Reporting Issues: TIPS

Tips received by servers and other individuals in the service industry are taxable. However, since tips do not show up on T4 slips, some taxpayers are under the false understanding that they are either not taxable, or only partially taxable.

In a February 3, 2020 Federal Court of Appeal case, the Court upheld the Tax Court decision that tips received by the taxpayer from his employment as a slot attendant at a casino were properly included in income and were not a windfall or gift. Further, the Court upheld gross negligence penalties (an extra 50% of the taxes at stake) in coming to the conclusion that the taxpayer displayed a “dismissive and indifferent attitude” in failing to enquire as to whether he should report the tips.

The taxpayer also raised the issue of procedural fairness. The length of time CRA took to process his objection, the amount of interest owed, and the fact that CRA may have settled with other taxpayers were not relevant to the taxpayer’s case.

Canada Emergency Response Benefit (CERB)

During the COVID-19 shutdown of many businesses, many servers have relied on receiving payments under the CERB. To be eligible, the individual must have received at least $5,000 in 2019 (or in the 12 months prior to application), and cannot have earned more than $1,000 during the applicable four-week claim period (this rule varied slightly in the first claim period). Tips earned while working and declared as income counts toward $5,000 required previous earnings. Tips count towards the $1,000 test as well.

Canada Emergency Wage Subsidy (CEWS)

This subsidy, which aims to cover approximately 75% of the first portion of salaries, is dependent on the amount of “eligible remuneration” received by employees prior to, and during, the COVID-19 crisis. Controlled tips are included in eligible remuneration (and reported on T4 slips), direct tips are not. Controlled tips are those that an employer receives, controls (or possesses), and then pays an employee. Direct tips are those paid directly to the employee, or those in which the employer is merely a conduit (the employer has no control over the amount or distribution.

ACTION ITEM: If you have service staff, remind them that tips are taxable and that they will now matter for various reasons. There is more incentive for CRA to review them, and they have had success applying gross negligence penalties.

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