When travelling around the globe, many travellers will research the worldwide tipping etiquette to determine what is expected of customers when they eat at restaurants. But what should business owners and restaurant managers know about their tipping processes in Canada?
As a restaurant owner and manager, it is crucial to understand the tipping requirements associated with the hospitality industry and how tipping will affect your business’s books for accounting and tax filing purposes. When waitstaff receives tips, this is known as tip income and must be recorded and accounted for when tax season rolls around.
Here’s what businesses need to know about tipping in Canada, from collecting and recording tips and gratuities to associated tax payments on these amounts.
Is Tipping Mandatory in Canada?
When it comes to restaurant tipping in Canada, there is no mandatory amount that customers should tip. However, even though tipping is not compulsory throughout the country, it is socially implied that all customers should tip those working in the service industry and hospitality sector, including waitstaff and bartenders.
Not tipping in Canada can be seen as rude or cheap. So how much should you tip restaurant workers then? Depending on the type of dining, and the service, restaurant waitstaff typically receive or expect to receive a tip percentage in Canada of 10% to 20%, sometimes more if you patronize a high-end restaurant.
Seeing as tipping is an expected social practice in Canada, restaurant owners and managers will need to know how these gratuities affect the business’s bottom line, especially when it comes to government taxes.
Can Restaurant Owners Take Tips in Canada?
When it comes to tipping in Canada, the business owner and managers cannot legally take or retain tips earned by their employees. In 2015 Ontario brought legislation into effect that protects workers from having their tips taken from them. Known as the Protecting Employees’ Tips Act, the provincial act dictates that employers cannot withhold gratuity or deduct tips from their employees.
The 2015 ruling protects waitstaff from having their tips seized to cover things like wasted food and drinks, broken glassware or plates, or losses or damages made to restaurant property due to destruction or theft. However, this act allows for employers to collect tips for tip pooling purposes. This means restaurant owners and managers can collect staff gratuities only for restitution between all business employees.
All provinces throughout the country will have similar legislation that protects employees against tip theft.
Do You Pay Tax on Tips and Gratuities?
According to the Canada Revenue Agency tipping regulations, tips and gratuities are considered earned income for employees. Therefore, any tips received by waitstaff must be recorded and have tax paid upon them. Therefore, employees and employers will need to report this gratuity on their income taxes to accurately and truthfully file their tax returns.
It is up to the employer and restaurant owner to determine if this employee tip income falls under insurable earnings under the Employment Insurance Act, or pensionable earnings under the Canadian Pension Plan, or both.
Controlled vs. direct tips
Tips in Canada can fall under one of two categories- controlled tips or direct tips. Controlled trips refer to tip money that passes through the employer before being paid to the employee. Such instances of controlled tips include when restaurants add a mandatory service charge to customer bills, tips divided between staff using a tip-sharing process, tips employees hand over to the employer to be redistributed through tip pools, or cash tips deposited into the employer’s bank account and are paid out to employees.
On the other hand, direct tips cover gratuity directly paid to the employee by a customer, whether that’s leaving cash on the table, handing it to them directly, or having the customer pay by credit card and the employer hands over the cash equivalent to the employee at the end of the shift.
Depending on the two categories the tip amount falls into, the tax requirements will differ.
Taxes on controlled tips
Controlled tips are considered part of the employee’s total remuneration for their work. As the employer controls these tips, they are responsible for deducting Canada Pension Plan contributions and Employee Insurance premiums from this amount, but only if the employee possesses pensionable or insurable employment.
Tipped employees will need to report the total amount of tips they received in a year on their income returns. This amount should be recorded by the employer throughout the year and stated on the T4 slips they provide their employees each tax season.
Taxes on direct tips
Direct tips are handled a bit differently, as they are not subject to CPP contributions or EI premiums like controlled tips are. That being said, employees have the option to make CPP contributions for tips earned while under pensionable employment.
Tip policies differ from business to business, as it is up to the owner or manager to decide which process of tip collections works best for them. However, restaurant employees can potentially receive both direct and controlled tips. If this happens, only the controlled tips are subject to the applicable deductions.
Learn more about tip tax filing for the restaurant industry.
There is a third form of tips that are only applicable to those working in Quebec. Declared tips cover tip amounts that the provincial law dictates must be declared to the employer, alongside controlled tips. Under the income tax act, such amounts must be reported as these tips are subject to taxation under the employee’s insurable earnings.
Quebec is the only province in Canada that stipulates this form of tax legislation on gratuities. For further information on this province’s tip taxes, click through to our Quebec’s tipping tax guide.
Tipping Etiquette in Canada
Since restaurant tipping in Canada can change from province to province, it is important to note the various etiquette and process changes surrounding gratuities throughout the country. Here is what restaurant owners and managers need to know when it comes to tips in Canada. According to a 2018 study by Global News, restaurants can expect average tips percentages of:
- Alberta: 13.9%
- British Columbia: 13.4%
- Manitoba: 13.9%
- New Brunswick: 14.9%
- Newfoundland and Labrador: 14.3%
- Northwest Territories: 15%
- Nova Scotia: 14.2%
- Nunavut: 14.4%
- Ontario: 14%
- Prince Edward Island: 15.2%
- Quebec: 13.9%
- Saskatchewan: 14.8%
- Yukon: 15%
To help you with your financial recording keeping and tax filing for restaurant tipping in Canada, check out this informative article on restaurant accounting for Canadian businesses.
Credit Card Processing Fees and Tips
As many customers pay by credit card these days, restaurant owners will need to familiarize themselves with the processing fees associated with this payment method and what it means for tipping. Gratuity included on a credit card payment can be considered either a controlled tip or direct tip, depending on the employer’s process of passing along the money to the waiter.
Keeping a Tip Log for Tip Income
A tip reporting log is the documentation of tips and gratuities that the waitstaff receives throughout their shifts. Owners and managers will keep track of the gratuity given to waiters, bussers, and bar staff to ensure an accurate representation of employees’ tip income.
All forms of tips should be recorded in this document, including tips received from cash, credit cards, debit cards, and gift cards. When recording this information in your restaurant’s tip log, always remember to include:
- First and last name of the employee
- Their employee ID number
- Date worked
- Daily tip amount
- Total weekly tips
- Charged tip percentage
It’s always a good idea to update your tip log weekly or monthly to accurately depict your employees’ tip income. Consistent reporting will help you come tax time, making the filing and deduction process easier for your business.
Accounting Software For Your Restaurant
Keep track of your restaurant’s tipping with quality accounting software. QuickBooks Online lets restaurants track and record expenses, process payroll, and maximize tax deductions, making tip recording and processing a breeze. Join the millions of small business owners who have improved their bookkeeping processes and overall finances when you start the software’s free trial today.