It is widely believed the tips and gratuities are “tax-free,” but this is not the case. Directly from Canada Revenue Agency’s (CRA) website:
“Tips and gratuities… represent taxable income and must be reported on annual income tax and benefit returns. Restaurant servers, hairdressers, valets, taxi drivers, and others who earn tips may not have all of their income recorded by their employers, which means that their T4 slips may not include all of their income.”
If you earn any tips or gratuities through your job, read on for a guide to reporting them and their eligibility for pensionable or insurable earnings.
NOTE: Pensionable means the earnings will require a Canadian Pension Plan (CPP) contribution; insurable means the earnings will require an Employment Insurance contribution.
REPORTING TIPS & GRATUITIES
First, determine if your employer reports all or any of your tips on your T4 slip. If not, it falls to you to track and log any and all gratuities earned through your job. These must be then reported on your tax return. All earned tips and gratuities are taxable and failure to report them is considered illegal in Canada.
TIP: CRA provides a Voluntary Disclosure Program (VDP) for anyone who is aware that they failed to report tips or gratuities in the past. Disclosing this way can help avoid fines, penalties or even jail time.
DIRECT VS. CONTROLLED
As the CRA outlines, there are two types of gratuities: direct and controlled. Direct tips are paid directly to the employee and are not controlled or altered by the employer. Controlled tips are instigated, paid out or redistributed by the employer, no matter how they are received from the client. So what is the essential difference?
- Direct tips are not subject to CPP or EI contributions;
- Controlled tips are subject to CPP and EI deductions.
So, no matter how you are tipped– remember: all earnings must be reported! Don’t risk serious financial or criminal consequences by overlooking your tips and gratuities at tax time. If you have any questions or concerns, visit or contact Liu & Associates today for a professional income tax assessment.