported income derived from the audit is subject to double-taxation, as this amount will be taxed at both the corporate and personal level.
At Rosen & Associates, we have experience in navigating, critiquing, and challenging the correctness of reassessments derived from revenue projection methods, amongst other IVI techniques. If you have been reassessed following an audit whereby an IVI technique was implemented, or are currently undergoing such an audit, you should seek legal advice as soon as possible. Our firm of tax lawyers would be more than happy to consult with you about the best way forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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