Whether you’re employed or self-employed, serving tables, cutting hair, or giving someone a safe ride home, tips are a form of appreciation for a job well done. But did you know that you should be reporting them as income on your taxes?
If you receive tips through your work or job, this is for you.
- Tips are taxable income and are broken into three categories: controlled, direct, and declared.
- Declaring your tips can help increase your income, which can help you grow your RRSP contribution room, increase your pension, and qualify for loans and mortgages.
- If you don’t report your tips and the CRA finds out, you’ll have to pay back what you owe, plus interest and possible penalties.
Do I pay taxes on my tips and gratuities?
All tips and gratuities you receive from the work you do are taxable and you’re required to report these amounts on your income tax and benefit return.
There are 3 types of tips to know: controlled tips, direct tips, and declared tips.
1. Controlled tips
Controlled tips are tips that an employer controls, collects, and pays to their employees. The Canada Revenue Agency (CRA) considers controlled tips as business income for the employer. So controlled tips are part of an employee’s salary or a form of compensation, where employers have to deduct CPP contributions and EI premium.
For example, let’s say you work as a server at a restaurant and the restaurant owner pools together all the tips, so all staff members get a share of those tips.
Other examples of controlled tips include when employers:
- add mandatory service charges or a percentage to a client’s invoice to cover tips
- distribute tips to their employees using a tip-sharing formula
- include tips in their business income and later pay them to their employees
2. Direct tips
Direct tips are untaxed income where the customers pay the employees directly. Employers have no control over this amount, so they aren’t subject to CPP or EI payroll deductions. An employee can choose to make CPP contributions by filling out Form CPT20. Direct tips won’t be included in your T4 slip, but you’re still required to report this as income on Line 10400 of your income tax return.
Examples of direct tips can include:
- cash tips that a customer leaves for their restaurant server to keep
- pooled tips controlled and distributed by employees
- tips paid with a debit or credit card and the employer returns the amount directly to the employee
TIP: It’s possible for employees to receive both controlled and direct tips. In this case, only the controlled tips would be part of the employee’s pensionable or insurable earnings, or both.
3. Declared tips (Québec only)
Declared tips are direct tips that require employees in Québec working in regulated establishments such as hospitality, to report their tips to their employers. The employer then combines direct and controlled tip earnings to include the total in a worker’s insurable earnings.
How do you report your tips?
The way you receive tips—whether via your employer or customer—can make a difference in how you report them. The CRA expects the income amounts you report 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.
The CRA does a great job summarizing everything you need to know about reporting tips and gratuities.
Here’s a breakdown of how to report the different tips you receive:
Type of tip | How to report it |
Controlled tips | Your T4 slips will have your employment income in Box 14, which may include controlled tips. Enter the total amount from Box 14 on Line 10100 of your return. |
Direct tips | For income that’s not reported on a T4 slip, enter the total amount of tips you received on Line 10400 in your tax return. |
Declared tips | Report your tips at the end of each pay period by filling out form TP-1014.4-V. |
TIP: It’s important to note that employment income (Line 10400 of your T1 General) is different from other income (Line 13000 of your T1 General). If you’re using tax software like TurboTax, there are several ways to enter this information.
What are the benefits of reporting tips on your tax return?
Beyond complying with the law and avoiding penalties and audits, reporting your tips means that you’ll have a higher total income, which offers you some financial benefits in the long run, including:
1. A bigger RRSP contribution
There’s a limit on how much you can contribute to your Registered Retirement Savings Plan (RRSP) every year, depending on the income you reported from the previous year. The more you earn, the faster your contribution room grows. Even if you’re nowhere near retirement and don’t plan to save money this year, growing your contribution room earlier on can set you up for a better financial future.
2. A better credit profile
Having a higher income can help you qualify for a larger loan or mortgage, which can be a big help!
3. A bigger pension
While no CPP and EI contributions are deducted from direct tips, you can choose to make voluntary CPP contributions on tip income using Form CPT20, which helps you get a higher pension amount when you retire.
4. The Canada Workers Benefit
CWB is a refundable tax credit given to workers who are in a lower income bracket and make at least $3,000 in earned income. The amount of credit paid is based on your income. So if your salary is not enough to apply, the extra tip income may increase it by enough to claim the benefit.
What happens if you don’t report your tips?
If the CRA reassesses your return and discovers you left out a significant portion of your income, you will have to pay what you owe, plus interest and possibly penalties. To avoid the hassle of having to correct an old income tax return and paying fines, it’s a good idea to keep track of your tips and report them accurately on your tax return.
You work hard to earn your tips and while it may seem tedious to have to report them, there are long-term advantages to increasing the size of your total income.
Whether you’re employed in the service industry full-time or part-time, TurboTax makes it easy to file your tax return with confidence.
Seems complicated? We’re here to help
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