Even though most wait staff might view their tips as a gift, the Canada Revenue Agency does not share that view. Tips are considered taxable income and need to be reported on your tax return as accurately as possible. If you simply claim an amount equal to 10 percent of your annual salary for tips, this is probably grossly underestimating how much you actually received in tips and will be hard to defend if the CRA reviews your return.
Employers who collect tips on behalf of their employees (which is typically the case for banquet staff) must include tips on their employees’ T4 slips, and deduct taxes, CPP and EI. However, where the customer pays the employee directly, which is usually the case, it is the employee’s responsibility to track his or her tips.
Tips can add up quicker than you think. For example, a waiter working lunchtimes during the week at a small restaurant can average about $2 in tips for every customer spending $8 to $10. Four people at a table means $8 in tips. If the restaurant has five tables, the waiter makes an extra $40 during lunch hour. It means approximately 400 percent of his wages are tips or an extra $10,000 over the year for lunch hour alone.
Claiming tips properly will usually mean a tax bill, but this should not been seen as a negative. You can make voluntary CPP contributions on the tip amount and this can be helpful once you reach retirement age. Not many hospitality workers have a pension plan so you may appreciate a little more in CPP and Old Age Security payments. It also means you can claim a non-refundable tax credit for the employee portion of the CPP payment and a deduction for the remainder.
As well, tips are considered earned income, allowing you to create more RRSP contribution room, increasing child care claims and increasing the Working Income Tax Benefit.
The CRA has instituted a number of audit programs targeting the service industry in recent years. Reviewing a restaurant’s receipts means they can get a good estimate on the amount of tips especially with debit and credit card payments. If you do not claim this income, you can expect to be re-assessed and be subject to interest and possibly a penalty depending on your situation. And once the CRA assesses an amount, it is up to you to prove the number is wrong. If you didn’t record your tips throughout the year, it will be hard to do.
So keep a log every shift of your tips. This can be a small note book, a file on a computer or even notes on a calendar. It just needs to show the date and the amount. It is much easier to keep track in case your return is reviewed than it would be trying to explain your numbers without backup. The interest and fines may be enough to cause serious financial difficulty.