What To Know About Being A Landlord in Alberta

couple of tenants shaking hands with landlord, receive house key, making rent deal

Becoming a landlord in Alberta requires a significant amount of responsibility – and a lot of money.

If you’re wondering if it’s worth it to become a landlord, Liu & Associates is here to tell you what it takes.

From how to be a good landlord to how rental income affects your taxes, this guide will help you determine if becoming a landlord is the right choice for you!

Is Being A Landlord Worth It Financially?

Becoming a landlord begins with investing in real estate, which involves factors such as a down payment and mortgage, as well as repairs and maintenance.

You will also have to consider the cost of insuring the property, and it will cost more if you don’t live in the building.

And as we mentioned, there are also repairs and maintenance, which can be a large expense if you purchase a larger building with many units.

As a landlord, you can’t ignore minor issues to avoid spending money. If a tenant needs something fixed, you have to fix it.

Plus, in between tenants, you may have to invest in fixing up a unit before you rent it again.

Now that we’ve talked about the ways in which being a landlord will cost you money let’s consider if becoming one is financially worth it!

As a landlord, you can earn a passive income in rental real estate, meaning that you don’t have to earn money simply by working for it.

Yes, you are responsible for maintenance and upkeep, but collecting rent requires no effort!

It’s also important to note that becoming a landlord offers you certain tax breaks you can use to offset the cost of repairs and renovations.

If you’re smart with your rental money, you can easily earn a guaranteed monthly income by becoming a landlord in Alberta.

How to Be A Good Landlord

Being a good landlord doesn’t mean becoming best friends with all of your tenants.

It requires that you balance care with business sense in order to ensure tenants are satisfied and continue to rent from you.

Here are some key traits of successful landlords:

Organization

Being a landlord means keeping track of many moving parts, from leasing to new tenants to dealing with maintenance requests and more.

This involves paperwork, such as forms, rental receipts, and repair receipts.

Having a structured system is key to staying organized as a landlord, so make sure you know where all your important documents are kept and develop a way to keep track of everything.

Communication and Understanding

While you can definitely consider being a landlord a business, you have to remember that you are renting to real human beings who call their units home.

In order to create positive relationships with your tenants, you have to communicate with them clearly.

This means responding to their questions and concerns as soon as you possibly can, as well as notifying them in advance if you are planning any maintenance or making changes to the rental policies.

You also have to be flexible when it comes to rules and policies – to a certain point.

Avoid being a pushover, but give your tenants reasonable leeway if giving in will solve more problems than it will cause.

For example, if your tenant contacts you because they have to pay the rent a couple of days late, a late rental payment is far better than the process of evicting a tenant, repairing the unit, and re-renting it.

Consistency

Whether you choose to be a flexible landlord or you prefer to stick to the rules, consistency with tenants is essential.

They should know what to expect from you as soon as they sign the lease and move in. 

Holding different tenants to different standards can lead to resentment and tension, causing a high turnover rate.

Clearly state your policies in the rental agreement, and make sure this agreement is the same for all tenants. If you make any changes to the policies, apply the changes to each tenant.

How Rental Income Affects Taxes

close up of woman calculating rental income taxes on laptop and calculator

If you are thinking about becoming a landlord, it’s crucial that you understand how rental income in Alberta works.

All net rental income collected in Alberta must be reported as income on your tax return.

This does not include any deductions for expenses such as insurance premiums, property taxes, and utilities.

Deductions

And, yes, you can make certain deductions on your taxes by being a landlord!

Here are some deductions you can make:

  • Property taxes
  • Insurance premiums
  • Utilities
  • Capital Cost Allowance (CCA)
  • Rental loss
  • Capital expenses
  • Current expenses

Some of these tax terms can be confusing, but to put it simply, you can capital expenses cannot be claimed as deductibles because they have a lasting benefit to your property.

However, they can be added to the tax cost of your property and claimed as a CCA over several years.

Current expenses often require regular maintenance so that they can be claimed as a deductible.

For example, if you add a deck to your rental property, the cost of the deck is considered to be a capital expense.

However, sanding and refinishing the deck is a current expense and can be claimed.

Filing Taxes

As a landlord, you can claim your rental income as a sole proprietor and not a business or partnership. If you do, you can claim the income on your personal taxes by filling out Form T776.

You can claim your expenses on this form as well.

Just make sure you keep all of your receipts from rent and expenses to ensure you file everything properly and avoid triggering an audit.

Becoming a Landlord in Alberta – Is It Worth It?

Here at Liu & Associates, we believe that with the right financial organization strategies, you can easily enjoy the benefits of becoming a landlord in Alberta!

But the only way to guarantee success as a landlord is to speak to a licensed tax professional.

Our team has the knowledge and expertise to help you maximize your earnings and tax return as a landlord.

Get in touch with us for more information!

Avoiding a CRA Audit When Self-Employed

woman sitting at home office desk with cup of coffee

Tax audits can be a stressful ordeal.

The CRA conducts audits based on risk assessments and considers self-employed individuals to be risky when it comes to filing taxes.

Rest assured that many self-employed individuals who experience audits have done nothing wrong – they simply caught the attention of the CRA, who wants to ensure that tax legislation and compliance are maintained.

However, there are ways that your small business can properly file its taxes and avoid a CRA audit!

Reasons Self-Employed Individuals Get Audited

As someone who is self-employed, there are things that can trigger an audit with the CRA.

Before we look at how to avoid an audit, let’s look at these common audit triggers:

You’re Self-Employed

Sometimes being self-employed is enough to trigger an audit!

When you don’t receive a T4 slip from an employer, the CRA cannot check your income against an official document to look for mistakes and accuracy.

Because you are reporting your income, the CRA may assume that the records are not accurate and will audit your income to check for errors.

Your Tax Return Has Changed Significantly

If you claim way more or way less than you did in previous years, the CRA may flag your account and conduct an audit.

There are many reasons a self-employed income can vary (COVID, supply chain issues, more time to dedicate to your business, etc.), but if you know you are filing a significantly different amount, then be prepared for an audit.

Your Claims Seem Excessive

Being self-employed means you can claim various expenses on your tax return, such as your home office or vehicle.

However, if the CRA thinks you are claiming more than you are eligible for, they will conduct an audit to review your expenditures.

For example, it’s unlikely that you would use your vehicle solely for business, so claiming the entire cost of your car is going to raise eyebrows at the CRA.

You Continually Claim Business Losses

If you are continually claiming business losses each year and reducing income from other sources, the CRA will conduct an audit to verify whether or not your business is actually a commercial enterprise.

How to Keep Proper Tax Records

Close-up Of A Businessperson's Hand Calculating Invoice At Workplace

The first step in avoiding a CRA audit when self-employed is to keep proper tax records!

This includes organizing your records, invoices, receipts, and other financial documents for at least six years.

You can use record-keeping software such as QuickBooks to help manage your tax records, but here are some other self-employed tax tips for organizing your documents:

  • Keep your business and personal accounts separate to keep things simple and efficient.
  • Use spreadsheets to log claims such as mileage on your vehicle and purchases for your business.
  • Use a file folder to organize your receipts. If the receipt doesn’t fully describe your purchases, make a note.
  • Make backups of any digital information. If using paper copies, make digital backups.
  • Dedicate time each week to work on your bookkeeping. Don’t leave your tax preparation to the last minute!

By improving your financial record-keeping, you can avoid a CRA audit, and if you do get audited, you will have all the necessary information organized and ready to go!

Incorporated Business vs. Non-Incorporated

Even as a self-employed individual, you can incorporate your business in order to separate your business from your personal finances.

Otherwise, when you run a non-incorporated business, you are personally responsible for the results of the business – good and bad.

However, when you incorporate your business, you are responsible for preparing quarterly and annual reports for the CRA.

This can involve extensive paperwork, so keeping good records as an incorporated business is essential.

Non-incorporated businesses don’t require such a heavy load when it comes to preparing taxes, and your business and personal taxes can be filed in one individual tax return.

Get to Know your Tax Deductions

Earlier, we mentioned how excessive deductions can trigger an audit. To avoid a CRA audit when self-employed, let’s look at the type of tax deductions you are eligible for:

Business Operating Expenses

  • Start-up costs
  • Delivery and shipping costs
  • Accounting fees
  • Advertising costs
  • Tax preparation services

Home Office Expenses

  • Home office cost (the percentage of your home your office space occupies compared to your rent/mortgage, utility costs, etc.)
  • Telephone and internet (the percentage of hours used for business versus personal)
  • Cleaning supplies
  • Office supplies

Vehicle Expenses

  • Gas
  • Insurance
  • Repair Costs
  • Parking Fees

(Keep in mind that if you use your vehicle for both business and personal use, you will have to calculate the deduction costs based on how often you use your car for business and how many kilometers you use for business.)

Other Deductions

Don’t miss out on these additional tax deductions for self-employed individuals!

  • Bank fees on your business bank account
  • Private health plans

Keep a Backup Fund (Just in Case)

As a self-employed worker, you do not get to enjoy having a regular income like waged and salaried workers.

For this reason, it’s important to keep a backup fund just in case!

Start by establishing an emergency fund by looking at your budget and seeing how much you can afford to put aside.

Not only will an emergency fund help you in a pinch, but it may come in handy for paying your taxes.

You should keep any balances on your credit cards below their limits and consider applying for a personal line of credit. These can be great buffers should you run into any financial hardships.

When it comes to being self-employed, financial hardships can occur for many reasons, such as:

  • Irregular income
  • Tech breakdowns
  • Late payments from clients
  • Burnout (you don’t get paid vacation, sick leave, or mental health days when you’re self-employed!)

Ultimately, having a backup means you can address any sudden financial issues in your business and avoid a CRA audit.

Accounting Services in Edmonton For Self-Employed Individuals

Avoiding a CRA audit when self-employed is considerably easier when you have a professional and knowledgeable accountant by your side!

Get in touch with Liu & Associates today to learn more about how our team can support your small business and help you organize your taxes to avoid a stressful audit.

Let’s talk!

The CEWS Subsidy + Tax Audits: How to Prepare For an Audit

The Canada Emergency Wage Subsidy (CEWS) was introduced by the Canadian government in March of 2020 to help employers who were adversely impacted by COVID-19.

This subsidy covers up to 75% of a business’s employees’ eligible earnings and encourages employers to retain their workers despite a drop in revenue due to closures.

However, the CRA will audit employers who received the CEWS subsidy to ensure that they did not receive more money than they were eligible for.

The process can be arduous and require a copious amount of documentation.

Although claiming the CEWS does not guarantee that your business will be audited, it is best to prepare so the process goes smoothly.

To help you to better understand what to expect when it comes to a CEWS audit and how to best prepare, check out the guide below:

CEWS Repayments and Audits

In April of 2020, an amendment was made to Canada’s Income Tax Act to include the CEWS along with some new tax rules.

These new rules allow the Minister power to determine if an employer was overpaid and issue a notice of repayment if necessary.

Those who received the CEWS may have to repay the subsidy if they canceled their application, made a calculation error in the application, or if the application was reduced or denied. 

In order to determine if any of these situations have occurred, the CRA is at liberty to perform an audit. This process can result in the CRA requesting access to your company’s details such as corporate and financial records.

What Is the CRA Looking For When It Comes to the CEWS?

For the most part, when it comes to a CEWS audit, the CRA is looking to review the following documentation and information:

  • Corporate Records: These records include any documents related to the CEWS claim as well as any changes related to the type and status of the business since 2019.
  • Revenues for 2019 and 2020: The CRA will seek information regarding the business’s revenue prior to the pandemic such as sales reports and qualifying revenue for the CEWS.
  • Payroll Information: The CRA also wants to see payroll journals, timesheets, employment contracts, and proofs of payments to employees.

The CRA may also request additional information related to other subsidies and other government programs that could impact the application for the CEWS.

How Can I Prepare for an Audit?

Man hand pick up Stack overload document report paper with colorful paperclip, business and paperless concept.

Just because the CRA is audited CEWS applications and payments doesn’t mean your business is guaranteed to experience one.

However, preparing for an audit can be a stressful task, so we suggest you take the time to prepare in the following manner:

Document Everything

As soon as you prepare your CEWS claim, keep track of everything. Because the CEWS was pushed out in a hurry, it’s possible that the rules surrounding it may be modified at any time.

Keep copies of all the documentation you referred to when completing the CEWS application as well as a hard copy of the instructions provided to you by the CRA at the time you filed for the subsidy.

Keep Aside Confidential Information

The CRA does not have the authority to access documents that are protected by client privilege.

This means that any sensitive and private information regarding your clients is off the table when it comes to a CRA audit. For example, if you are a lawyer this would include any communication between you and your client, the client’s case file, etc.

Because these documents are private and not required during an audit, ensure they are stored separately to avoid any mistakes.

Have One Point of Contact With the CRA

To ensure the audit process goes smoothly without inconsistencies or misinformation, appoint one person from your business to communicate with the CRA.

Additionally, all exchanges with the CRA should be in writing since the process can take a year or more to complete. 

How Long Do I Have to Provide the Necessary Information?

Gathering the required documentation can be complex and extensive with the CRA not giving you much time to do so. In fact, the CRA generally requires the necessary information within 10 business days.

While you can request an extension, the CRA is merely looking for information you already have. If you have it prepared and organized, meeting this deadline is completely realistic.

Failure to comply with the CRA during the audit process can result in a “gross negligence penalty” that could amount to 50% of the difference between the amount of CEWS you claimed and the amount of CEWS you were entitled to.

Conclusion

If you have received an audit letter in relation to the CEWS subsidy, it’s important to consult an expert accountant to ensure the proper organization of documentation.

For more information on CEWS audits, don’t hesitate to contact our team of professionals at Liu & Associates.

What’s a Tax Audit?

tax audit concept

While the auditing process is meant to help maintain public confidence in the fairness of Canada’s tax system, it can be a stressful and onerous experience on a taxpayer. There are two main types of tax audits: business audits and personal audits. Read on to learn a bit more about each type, what you can expect if you’re selected for an audit of your own and how Liu & Associates can help.

Business Audits

A business tax audit is a process in which the CRA closely examines small and medium-sized businesses’ books and records to ensure they are complying with their tax obligations. Audits are also used as a way to ensure the business is receiving any monetary amounts they are entitled to.

How Are Businesses Chosen?

The business audit selection process is based on a risk assessment system. When choosing businesses to audit, the CRA will also look at any information it has on file and may compare it to similar files.

What Does an Auditor Look at?

A tax auditor will look at the company’s books, records and documents. Examples include but are not limited to:

  • Previous tax returns
  • Business records
  • Personal records

Personal Audits

Personal audits are very similar to business audits. The selection process and the documents that are reviewed are all of similar nature – the difference is that the focus is on personal taxes rather than company taxes. Again, the purpose of an audit is to ensure that your assessment is accurate. If you’re selected for a personal tax audit, the CRA will ask for you to submit certain receipts and records. Sometimes the submission of these documents will be enough, and other times an auditor will be sent out to complete a more thorough check. The audit may take place at a CRA office, or at your home.

Results of an Audit

Throughout the audit process, the auditor will openly identify any issues and discuss them with you. You are also welcome to raise any concerns you may have as well. At the end of an audit, one of three things will occur:

  • No adjustments will be made to your assessment
  • A reassessment will result in you owing more tax
  • A reassessment will result in you receiving a refund

Don’t Sweat It

Audits may seem like a scary process, but if your documentation is accurate and in order there shouldn’t be any major issues that come up. Most errors that arise are honest mistakes that are easily amended. The best thing you can do to prepare for an audit is to keep track of your records for a minimum of six years.

If you or your company is selected to undergo an audit, contact the experts at Liu & Associates. Our team will ensure that your rights are observed and work to minimize any consequences. We act as a buffer between you and the CRA to minimize the time and stress that is so commonly associated with an audit. Give us a call today!

What to Do If the CRA Orders You To Pay Back Taxes

Woman Receiving a CRA Letter About Back TaxesFor some, getting a letter from the Canada Revenue Agency that your taxes have been reassessed – and that you owe back taxes – isn’t just a bad dream. The reality is that in most cases, the CRA has three years from your original date of assessment to reevaluate your income tax return. If they can prove willful or careless misrepresentation – or fraud – then the three-year window can be waived.

What Can You Do?

  1. Pay up. CRA charges 5% interest calculated on a daily basis back from the original tax year – meaning that if you get a letter from the CRA requesting back taxes, you already owe a significant amount of interest on those back taxes. The only way to stop the accumulation of interest is to pay the fine up front.

2. File an objection. You have 90 days to file an objection with the CRA outlining your position regarding your reassessment, which they are obliged to consider. You will be contacted to confirm receipt of your objection, however, it could take months or years for your objection to work it’s way through the process.

3. File an appeal. If you haven’t heard back about your objection within 90 days again, your next option is to file an appeal at Tax Court. Like any court case, you’ll require legal representation and it could take years to resolve. Furthermore, the odds are against you – in these matter, the CRA’s assessment is considered to be correct and the burden of proof is on you.

This is a simplified overview. If you’ve been reassessed and owe back taxes your best bet is to contact a professional, like the accountants at Liu & Associates, who have years of experience working with the CRA that can walk you through the process to get you the best outcome.

Top 10 Canadian Tax Myths

Detail-of-calculator-focusing-the-TAX-key-next-to-a-sheet-of paper-with-numbers-and-a-metal-pen

It’s tax season again and everyone’s uncle, neighbor and postman have advice on how to maximize your return. Don’t listen to the chatter– consult the professionals here at Liu & Associates today! Meanwhile, refer to our myth-busting list below for the hard facts about filing your Canadian taxes in 2016.

1: I earned less than the basic personal amount, so I can skip filing this year.

While yearly income under $11,474 is not taxable, you should still file a return.

2: Once I get my Notice of Assessment, I’m in the clear.

People usually breathe a sigh of relief when they receive a Notice of Assessment, but it is only a brief review of your document’s basic math. CRA has a window of years to follow up on any inconsistent files.

3: Interest on my mortgage is tax deductible.

You do receive a tax credit when you sell your home, but not for any interest paid against an existing mortgage. On exemption is a small percentage for people that operate a business out of their homes.

4: Filing online is risky and flags your account for audits.

Some feel that an online return could put them in a bad position, but it is simply not true. Filing method has no effect on the reasoning behind tax audits. You may be asked to send in supporting documents, but this is a routine verification.

5: There’s no incentive to report tax evaders.

Recently this would have been true, but new legislation in 2014 established a hotline for good Samaritans to report false tax claims. If true, the whistleblower stands to earn 5-15% of the tax collected as a cash reward.

6: Only a child’s mother can claim the corresponding tax credit.

It is the responsibility of the spouse who earns less to claim any children on their return, regardless of gender.

7: I have no taxable income, but I can still cash in my tuition credits.

A student must have taxable income to be able to use tuition credits for a refund. Credits can be held over or transferred to relatives or spouses.

8: My tips and gratuities are not taxable forms of income.

Don’t fall for this common line, especially if you work in the service industry! Tips and gratuities are considered income– they are therefore taxable. You risk fines and other consequences if you fail to report taxable income.

9: Skipping the tax deduction means I don’t have to report RRSP contributions.

Whether or not you intend to use your RRSP contributions as tax deductions, they need to be reported in your annual filing. Failing to do so will be viewed as an inconsistency, raising your risk of audit.

10: The employment insurance I received during maternity leave is not taxable

All employment insurance benefits– regardless of maternity status– are eligible for taxation.

5 Myths About Tax Audits

When it comes to tax audits, this standard governmental process tends to get a bad rap. In general, tax audits are dreaded because they are not well understood by those who file. By debunking common myths about tax audits, Canadians can ease their worries over this regularly occurring event. Whether you are being audited or would just like to know more about the process, consider the following five myths about tax audits:

Filing for tax deductions makes you more likely to be audited.

Every year, many people avoid filing for the deductions they deserve because they are nervous it will put them at an increased risk of being selected for an audit. However, the number of deductions you claim on your taxes has little to do with whether or not your filing is audited. When it comes to your submission, the Canada Revenue Agency (CRA) looks at the filing as a whole, rather than just your deductions, to ensure it makes financial sense. It is better to claim the proper deductions each year, and receive an appropriate tax return.

I can avoid being audited by waiting to file my taxes.

It is wishful thinking to hope that you will not be audited by avoiding the CRA altogether. Failing to file your taxes can not only result in serious fines, it is also illegal. Penalties for missing the submission deadline can be much stricter and less desirable than a routine audit. It’s best to file your taxes on time with the appropriate financial details.

It is not worth correcting previous filings.

Audits do not take place immediately. In fact, they can take place several years after you file. If you notice an inaccuracy on a previous year’s submissions, you can typically volunteer the correct information to the authorities without risk of criminal charges. Keep in mind, the CRA can access any year’s tax filing at any time; if you’re concerned about an error or omission, it’s best to speak up proactively.

If you file online, you will be audited.

Many individuals who have a history of filing their own taxes or working with a professional to submit their filing are skeptical of online tax submission services. Yet those who utilize this software have been shown to be at no increased risk of being audited. In fact, those people who submit taxes online or work with a professional may be at a decreased risk of being audited, because it is less likely that a mathematical error will occur.

Audits are scary.

While many taxpayers fear being audited, the truth is that the auditing process can be a very straightforward procedure. Typically, the audit process involves you being asked several questions about your filing, and being given an opportunity to explain any drastic, year-over-year financial changes.

This tax season, if you would like more information on avoiding an audit or properly filing your taxes, consult Liu & Associates for assistance.

 

Income Tax Guide For Landlords

If you’re a landlord, then you know that tax season typically looks a little different for you than it does for those without income properties. While filing your taxes as a landlord may at first seem overwhelming, rest assured that there are straightforward ways to reduce confusion when completing your paperwork.

The most important method of managing your taxes is to learn more about landlords’ tax responsibilities and the overall filing process. Through this knowledge, you will feel more empowered to ask questions, get support and confidently complete your tax forms.

Understanding your income

Before you file your taxes for rent payments you’ve received, it is essential that you know the ins and outs of what qualifies as rental or business income. Canadian law differentiates between housing that provides simple living quarters and businesses that provide a wide range of services.

If your responsibilities as a landlord start and end with providing tenants with a safe and lawful place to reside, then resident payments will most likely be considered as rental income. Conversely, if you are providing tenants with other offerings such as cleaning, landscaping, security or administrative support, then your income will typically be considered as stemming from a business. Knowing the proper classification of your income type is critical, because it sets the foundation for the rest of the tax paperwork you must complete.

Keeping track of your expenses

There are countless types of expenses that landlords must face each year in order to maintain their property and provide a safe and comfortable dwelling for tenants. Because these expenses can add up so quickly—and just as easily be forgotten—it is in your best interest to keep a detailed record of all expenses pertaining to your property.

Expenses can include costs of onsite repairs, gas used to go to and from your building for maintenance or business-related purposes and even legal fees used to draft contracts and lease agreements. Keeping tabs on all property-related costs will increase the ease and speed in which you file your taxes each year.

Utilizing appropriate deductions

There are many tax deductions available for landlords who receive income from a rental property. While some deductions are common and easily recognizable, such as building repairs or home office expenses, others are not so straightforward. If you are a landlord, you may also be eligible for deductions related to interest on mortgage payments and loans, business-related travel, contractor payments and insurance payments made for your rental property. Additionally, you may be eligible for a deduction if your property recently decreased in value, or if you suffered property damage from a fire or break-in. Becoming familiar with the range of deductions available to you will help you secure an appropriate tax refund.

Through these simple steps, you will be on your way to filing accurate taxes that properly reflect your income. For additional guidance on how to file taxes as a landlord, consult with Liu & Associates today.

Guide to Saving Documents for your Tax Return

an-accountant-using-a-calculator-and-checklist

Around tax time, the exaggerations are everywhere– from TV to comic strips, there are many depictions of a hapless taxpayer poring over a mess of documents. It’s fun to have a laugh, but the true nature of a tax return should not require a mountain of receipts and invoices. Read on for Liu & Associates summarized list of which documents you should be saving for your yearly income tax return.

 

The basics: With any return, it is essential you have easy access to the SIN numbers and income amounts (T4 slips) of you and your family. Educational expenses and tax receipts should also be handy, as well as any business income records.

 

Investments: Keep all documents pertaining to rental property income, retirement fund contributions and any capital earned due to savings or investments. All of these can affect both your income tax owed and the deductible.

 

Receipts: The most commonly cited item to save, but what receipts are actually eligible for tax deductions? Medical and childcare expenses often qualify as deductibles. If you have expenses through work and you are either unreimbursed by your employer or self-employed: you may be sitting on a goldmine of tax credits.

 

Past returns: It is always smart to keep your personal tax records for up to three years. At tax time, you or a Liu & Associates tax expert can review your past returns for accuracy and any overlooked or carried-over deductibles.

 

Charitable donations: Any tax receipts for any eligible charitable donations are an easy way to claim a tax credit. Be aware of the minimum and maximum amounts.

 

The above list is just a brief overview of the necessary documents for filing a tax return. Work, household and lifestyle variations can all impact the details of your yearly return. Consult CRA guidelines or Liu & Associates to ensure you meet all of your requirements. Our experts can ensure your complex financial realities are taken care of completely at tax time.

Income Tax Guide To Tips & Gratuities

a-waitress-giving-back-change

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.