Restaurant Inventory and Cost of Goods: Accounting Strategies to Reduce Taxable Income — CPA Firm Near You, Montreal

Introduction

Restaurant profitability rises and falls on how well you manage your inventory and cost of goods sold. Food costs, waste, shrinkage, supplier invoices, yield loss, and menu pricing all directly impact taxable income. CRA and Revenu Québec audits frequently target the restaurant industry because poor record-keeping creates discrepancies between reported sales and expected food costs. This guide explains how inventory and COGS should be calculated, which accounting strategies protect you during audits, and how a CPA firm near you in Montreal can help reduce tax exposure while improving financial performance.

Legal and Regulatory Framework

The Income Tax Act and the Taxation Act of Quebec require restaurants to maintain accurate books and records that support inventory levels, COGS calculations, and supplier purchases. CRA’s Guide RC4081 and Revenu Québec’s requirements for record-keeping mandate that restaurants must track opening inventory, purchases, closing inventory, spoilage, promotional meals, employee meals, and adjustments. Restaurants must also keep detailed supplier invoices, delivery slips, POS sales summaries, and annual inventory counts. Incorrect COGS calculations expose businesses to reassessments, penalties, and denied deductions.

Key Court Decisions

Tribunal decisions show a consistent pattern: when restaurants cannot prove the accuracy of their inventory or purchases, tax authorities are allowed to use industry standards or estimated yield ratios to rebuild income. Courts have repeatedly ruled that relying on inaccurate inventory values or missing shrinkage records creates a presumption of undeclared sales. In several cases, the burden of proof shifted to the taxpayer to justify discrepancies, leading to higher taxable income and penalties for gross negligence.

Why CRA and Revenu Québec Target Restaurants

The restaurant industry is high-risk because inventory, waste, and cash sales create opportunities for unrecorded revenue. Auditors compare your food purchases against expected menu yields, average plate costs, and standard waste ratios. If numbers fall outside expected norms, auditors assume unreported sales and may reconstruct your income using purchase-based formulas. Missing invoices, inconsistent food costs, and year-end inventory errors immediately raise red flags. Accurate COGS tracking protects you from these assumptions.

Mackisen Strategy

At Mackisen CPA Montreal, we help restaurants build a complete COGS and inventory control system. This includes establishing proper year-end inventory counts, setting up digital tracking of purchases, analyzing menu yields, separating taxable versus non-taxable adjustments, and preparing audit-ready COGS calculations. We also optimize financial reporting so that restaurants can reduce waste, manage supplier inflation, improve menu profitability, and structure their accounting to minimize taxable income without risking audit exposure.

Real Client Experience

A Montreal café with rising food costs struggled to understand its declining profit margins. By analyzing invoices, recalculating COGS, and adjusting inventory procedures, we uncovered supplier pricing inconsistencies, excessive waste, and under-priced menu items. With our redesign of their cost accounting, the business improved its gross margin, reduced waste, and created audit-ready inventory records that aligned with CRA and Revenu Québec requirements.

Common Questions

How do you calculate COGS for a restaurant?

Opening inventory plus purchases minus closing inventory equals cost of goods sold.

Does waste or spoilage reduce taxable income?

Yes, but only if it is documented properly with logs or adjustments supported by evidence.

Do I need a year-end inventory count?

Yes. CRA and Revenu Québec require a physical inventory at least once a year to support financial statements and tax filings.

What happens if my food cost percentage seems too low or too high?

Auditors may assume under-reported sales or poor record-keeping and can reassess based on industry benchmarks.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.