Many believe that gratuities and tips earned through personal services employment are not taxable income, but this is not the case. Canadian taxpayers must report all income from employment, including tips or any other income not reported on T4 slips.
There are several ways that gratuities are handled in the workplace, and this affects how you report such earnings.
Controlled Tips
While all tips and gratuities received by a taxpayer represent earned income under the Income Tax Act, Canada Pension Plan and Employment Insurance obligations vary, depending on how the earnings transfer from the customer to the earner.
Controlled tips can be any of the following:
- Amounts that an employer adds to a client’s bill to cover tips.
- Shared tips distributed by the employer.
- Other tips or gratuities that an employer adds to business revenue then pays out later.
The Canada Revenue Agency (CRA) considers controlled gratuities as paid to the employee by the employer.
- These earnings are reported in box 14 of the employee’s T4 slip.
- The earnings are subject to CPP and EI payroll deductions.
- Gratuities reported by the employer do not need to be tracked or claimed elsewhere on the tax return.
Direct Tips
Direct tips are paid to the employee by the customer, with no intervention or control by the employer. These gratuities may take the form of cash received from a client, pooled tips controlled by employees or amounts collected through electronic means.
When a tip is paid with a debit or credit card, and the employer returns that amount directly to an employee or employee-directed tip-sharing arrangement, the CRA considers it a tip paid directly between client and employee.
While no CPP and EI contributions are deducted from direct tips through payroll, an employee can make voluntary CPP contributions on tip income using form CPT20. It is possible for an employee to earn both direct and controlled tips, though only direct tips are declared on line 10400 (other employment income) of tax returns.
Declared Tips
The province of Québec has a law under its taxation act that requires hospitality employees working in regulated establishments to declare direct tips to their employer. Direct and controlled tip earnings are combined and the employer includes this amount in a worker’s insurable earnings.
More information for Quebec residents can be found in this Revenu Quebec publication: Tax Measures Respecting Tips.
Reporting Direct Tips and Gratuities
You can report tips and gratuities along with other income that does not appear on T4 slips on line 10400 of your tax return as other employment income. TurboTax software will guide you to the appropriate section through the interview process to correctly enter your tips/gratuities.
The CRA expects this amount to be a real number, reflecting tips earned in a tax year, rather than an estimate or a percentage of earnings reported on a T4 slip.
- Keeping a simple tip log supports your claim for tips. Tracking the days you work and the direct tips earned is sufficient record to document your claim.
Direct tips represent untaxed income, so there will be a tax liability on the line 10400 amount. If you work part-time in the hospitality industry while attending school, for example, your tax credits and deductions may offset tax owed on gratuities.
Depending on your situation, consider saving about 25 percent of your gratuity income throughout the year to cover additional taxes.
Employer Considerations
The CRA considers controlled tips as income for the employer and these must be declared as such.
While an employer is entitled to deduct controlled tips, documentation protects it in case of reviews that show contradictory employer-employee claims.
Likewise, having a written policy for employer-controlled, shared gratuities protects the business in case of a dispute. Direct tips don’t require tracking on the part of the employer, nor do shared tips that employees control.
References & Resources
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