Are Tips Taxable in Canada ?

Tip Box

The tipping culture has been going around for years and years. Tips are often modest sums of money given to someone in appreciation for a service they have provided or rendered. There are several occasions in our everyday lives when we are given the opportunity to give tips to any service provider. 

For instance, you are dining out or in, meeting with friends at a pub, or getting your hair and nails done at a salon. So in each situation, you received a service. Now it is your decision to make whether you need to give a high tip or a low tip according to the service provided to you. Customers must adhere to several standards. Technology has been so developed that you can now easily calculate tips, such as new features on most modern phones. 

What is the tipping and gratuity culture in Canada?

In most Canadian restaurants, gratuities are not included. Tipping is customarily between 15% to 20% of the entire cost before tax, with less for bad service and more for exceptionally good service. 

For bigger groups, many restaurants will automatically charge a 15%–18% gratuity. It is okay to do that as the service provided to the customer is usually doubled. However, this does depend on the institution. However, it is normally applicable to groups of 8 or more. Some restaurants also have “auto grats” groups from non-tipping nations. If you are confused about how much tip you should give, then multiply the GST (Good and Service Tax) amount indicated on the bill by three times. Three times 5% equals 15%. For these reasons, it is customary in Canada to leave tips at restaurants and bars. Tradition and peer pressure have spread the trend to other sorts of enterprises, such as tourism or wellness. They don't require gratuities to survive, but leaving nothing is seen as impolite or a sign that the service provider has done a bad job.

Types of tips

There are three types of tips given to the service provider, so let's dig in deeper and understand their concepts. 

1) Controlled Tips

2) Direct Tips 

3) Declared Tips 

Controlled Tips

So "controlled tips" are when the tips come under the control of the employer; they are referred to as controlled tips. Controlled tips are included in the employer's total salary, and the employer is required to deduct the relevant income tax, Canada Pension Plan (CPP), and employment insurance (EI) at the time of payment. Frequent instances of regulated tips are as follows:

  • Employers collect tips and put them in general income before paying them out with a normal bi-weekly salary.
  • Collect all the tips that were redistributed to all employees. Instead, you can also reconsider involving two or three senior employees in the business.
  • An employer has developed a novel sharing method in which gratuities are collected and then redistributed based on length of service. 
  • Large pirates or hug events and banquets are subjected to an automatic service charge imposed by an employer.

Direct Tips

Simply described, direct tips are gratuities offered willingly by customers to employees in appreciation for excellent service. The management has no right to say anything about the tips provided to the employee and they should be passed straight to the employee. These tips can be paid by cash, credit card, or debit card. The Canada Revenue Agency (CRA) accepts that employers must provide credit or debit card tips to employees. They are termed "direct tips" if they are given to the employee right away, no later than their next shift. Payroll tax deductions do not apply to direct tips. Employees who earn tips, on the other hand, must declare tip revenue on their tax returns.

Declared Tips

The declared tip is a little different as, under its tax statute, the province of Québec compels hospitality employees working in regulated facilities to disclose direct gratuities to their employer. Direct and regulated tip earnings are aggregated and included in a worker's insurable wages by the employer.

How to report your tips 

On line 10400 of your income tax and bonus return, enter the overall number of tips you got during the year. If you work as an employee, your tip revenue could already be listed alongside your T4 slip. 

Benefits of reporting tip tax 

The excess income you declare may help you when applying for a loan or mortgage.

Tips are considered earned income for RRSP contribution restrictions, so you will be able to invest and deduct more in RRSPs.

You can opt to contribute to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP), which will boost your CPP or QPP pension payments when you retire.

The cons of not reporting work benefits

The biggest con of not reporting work benefits is that if the CRA chooses you for an audit and determines you haven't disclosed all of your income, you'll have to pay what you owe plus possibly interest and perhaps further penalties. So, not reporting is certainly not recommended.

The same is true if you file your tax return late. The late filing penalty in Canada is 5% of the total owed. Furthermore, for each full month that your return is late, an extra 1% is added to the total owed (up to a maximum of 12 months). You will avoid paying more than necessary if you pay your tax payment on time.

Conclusion 

In this blog, we have learned that gratuities are not included in the majority of Canadian restaurants. Tipping is typically 15% to 20% of the total bill before tax. Leaving nothing is considered disrespectful unless the service provider has done a poor job. Some restaurants feature "auto grats" groups made up of people from non-tipping countries. Controlled tips are included in the total remuneration of the employer, and the employer must deduct the applicable income tax, Canada Pension Plan (CPP), and employment insurance (EI) at the time of payment. The employer aggregates direct and controlled tip revenues and includes them in insurable wages. Tips are considered earned income for RRSP contribution rules, so you will be allowed to contribute to them. So now you know tips are taxable in Canada and what to do to report your tips.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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