OTTAWA - A third of Canada's restaurants may be ripping off the taxman by using sophisticated "zapper" programs and other software to hide their sales.

The Canada Revenue Agency has found an estimated $141 million in phantom sales that were deliberately erased in electronic cash registers to dodge taxes.

The widespread fraud was uncovered in a three-year pilot project that analyzed electronic sales data at 424 establishments to find faint traces of sales that were wiped clean.

A team of 14 data specialists discovered at least 143 cases of suspected fraud, each with an average of $1 million in hidden sales. That works out to about 34 per cent of all the sale systems that came under scrutiny.

The agency says the specialists "gathered sufficient and irrefutable evidence" of the alleged frauds.

The pilot project was originally scheduled to run only two years. But the work was extended by an additional year, to March 31 this year, after the potential tax losses from the electronic suppression of sales were deemed "significant."

"There is usually intense competition in the restaurant sector, and as (electronic suppression of sales) gains a foothold, more and more businesses may feel they need to compete by suppressing sales," says an internal agency document.

"In some cases, taxpayers are suppressing sales and paying employees and suppliers in cash while not claiming the expense. This allows taxpayers to remain under the radar ..."

A heavily censored internal report on the pilot project was obtained by The Canadian Press under the Access to Information Act.

The taxman's net was spread across Canada, focusing on restaurants with electronic sales systems, except in Quebec where the focus was on grocery stores.

The internal report cautions that the Canada Revenue Agency does not have data on how many businesses use electronic sales systems, and so "any statistical valid sampling was not possible." The early results, while alarming, are therefore not necessarily representative of the whole sector.

A spokesman says the agency now is developing a broad strategy to tackle the problem and "has every intention of proceeding in due course."

In the meantime, "two cases have been successfully prosecuted resulting in fines and jail time. In addition, charges have been laid in six other cases," said Noel Carisse. Other cases are under investigation.

"The ... problem will continue to grow as long as taxpayers perceive that only limited steps are being taken to combat the problem," says the internal report, calling on the agency "to move forward immediately" with a broader strategy.

The fraud has been detected so far only in the food-and-beverage sector, as well as at one grocery store in Quebec. The tax dodge usually — but not always — involves hard-to-trace cash transactions.

Restaurants that want to cheat often buy software with built-in hidden features, called "phantom-ware," that can remove sales data. Or they use stand-alone software — "zappers" — on a thumb-drive or CD that does the same work.

Software providers to the food-and-beverage industry are nimble and sophisticated, leaving the taxman trailing. But the Canada Revenue Agency has acquired at least two working copies of "zappers" for analysis.

"In both cases, it is suspected that the software developer created and marketed the zapper," says the report. The agency has also identified at least 10 commercially available software products "where suspicious activity has been detected." Carisse declined to provide details.

The federal agency detected the first "zapper" case only in 2006, in Vancouver. Revenue Quebec, on the other hand, has rooted out more than 200 "zappers" since 1997, and is considered a world leader in such investigations.

The president of the Canadian Restaurant and Foodservices Association, with 30,000 members, says his group has worked with Revenue Quebec for years to resolve the zapper problem.

"You've got to work with the industry. The problem is, the CRA has not contacted us to work with us," Garth Whyte said in an interview from Toronto. "Our members are against people scamming the system."

"The other thing we recommend is that you go after the guys that are selling the zappers. ... Go to the source."

Whyte cautioned against any burdensome enforcement system that could saddle struggling restaurant owners with new costs, and questioned whether the sample of 424 establishments is truly representative of the sector.

Canada's restaurant industry employs about a million people, and is worth about $60 billion annually.

As of Sept. 1 last year, the Quebec government has required restaurants in the province to issue bills to their clients and to keep a copy of each bill, as a measure to fight "zappers" or "camoufleurs de ventes."

And beginning in November, Quebec restaurants will be required to use a government-approved black box — known as a sales recording module — to generate bills. The province expects to receive $300 million in additional tax revenues each year once the system is fully in place.