When tips are received ‘directly’, it is the responsibility of the employee to claim it as income on their personal tax return. With the large percentage of tips now being paid via debit/credit cards, CRA can ask the employer for a report showing total tips received and check against the employees reported tip income.
Employees need to be aware that CRA can assess a penalty for failure to report income or for repeated failure to report income if it has happened for more than one year.
When employers ‘control’ the distribution of tips they are no longer considered ‘direct’ tips. Many business owners are attempting to be fair to their staff by collecting and distributing tips, however, CRA views this collection of tips as business income.
As business income, GST/HST must also be collected on the tip amount. Distributions to employees are now considered employment income and need to be included in their wages. CPP and EI need to be deducted and the employer portion of CPP and EI also contributed.
As an employer; tips need to be voluntarily received and paid out in cash as soon as possible to the designated individual, otherwise you will be liable to collect and remit taxes.
