Are you aware that all your tips and gratuities are taxable?

Restaurant and bar servers, hairdressers, valets, taxi drivers and others who earn tips need to be sure those amounts are included as income when they file their income tax and benefit returns. This includes tips received if you are self-employed.

How it is reported depends on whether it is received directly or through a controlled arrangement: you are responsible for tracking and reporting direct tips, while your employer is responsible for tracking and including controlled tips on your T4.

If you receive direct tips or gratuities (amounts paid directly by the customer) as part of the work you do, it is your responsibility to follow these four steps:

1. Keep track of all your tips and gratuities received throughout the year (for example, on a calendar, a mobile app or in an agenda) and keep a copy of your tracking document.
2. Calculate the total received between January 1 and December 31
3. If you earned tips as an employee, including if you own and are employed by your corporation, report the total amount received on line 10400 of your income tax and benefit return.
4. For self-employed individuals, report the total amount of tips you received during the year on Form T2125 and include it as part of your self-employment income on lines 13499 to 14300 of your income tax and benefit return.

If any of your tips and gratuities are controlled by your employer, your tip income amount should already be included on your T4 slip. If you’re not sure, ask your employer.

In Canada, the law is clear about the treatment of income received from tips and gratuities: all tips and gratuities are taxable, and it is your responsibility to track and report any amounts received.

How reporting your tips and gratuities can benefit you

• applying for a loan or mortgage – your total income will be accurately reflected to lenders, which may help you qualify for a higher loan or mortgage amount;
• saving for retirement – your contribution limit for your registered retirement savings plan (RRSP) will be higher; and
• collecting Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) – you can choose to pay CPP or QPP contributions on tips and gratuities earned, which will increase the pension amount you collect when you retire.

Get back on track with past returns

The Voluntary Disclosures Program (VDP) gives you a second chance to correct a return you filed if you didn’t fully declare your tips and gratuities. If you file a VDP application and it is accepted by the CRA, you will have to pay the taxes owing, plus interest in part or in full. However, in some cases, you may be eligible for relief from penalties that you would otherwise have to pay. For more information about the VDP, go to Voluntary Disclosures Program.

Avoid the consequences of not reporting your tips

If the CRA reassesses your return and you haven’t declared all your tips, you will have to pay what you owe, plus interest and possibly penalties. This would mean you end up paying significantly more than if you had reported correctly.

How to contact the CRA

If you have questions, feel free to call the CRA individual income tax enquiries line at 1-800-959-8281.

Additional information relating to tips and gratuities can be found here: Tips and Gratuities - Canada.ca.

Quebec residents

Quebec requires employees to declare their tips to their employer. For more information, visit Employees Who Receive Tips – Benefits and Obligations | Revenu Québec.