Do you earn money in tips and gratuities? One of the main questions asked by first-time tip workers is, “Do you pay taxes on tips in Canada?”
The Canada Revenue Agency (CRA) regards all tips as taxable income. All tips and gratuities received through employment count as taxable income and are subject to both federal and provincial taxes.
Failure to report tips, either by employees or employers, is considered tax evasion and can get you in trouble with the CRA. Below, I’ll outline how tips are taxed in Canada so you don’t receive any unexpected letters from tax agents.
Working a job where you receive tips is a great way to supplement your income and can give you some extra money to invest, save in your TFSA, or spend on some self-care.
Many service industry employees, such as restaurant servers and bartenders, rely on tips to supplement their lower hourly wages compared to non-tip-earning workers in other industries.
The extra tips earned in the busy season can be used to “float” service workers through the slower months, where they may not earn as many tips or work as many hours.
Unfortunately, the CRA expects all workers (and their employers) to report every penny earned in tips. If your base hourly pay is $15 and you earn an extra $5 per hour in tips, then you’ll be taxed just as if you earned $20 per hour.
There are two types of tips that an employee may receive, depending on their pay structure and other circumstances:
- Controlled tips: Tips disbursed by the employer through the standard payroll system. When you receive your paycheque, your hourly pay will be listed separately, followed by your tip earnings.
- Direct tips: Tips that are issued directly to employers from customers. These typically come in the form of a cash tip.
Today, many Canadians tip with their credit/debit cards after receiving their bill, which is a form of controlled tipping. Card tips must be entered into the business’ tip-reporting system at the end of each shift. The extra amount is then billed to the customer’s card, which is included in the worker’s paycheque.
Cash tips may also be controlled in some payroll structures. If an employer requires employees to pool their tips, the employer will evenly distribute tips (based on tip percentage) on each worker’s paycheque.
Direct tips are gratuities paid directly to the worker by the patron. These typically come as a cash tip offered before or after a service is completed.
Direct tips are not controlled by the employer, meaning that they must be individually reported by employees on their tax returns.
No matter which province you live in, tips are considered taxable income. Canada has a progressive tax system that imposes higher federal taxes on higher-income earners. This means that your tips will be taxed at the same base federal rate, depending on your tax bracket.
In addition to federal taxes, each Canadian province has its own local income taxes. Alberta, for example, has the lowest provincial income taxes in Canada, which could allow tip earners to pay lower taxes than neighbouring provinces.
One of the great things about living in Canada is that there is no “gift tax.” This means that any gifts you receive, whether money or an asset of monetary value, do not count towards your taxable income. Sometimes, a gift-giver may even write off a portion of the gift on their tax returns.
While gifts and tips may seem similar, they’re not viewed as the same by the CRA.
So, what’s the difference?
A tip is considered any gratuity received from an employer or from employment (i.e., while you’re on the clock). A gift, on the other hand, is a personal exchange that is unrelated to your work or employment.
As an employee, you are responsible for reporting every tip you receive. Whether you’re working in a restaurant or receive tips online through a platform like Twitter or Patreon, you must report each and every dollar that you receive.
Today, many employers simplify this process with a controlled tip system. The employer manages your card tips, and they’re automatically taxed and disbursed on your paycheque. In this case, you don’t have to manually report your taxes, as they’ve already been reported.
However, any direct tips (cash or otherwise) received outside of the controlled tip system must be reported. Some employers may require you to report your cash tips to the payroll manager, while others may not.
If your employer doesn’t report and disburse cash tips, then you’ll need to report them manually on your income tax returns.
Once they’re reported on your tax return, your eligible income and benefit taxes (such as EI) will be deducted from your refund.
Some employees who receive a large portion of their income from direct tips may even be required to pay additional taxes at the end of the year, depending on their tax situation.
If you want to make tip reporting easy, I suggest using a free tax reporting software like Wealthsimple Tax.
Your direct tips will be taken into account, and your estimated refund or tax payment will be automatically calculated for you.
Employees who fail to report direct tips may receive a notice of reassessment from the CRA. If the CRA finds that they knowingly withheld tip earnings, then they could face a financial penalty.
At the end of the day, the direct tips you report on your income taxes should match those reported by your employer. If there’s a significant discrepancy, then you may get in trouble.
Here’s a quick wrap-up with a few quick answers to common questions about how tips are taxed in Canada.
Self-employed freelancers, entrepreneurs, or those working for a contract service such as Uber or DoorDash must report all tips they receive as self-employment income.
Any and all cryptocurrency earnings and tips must be reported on your tax returns and count as taxable income.
It’s unlikely that you’ll go to jail for failing to report tips. If you’re found guilty of minor tax evasion, you’ll most likely receive a fine in addition to paying taxes on the unreported amount.
However, extreme situations (i.e., repeat offences or cases that involve large sums of money) could warrant jail time.
Reporting Taxable Tip Income in Canada to the CRA
It is important for employees to understand how to report tip income correctly to the Canada Revenue Agency (CRA) and be aware of their responsibilities regarding income tax and contributions to the Canada Pension Plan (CPP).
Employers are required to issue a T4 slip to their employees, which reports their total income, including wages and other taxable benefits. However, not all tip income may be included on the T4 slip.
Some tips, known as controlled tips, are managed and distributed by the employer, who must report these amounts on the employee’s T4 slip. Examples of controlled tips are those added to a credit card payment or pooled amongst staff members.
Direct tips, on the other hand, are those received directly by the employee from the customer, such as cash tips left on a table. These direct tips are generally not reported by the employer on the T4 slip.
In this case, it is the employee’s responsibility to track and report their direct tip income (though I imagine that many don’t report this to the CRA!)
To accurately report their tip income, employees need to enter the total amount of tips received during the year on line 10400 of their income tax and benefit return.
This includes both controlled and direct tips, if not already included on the T4 slip. By declaring their full tip income, employees not only comply with the CRA regulations but also potentially increase their RRSP contribution room, pension benefits, and eligibility for loans and mortgages.
CPP Contributions and EI Premium
In Canada, employers are responsible for deducting Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums from most payments made to their employees.
These amounts, alongside the employers’ share of CPP contributions and EI premiums, must be remitted to the Canada Revenue Agency (CRA).
Tips and gratuities form a significant part of many employees’ income, especially in the service and hospitality industries. However, they can be classified as either direct tips or controlled tips. The classification affects the handling of CPP contributions and EI premiums for the tips received by employees.
Controlled tips, also referred to as employer-allocated tips, are tips paid to employees by their employer. These tips are subject to CPP contributions and EI premiums for both the employee and the employer.
In contrast, direct tips are those given by customers directly to employees. While these tips are not subject to CPP contributions or EI premiums, employees have the option to make CPP contributions on their direct tips during pensionable employment.
It is important to note that there are certain exemptions and eligibility conditions when it comes to CPP contributions and EI premiums. For instance, no CPP or Quebec Pension Plan (QPP) contributions are required for the first $3,500 of annual employment earnings.
Additionally, employees receiving a CPP or QPP retirement pension, or those aged 70 and over, are not required to pay CPP contributions.
Under the Employment Insurance Act, the insurable earnings of an employee aid in determining the EI premiums payable by both the employee and the employer. Tips and gratuities can also form a part of these insurable earnings.
Provincial Laws and Regulations
In Canada, tax laws and regulations concerning tips may vary by province. One such province with unique rules governing tips is Quebec, which has specific legislation for the declaration and taxation of tips.
Quebec Pension Plan
In Quebec, the provincial law mandates that employees working in regulated establishments within the hospitality sector declare their tips to their employers.
This is because, under Quebec law, tips are considered part of the employees’ insurable earnings and are subject to the Quebec Pension Plan (QPP) contributions, Employment Insurance (EI) premiums, and income tax deductions.
Regulated establishments include places such as:
- Other service-based businesses in the hospitality industry
In addition to the above-mentioned requirements, employers of regulated establishments in Quebec are responsible for calculating and remitting the necessary deductions, such as QPP contributions and EI premiums, on behalf of their employees.
This is done to ensure that both employees and employers contribute their fair share for social security programs and to maintain compliance with provincial law.
Many employers utilize a controlled tip system that simplifies tax reporting for both the business and its tip-earning employees. These controlled tips are added to the employer’s paycheque, and income/benefit taxes are automatically withheld.
However, any direct tips earned outside of a controlled tip system must be manually reported by the employee when filing their annual tax returns. Self-employed individuals must also report their tips as earned income.
Taxes are no fun, but the good news is that are plenty of legal ways to avoid certain taxes and even get a refund. Keep reading for 30 tips on how to pay less taxes!