Auditbusters: Tips and Gratuities

Canadians who earn tips and gratuities are required to report this income on their annual income tax returns. This year the tax auditor is once again taking a closer look, and it’s become easier than ever, as audits of credit card and debt payments provide a reliable record of undeclared amounts.  Here’s what you need to know to bust those tax audits:

Restaurant servers, hairdressers, valets, taxi drivers and others who earn tips may not have all of their income recorded by the employer and therefore not included on their T4 slips. The Income Tax Act is clear regarding the treatment of income from tips and gratuities. All tips are taxable and it is your responsibility to report any you receive.

The Canada Revenue Agency is committed to administering and enforcing the Income Tax Act in a fair and equitable manner, ensuring that the requirements under the law are met while respecting the rights of the individuals involved. When people earn tips and do not report them, they are increasing the tax burden on their friends, family, and neighbours who have all of their income reported by their employers on their T4 slips.

Even if you do not get a T4 slip to show your income from tips, you are still required to report all tips received in the course of your work and report the amount on line 104 of your return. In preparing to file your tax return this year, you may have to contact your employer to find out if any or all of your tips will be included on your T4 slip.

If not, it is your responsibility to keep track of all amounts received in a log book. During a review or audit, CRA officers use the employer’s available records to confirm taxable income. Your best audit defence is to provide your log, kept consistently, to justify the income you earned.

Remember, you can elect to pay CPP premiums on this income to shore up your retirement or potentially tap into a disability benefit in the future if you need to.  Or you can save your tips and invest in an RRSP before March 1, to reduce the net income subject to tax.

See your DFA-Tax Services Specialist for help today.

Evelyn Jacks is author the new Essential Tax Facts:  How to Make the Right Tax Moves and Be Audit Proof too.  This book will be updated to the February 27, 2018 budget.  Pre-orders are now accepted.

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