CRA to Service Workers:  Report Tips

Report your tips or hand a chunck of them over in fines to the taxman.  In case you missed it, that’s the message CRA  has posted in the heart of the summer holidays.  In their statement released August 5th, the CRA targeted waiters and waitresses, taxi drivers, hairdressers and others warning:

When you earn tips and do not report them, you are participating in the underground economy—you are increasing the tax burden on your friends, family, and neighbours, who have all of their income reported by their employers on their T4 slips.

Besides fines and penalties, jail time is possible in severe cases. While the CRA does not collect much tax on these individuals because they generally receive lower hourly wages, the take on tips can be several hundred dollars a day.

Statistics of lost revenue on under-reported tips are difficult to estimate. But in CRA’s latest report on the Underground Economy, published in 2012 for the 2009 year (http://www.cra-arc.gc.ca/nwsrm/fctshts/2012/m09/fs120927-eng.html), the  total underground activity in Canada was estimated at $35 billion, an increase of 77% from 1992.

CRA notes that the Underground Economy thrives most significantly in three industry sectors:  construction (29%), retail trade (20%), and accommodation and food services (12%). These industry sectors accounted for 61% of the total UE estimate.

A study in the United States for the 2008 tax year estimated that the difference between what Americans owed in tax and what the government received was about $500 billion. It was also estimated that there was unreported income of $2 trillion¹.  Those figures represented 18-19 percent of the total reportable income in the US at that time.

¹Richard Cebula and Edgar Feige, "America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S."
http://ideas.repec.org/p/pra/mprapa/29672.html