Voltaire, the famous 18th-century French wit, once remarked that the British navy found it useful to execute an admiral every once in a while “pour encourager les autres.”
Earlier this year, the Canada Revenue Agency sent a similar message of encouragement to the entire hospitality industry with an audit of dozens of wait staff at Murphy Hospitality Group’s P.E.I. restaurants. It was looking for undeclared tips from back in 2014 and 2015. With many servers thought to declare only a small portion of their tips for income tax purposes (10 percent is a popular estimate), the crackdown should prove both instructive and lucrative.
In 2012 CRA did the same thing to 145 servers at four restaurants in St. Catharines, Ont., and found, according to an internal report, $1.7 million in undeclared tip income—or nearly $12,000 per server. “The amount of unreported income was very surprising,” the report noted dryly.
$12,000: Average undeclared tip income, per server, found in a previous CRA audit
Going after undeclared tips is getting a lot easier for the revenue agency, says Paul S. Hewitt, a CPA and Toronto-based restaurant consultant. “Back when the business was mostly cash, it was very difficult to audit restaurant staff,” he says. “But now with everyone paying by credit or debit, CRA can easily demand a tip report for every waiter and waitress and compare that to what they’re reporting on their taxes.” He recommends servers start reporting all tips, even if they don’t like it.
Hewitt also warns owners against getting involved in the distribution of tips. Controlling the tips, so kitchen staff get a share, for example, means CRA will consider that money to be restaurant income and not a direct payment to the individual server. And that triggers CPP and EI contributions, T4 inclusion and HST owing. “Even if restaurants think they’re doing the right thing by being fair to their chefs, it’s a huge potential liability,” he cautions.