Last summer, the Canada Revenue Agency released results of an audit of employees working in a restaurant in southern Ontario. It showed most of employees did not report their tips as income. Fortunately, most of the employees were students, so they usually did not earn enough to have the oversight impact their returns, but it highlighted the need to report all your income – even tips.
Since most people tip between 10 to 15 per cent on a restaurant bill, it is tempting to think tips would be about that same percentage of your income. However, when the CRA performed audits of waiters and servers, they estimated tips can be anywhere from 200 to 400 per cent of a server’s income. This depends on the type of establishment and the average dining bill, but tips add up more quickly than you think.
If you work in the hospitality industry and receive tips, you need to report your tips. Ideally, you have kept a record throughout the year. If you have not, you should use a calendar or your work schedule to estimate the amount as best as you can. Remember, the Canadian tax system is based on self-assessment. You are obligated to report your income for the calendar year as accurately as possible. Once you sign your return, you are responsible for the numbers on it.
One advantage of reporting your tips is that you can elect to pay CPP/QPP contributions on them. This will increase the amount you receive when you retire or become eligible for disability benefits. You can claim a deduction for half of this voluntary contribution on Line 222 and a non-refundable tax credit for the other half on Line 310.
The amount you report as tips will also constitute earned income for the purpose of determining your RRSP contribution room.
People who work in the food service industry are not typically paid as well as they would like, and so they may be tempted to under-report tip totals, but the CRA has shown a willingness to audit wait staff. It is better to report a realistic amount of income than to face the possible penalties of an audit.