Feigenbaum Law

Canada Revenue Agency Focusing on Undeclared Tips in the Hospitality Industry

Personal Tax Planning
February 22, 2018

The Globe and Mail recently reported that a number of hospitality industry employers have reached out to the newspaper, indicating their frustration with what they perceive as a “sudden shift in [Canada Revenue Agency] tactics”,  after the Canada Revenue Agency (CRA) recently set out on a flurry of tax audits focused on the restaurant industry.

Targeted Audits

Up to 200 staff members at Murphy Hospitality Group, a large employer in Prince Edward Island recently received letters from the CRA notifying them that the agency believes that they underreported tips earned in 2014 and 2015. The CRA claims that some individuals failed to declare as much as tens of thousands of dollars and is asking for the suspected employees to pay back taxes and potentially high interest. The hospitality group employees hundreds of employees in Prince Edward Island and across the Maritimes.

The CRA insists that it is simply working to ensure that all Canadians pay a fair share of taxes. A CRA spokesperson told the Globe and Mail that the agency:

…conducts a number of review activities [annually]… to maintain the integrity of the Canadian tax system, as well as the confidence of Canadians in the fairness of the system. The hospitality sector is one of many sectors that the CRA addresses through its risk-based approach to identifying non-compliance. Audits related to this sector occur regularly across the country, and have for many years.

Back when restaurant and bar bills were paid mostly in cash, real figures were hard to trace and confirm. However, due to increasingly widespread use of debit and credit cards and digitized payments, exact tip amounts can now be determined through payment records.

The Agency also conducts “lifestyle analyses”, taking into account things like property ownership, to determine whether a taxpayer’s declared income lines up with the type of lifestyle they lead.

The CRA notes that “every taxpayer has an opportunity to provide written representations in response to a proposed tax reassessment”.

Response from the Restaurant Industry

The employees who received the letters note that this audit should draw attention to the changing ways in which service-industry employee tips can be accounted for, and how much effort such employees must now expend in determining their real income.

Murphy Hospitality Group has used the same informal guidelines popular across the hospitality and service industry of having staff declare a small portion of tips on their tax returns (generally equivalent to about 10% of their income). The staff who spoke to the Globe and Mail indicated that they had generally been advised, at some point in their careers, to follow some variation of that guideline.

The employees being audited have expressed frustration with the CRA suddenly targeting the undeclared income of a concentrated group of individuals in a particular geographic region- individual who are primarily young and earn a low income.

Many are confused as to how the CRA calculated the tips they apparently earned in 2014 and 2015, or how they will be able to confirm such dated information. If the CRA’s calculations were taken from debit or credit transactions at point-of-sale machines, that would not account for “tipping out” (i.e. dividing any tips earned during a shift with kitchen and other staff).

The Chief Operating Officer of the Murphy Hospitality Group expressed his perplexity about the CRA’s approach, noting:

There’s bigger fish to fry – if they want to raise tax revenue, they can do it in other ways…[i]f they do decide that this is how they want to go about raising tax revenue, put out a letter and say, ‘Starting in 2019, we’re going to start enforcing this rule more strictly.

Potential Penalties

While the audit letters received by the employees mentioned penalties, but the language was vague, including noting that the CRA was “considering” imposing penalties of up to 50% of the back taxes owing on undeclared earnings.

Each case will likely be considered independently, taking into consideration the specific circumstances of each audited individual.

If you have questions about tax audits, or compliance with your tax obligations contact Mark Feigenbaum for a custom solution to your personal tax needs. We work with you to create a bespoke solution that will streamline your compliance requirements. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.

Tagged: audit, CRA, gratuities, tips, undeclared income