The March 21, 2013 Federal Budget in Canada announced new administrative monetary penalties (AMPs) and criminal offences under the Excise Tax Act (Canada) for:
(1) the use of Electronic Suppression of Sales (ESS) software;
(2) the possession or acquisition of ESS software; and/or
(3) the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software.
ESS software is also known as "zapper" software because it hides sales transactions, thereby allowing vendors to under-state sales and evade payment of GST/HST and income taxes. This has been a hot audit topic for a number of years and the Department of Finance is giving the Canada Revenue Agency (CRA) new tools to rid Canada of zapper software.
The AMPS penalties will shock the vendors who use ESS software or possess or acquire ESS software. Vendors who use ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction. Vendors who possess or acquire ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction. These two AMPs penalties go hand-in-hand because a vendor who acquires or possesses ESS software is also likely to use it. Both AMPs penalties can be imposed against the same vendor. Also, if the CRA issues a first level AMPs penalty, it will also require the ESS software to be removed from the computer. If ESS software is subsequently discovered in a new audit, it is likely second level AMPs will be imposed. It may be possible that the CRA will interpret the AMPs penalties on a per transaction basis because the penalties may be imposed on a per infraction basis.
Businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale will receive higher voltage AMPs. The AMPS penalty for a first infraction is $10,000 and $100,000 for any subsequent infraction. This AMPs penalty aims to end the supply of ESS software in Canada.
There is a limited due diligence defense available for vendors who acquire and possess ESS software and businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale. The due diligence defence will generally require a person to show that exercised the degree of care, diligence and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have used in comparable circumstances. There may be cases where the person has attempted to ensure that they do not have ESS software and it has been installed on their computers. There may be a bug in a computer program that disrupts the sales records, but it was not intended.
In addition to the AMPs penalties, businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale may also be subject to criminal sanctions. The potential fines are as low as $10,000 (in addition to the AMPs penalties) and as high as $1,000,000 and/or imprisonment of up to 5 years or both.
These new AMPs penalties and criminal sanctions will take effect January 1, 2014. Given the time before implementation, it may be prudent to spend money on an IT check-up (it will likely cost less than a first level AMP).