Budget 2013 - Electronic Suppression of Sales Software Sanctions
Notice to the reader
Budget 2013 proposed new administrative monetary penalties and criminal offences under the Excise Tax Act (in respect of GST/HST) and the Income Tax Act to address the underreporting of revenues through the use of electronic suppression of sales software, also known as "zappers" or phantomware. The proposed legislation received Royal Assent on December 12, 2013, and came into force on January 1, 2014.
What is electronic suppression of sales?
Electronic suppression of sales (ESS) refers to the use of a software application to delete or modify sales transactions (ESS software) from a point-of-sale (POS) system without maintaining a record of those changes. ESS software has been used by some businesses to hide their sales to evade the payment of GST/HST and income tax.
What are the new sanctions announced in the budget to combat this type of tax evasion?
The budget proposed new administrative monetary penalties and criminal offences for both GST/HST and income taxes to specifically address the underreporting of revenues through the use of electronic suppression of sales software. The new penalties and offences are:
New monetary penalties
For use, possession or acquisition of ESS software:
- $5,000 on the first infraction; and
- $50,000 on any subsequent infraction.
For the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software:
- $10,000 on the first infraction; and
- $100,000 on any subsequent infraction.
New criminal offences
For use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software:
- on summary conviction, a fine of not less than $10,000 and not more than $500,000 or imprisonment for a term of not more than two years, or both; or
- on conviction by indictment, a fine of not less than $50,000 and not more than $1,000,000 or imprisonment for a term of not more than five years, or both.
When will these new sanctions take effect?
The budget proposed that these new sanctions take effect on the later of January 1, 2014 and when the enacting legislation receives Royal Assent.
Can I be assessed a separate penalty for both GST/HST and income taxes?
Yes, a failure to comply with the new rules can result in a separate monetary penalty for both GST/HST and income tax. For example, if you are a GST/HST registrant and use ESS software to evade the payment of both GST/HST and income tax, penalties totalling $10,000 can be assessed for a first infraction.
As a business, what should I do to avoid these new sanctions?
The following are guidelines to avoid these new sanctions:
- Do not use, possess, or acquire ESS software.
- Do not manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software.
- If you possess ESS software, delete it from your system or otherwise destroy the software.
- If you have used ESS software to delete sales, stop doing so and correct your records to undo your previous deletions.
- If you are acquiring a new POS system, obtain assurances from your software provider that the new POS system does not contain ESS programming.
- For your existing POS system, contact your software provider and obtain assurance from them that your POS system does not contain ESS programming.
- Keep a record of any assurances you receive and document any other steps you have taken to ensure you do not possess ESS software.
How can I be sure that my systems are free of ESS software?
Except in the case of use, the new penalties will not apply where a person can establish that they have exercised the degree of care, due diligence, and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have exercised in comparable circumstances.
If you know or suspect that ESS capability resides in your software, you must take steps to delete it. It is also suggested that you contact your software provider to obtain assurance from them that the software is compliant with the legislation.
ESS software may have deleted or modified a sales transaction related to my business for a prior taxation year. What should I do?
Follow the guidelines provided in Question 5 and disclose information related to prior years as a voluntary disclosure to the CRA.
Where can I get more information about these new sanctions?
The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web site often. All new forms, policies, and guidelines will be posted as they become available.
In the meantime, please see the Department of Finance Canada's Budget 2013 documents for details.
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