What Do You Need To Know About Tips & Gratuities Taxation In Canada?

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    20 Jul 2023

    Are you employed or self-employed and receive appreciation as tips and gratuities when working? While serving tables, giving a ride home, doing nails, cutting hair, or giving a service that impresses the customer, servers often receive a tip.

    Did you know that gratuities and tips in Canada are taxable? While filing a tax return, you, as a recipient of tips & gratuities in Canadian provinces, are responsible for reporting them in your income. 

    Keep reading to learn more about tips as a part of your declared income.

    Need Help: Consult a CPA in Surrey Canada for more information on restaurant taxes.

    Paying Taxes On Tips & Gratuities: Types, Methods

    Employees that receive tips and gratuities must declare them as a part of their income concerning the Income Tax Act. There are three kinds of tips: 

    Controlled Tips, Direct Tips, and Declared Tips.

    Also, the recipient must determine if their tips get coverage under pensionable earnings (Canada Pension Plan), insurable earnings (Employment Insurance Act), or both of these options. The answer lies in the type of tips the recipient gets, as mentioned above.

    Read below and find out about the type of tips you receive:

    Paying Taxes On Tips & Gratuities: Types, Methods

    Employees that receive tips and gratuities must declare them as a part of their income concerning the Income Tax Act. There are three kinds of tips: Controlled Tips, Direct Tips, and Declared Tips.

    Also, the recipient must determine if their tips were covered under pensionable earnings (Canada Pension Plan), insurable earnings (Employment Insurance Act), or both of them. The answer lies in the type of tip you receive as mentioned above.

    Read below and find out about the type of tips you receive:

    • Controlled Tips

    When the employer collects and possesses these tips directly from the customer, these are called controlled tips. Here, the employer pays these tips to the employees. Thus, employers also deduct CPP contributions or EL premiums from an employee's salary. Here are some examples of controlled tips:

    • The employer will add a percentage of service charges/ other charges to cover tips from the client’s bill. 
    • Employers include tips in their business income, after which they pay business expenses and redistribute them to employees in addition to their income.
    • Cash tips are mixed with income in the employer’s bank account or property of the employer and later paid out to employees.

    Given that these tips are controlled by the employer directly, they pass on this gain to their employees. Hence, the CPP contribution and EL premiums are deducted at sources when the employee is either pensionable or insurable employment or both. It will be reflected in Line 10100, a part of Box 14 of the T4 slip of income tax return form.

    • Direct Tips

    When customers pay tips to the employees without involving anyone, these are direct tips. Here, the employer doesn’t have control over the amount or its distribution. Since direct tips are collected without a middle person (such as a restaurant), these tips aren’t subject to CPP contributions or EL premiums. Here are some examples of direct tips:

    • A guest offers a tip directly to a server, such as a door person, porter, bellhop, car attendant, etc.
    • A customer adds a tip while paying the bit via credit/ debit card and the employer pays this tip in cash at the end of the shift/ next day.
    • The guest leaves money at the end of the meal on the table and the server picks the whole amount.

    An employer can receive both direct and controlled tips, as directed by the example. Here, the direct tips don’t account for pensionable or insurable earnings. Also, to file direct tips on your income tax return form, mention it in the “employment income not reported on T4 slip” section available in Line 10400.

    • Declared Tips

    Declared tips are specific to Quebec province. The law in Quebec requires employees to declare their direct tips with controlled tips to the employer in all regulated establishments. The amount of both declared and controlled tips is included in taxable income, as part of the Employment Insurance Act.

    There is specific guidance for employers of hospitality businesses whose employees are working in a regulated establishment.

    How Do I Report My Tips? 

    The method of reporting your tips will depend upon whether you receive them from the employer or the customer. They should mention it in the T4 slip with actual figures instead of reporting it as a percentage of your base income. 

    Here is a summary of how to report different types of tips in Canada while filing income tax: 

    • Controlled Tips: Go to T4 Slip in your income tax return form and look for Box 14. It contains controlled tips. Further, enter the total amount in LIne 10100 that declares your total earned income. 
    • Direct Tips: Report the total amount of these tips on Line 10400 in the income tax return filing form.
    • Declared Tips: By the end of every pay period, fill out the form TP-1014.4-V to report your declared tips in Quebec.

    Note: Kindly consult a CPA in Surrey Canada to file your personal or corporate tax return. Avoid any issue of tax compliance with the right consultation.

    Why Should You Report Your Tips In Canada?

    Reporting your tips has benefits beyond tax compliance and escaping penalties. Here are some financial benefits you wouldn’t want to miss out on when reporting your tips to CRA:

    • Improved Credit Score: A higher income helps qualify for a larger mortgage, which might be helpful in times of need.
    • Bigger Pension: One can make voluntary CPP contributions on their tip via Form CPT20, which will lead to a higher pension amount after retirement. Presently, there are no CPP and EI deductions from direct tips.
    • CWB Benefit: Canada Workers Benefit or CWB is a refundable tax credit for low-income individuals and families. The credit one can claim depends upon the income, which one can increase by adding tips. 
    • Increase RRSP Contribution: Registered Retirement Savings Plan contribution is in direct relation to the income reported of the previous year. The more income shown here, the faster your RRSP contribution grows. 

    What If You Don’t Report Your Tips?

    Reporting your tips is a legal requirement too. Not reporting tips in your income tax return has several consequences.

    For example, when CRA reassesses your returns and finds anomalies, there will be more cost to incur than you’ve saved. For instance, you will have to pay what you owe, interest on that amount with penalties. Hence, the total sum you would pay would be more than what you would have reported originally.

    Correcting old income tax and paying fines can be a hassle. Hence, keep a record of your tips and report them timely and accurately on your tax return.

    Report Your Tips Easily!

    Earning tips requires lots of work. Even if it seems tedious to keep track of them and report them, it has far-fetched benefits in the long term. To help you out in this journey, CJCPA can help. 

    For any advice regarding personal taxes, corporate taxation, compliance, financial planning, business evaluation, and more, kindly contact the experts of Corporate Planning & Compliance Canada firm CJCPA. It is a British Columbia-based firm that deals with individuals, self-employed professionals, small businesses, and big corporations, fulfilling their bookkeeping, taxation and accounting needs. Stay updated with our blogs for more such info!

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