With the tax season right around the corner, and let’s be honest, tax season always feels like it’s just around the corner, now is the time to familiarize yourself with the necessary information needed to file Canadian taxes for restaurants and food establishments.
With a grasp on restaurant accounting, now is the time to dive into the tax side of running this type of business. Like all other business types, restaurants and their owners must file tax returns with the Canada Revenue Agency every year.
Tax Filing Based on the Restaurant’s Business Structure
Depending on how you structured your business in the government’s eyes, your restaurant’s tax filing process will differ. What we mean by your restaurant’s business structure is how you defined your business on a legal level to the government, whether that’s as a sole proprietorship, partnership, or corporation.
Your business structure will dictate which returns to complete, as well as the tax filing due date. Due to the world pandemic, specific tax regulations and filing dates may differ from previous years and circumstances. It is always best to consult the CRA’s website for the most current information available.
Sole proprietorships & partnerships
A sole proprietorship is a business that one person owns. The business is seen as an extension of the owner by the CRA. There is no legal status separating the two, meaning if your business goes into debt, you and your personal assets are on the line. A sole proprietor assumes all risks associated with the company.
As a result, a restaurant owner structuring their business as a sole proprietorship can file their personal tax returns and business tax returns together in one return. The business’s income is stated on the personal income tax return.
Like a sole proprietorship, partnerships work in much the same way. The only difference is that multiple people, not just one, own a partnership. Restaurant owners that structure their business as a partnership will file their business returns with their personal returns. That being said, they will also need to file extra returns concerning the partnership.
Incorporating your business means registering your restaurant as a corporation with the Canadian government. By law, the corporation is considered a separate entity to the owner compared to a sole proprietorship or partnership, where the business and the owner are seen as the same.
Many owners decide to incorporate their business as a means of protection. By separating their business from their personal finances, these owners protect their assets from being seized should the corporation flounder.
As a separate legal entity, incorporated businesses will file corporate tax returns while the owner(s) file separate personal income returns.
Types of Taxes for Restaurants
No matter the business structure, when filing taxes, restaurant owners must be aware of the multiple types of taxes they will need to pay to the CRA. These Canadian restaurant taxes include:
- Beverage (nonalcoholic)
- Beer and wine (alcoholic)
- HST & GST
- Payroll and employee benefits
- Tip income
Depending on your restaurant’s location, which province it works out of, certain taxes and tax rates may differ your goods and services. Learn more about how to file small business taxes.
When it comes to tax on food items, Canada differentiates between prepared food from restaurants and establishments versus food bought at a grocery store.
According to Restaurants Canada, an independent organization that supports the country’s food industry, food tax in Canada, based by province and concerning prepared meals, are as follows:
- Alberta: 5% GST
- British Columbia: 5% GST
- Manitoba: 7% Retail Sales Tax + 5% GST
- New Brunswick: 15% HST
- Newfoundland and Labrador: 15% HST
- Nova Scotia: 15% HST
- Ontario: 13% HST
- Prince Edward Island: 15% HST
- Quebec: 9.975% Quebec Sales Tax + 5% GST
- Saskatchewan: 6% PST + 5% GST
- Northwest Territories: 5% GST
- Nunavut: 5% GST
- Yukon: 5% GST
Ontario restaurant owners will be happy to hear that there are applicable tax rebates for the food they prepare in-house and is sold from their menu for immediate consumption. Prepared foods and beverages in Ontario qualify for this rebate only if such products are sold for no more than $4.00 in total, excluding HST.
Nonalcoholic beverage tax
The GST and HST associated with nonalcoholic drinks are determined based on the category of the drink. This categorization is dependent on the beverages’ characteristics and serving size. Using these categories, the CRA rules whether nonalcoholic beverages are either taxable or zero-rated, meaning such drinks are exempt from taxes.
Carbonated beverages like sparkling water and soda, non-carbonated beverages, such as juice and fruit flavoured drinks, are all taxable. However, in certain instances, non-carbonated fruit juices with less than 25% natural fruit ingredients are zero-rated.
Non-carbonated, non-fruit beverages such as soy drinks, vegetable juice beverages, tea and coffee, and iced tea beverages less than 600 mL are taxable, well beverages over 600mL and more are zero-rated. All milk-based beverages are also zero-rated with the exception of flavoured milk, such as chocolate or strawberry.
There is also a separate section for beverages sold under certain conditions. The CRA differentiates between heated drinks, drinks dispensed within a business, catered beverages, vending machines, and sales made within establishments.
Beer and wine tax
This type of Canadian restaurant tax is an important one for businesses that sell alcoholic beverages. The tax attached to alcoholic beverages will differ based on a few different factors. Depending on the alcohol type, percentage, volume, and whether it was local or imported, provincial beer and wine taxes range from 5% to 15%.
Things can get tricky if your business is considered a brewery or winery with an attached restaurant. For example, the beer and wine tax in Ontario dictates that if you are categorized as such, and ‘buy’ your own beer and wine to be sold at the restaurant, you will still need to pay the associated taxes of these products.
HST and GST
The province your restaurant operates within determines the sales taxes associated with your business’s food, beverages (alcoholic and non-alcoholic), and equipment. Most provinces will either have HST, harmonized sales tax attached to services and goods, or GST, the goods and services tax, and PST, provincial sales tax.
Businesses located in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island use and must pay taxes on harmonized sales tax HST. While Alberta, British Columbia, Manitoba, Quebec, Saskatchewan, Northwest Territories, Nunavut, and the Yukon all must use GST and pay all associated taxes.
Saskatchewan is one of the only provinces that charge PST. On top of this, Quebec also has another form of sales tax, known as QST, or Quebec sales tax. Check out this guide to the country’s provincial sales taxes to help you determine how much HST and/or GST taxes your restaurant will need to pay to the CRA.
As businesses need a workforce to operate, your restaurant should be used to processing payroll weekly or monthly to pay employee wages. As such, payroll deductions are part of the tax filing process for restaurants. The CRA has created an Employer’s Guide to payroll to help them understand what is required of them for these applicable tax rules.
Restaurant owners must calculate the proper payroll deductions and contributions based on the amount you pay your employees. As an employer, you are responsible for deducting Canada Pension Plan (CPP) contributions, Employee Insurance (EI) premiums, and income tax from your employees’ wages.
As the restaurant owner, it is up to you to decide whether or not to accept tips. However, as tipping is customary in Canada, your employees will most likely receive tip income. As tips and gratuities are seen as income, individuals must pay taxes on them.
There are three types of tips as dictated by the Canadian government. The type of tip you and your employees receive determines if they are considered pensionable earnings, insurable earnings, or both by the CRA.
- Controlled Tips: Tips paid by the employer to the employee are controlled tips and are considered part of the employee’s total remuneration. All CPP contributions and EI premiums must be deducted at the source.
- Direct Tips: Tips paid directly from customer to employee are not subject to CPP contributions and EI premiums. However, employees can make such contributions if they so wish.
- Declared Tips: Only applicable in the province of Quebec, these tips must be reported to the employer as well as the provincial government. The total amount of tips must be included in the insurable earnings of employees.
Overall restaurant owners will need to be especially aware of the controlled tips of their employees, as they are the ones responsible for making the proper deductions.
Restaurant Tax Auditing
Restaurant tax audits are no joke. If the CRA believes your tax returns are… then they have the right to audit your business. That is why it is so vital to complete and file your returns as accurately and truthfully as possible.
If the CRA audits your restaurant, the government will reassess your business to determine if you have paid the correct tax amount or owe more to the CRA. This can be costly for food establishments, as they could be forced to pay further taxes, as well as thousands of dollars in negligence penalties. In some restaurant audit cases, these small businesses can end up owing the Canadian government over $500,000.
To protect your restaurant from a tax audit, it is essential that you report your financial data correctly and honestly, complete all necessary forms, file your return before the deadline, and pay your taxes owing on time and in full. To do this, many restaurants look to accounting software to help them with this necessary task.
Accounting Software for Restaurant Taxes
If you need help creating and filing your restaurant’s tax returns this season, then QuickBooks Online offers owners comprehensive support. This quality software aids restaurants in financial management and reporting requirements.
Whether dealing with food taxes, beer and wine taxes, or sales tax, QuickBooks Online can help businesses track and sort expenses and revenue and maximize your restaurant’s tax deductions. Why not try it free today in time for the upcoming tax season.