Not everyone sets out to deliberately mislead the Canada Revenue Agency (CRA) and fall victim to a tax audit. Even taxpayers who believe they are reporting their income correctly can find themselves caught in hidden tax traps. The CRA loves to go hunting and fishing and is always sending agents into the field to fish for more tax dollars.
The service industry is especially at risk of this happening. For instance if you’re a server in a restaurant or bar, or an esthetician in a spa, or a bellhop at a big hotel, or if you work in any other service role where people often give you a cash gratuity, your tips aren’t considered a lucky windfall. You have to report them in addition to your salary – even if you don’t have receipts.
The Tip Project: A Red Flag and Favourite Tax Audit Trap of the CRA
Workers in service jobs are under constant scrutiny. The Canada Revenue Agency maintains lists of hotels, restaurants, spas, and hair salons. Through the matching program it can target all the employees of a specific bar, hotel, or spa, and compare salaries and “other income reported”. One overly honest waitress or bellhop can condemn the rest of staff to a reassessment or a tax audit.
Even worse, the Agency may send agents into the fields on what they call a “Tip Project”. The agent will pose as a customer and visit the hotel, restaurant, or bar on the busiest day of the week at the busiest time. The agent will observe how much the server or bellhop appears to receive in tips. (In some cases, the agent will even offer the server an exceptionally large tip).
The agent will then use the tips earned during that “peak period” as the benchmark for the tips earned on a consistent basis, and issue an income reassessment based on that amount for all the servers or bellhops in the restaurant or hotel. It’s up to the servers and bellhops to prove the assessment is wrong and they are not concealing income. Not easy especially when a field agent has first-hand evidence.
Even more insidious, the Agency may single out one of the servers or bellhops for reassessment and then offer to waive penalties, interest, and prosecution if that person agrees to amend his or her tax return to show the proper amount of gratuity income and taxes owing. The CRA will then use that evidence to reassess all the other servers or bellhops for unreported gratuities of the same amount, trying to build more cases of potential tax fraud or tax evasion.
At the end of the day, the field trip puts more tax dollars into the Agency’s coffers from those they deem are evading taxes on their income tax return.
How can you protect yourself?
Keep a daily record of the tips you receive. Jot them down in a pocket notebook.
Report all gratuities accurately on your tax return.
Share your “process” with your co-workers and suggest they do the same.
Retain all your records so that you can refute an inflated reassessment or being charged with committing tax evasion.
Immediately contact a tax lawyer if you are approached by the CRA to “cut a deal”. You have the right to retain counsel to protect yourself against self-incrimination, regardless of what the CRA may say. For instance, the Agency may suggest that it would be better to handle this one-to-one, or even threaten more serious consequences if you retain a lawyer.
Remember, don’t trust the Agency to honour a verbal agreement and contact a lawyer to avoid paying a higher amount of taxes than required.
Not everyone sets out to deliberately mislead the Canada Revenue Agency (CRA) and fall victim to a tax audit. Even taxpayers who believe they are reporting their income correctly can find themselves caught in hidden tax traps. The CRA loves to go hunting and fishing and is always sending agents into the field to fish for more tax dollars.
The service industry is especially at risk of this happening. For instance if you’re a server in a restaurant or bar, or an esthetician in a spa, or a bellhop at a big hotel, or if you work in any other service role where people often give you a cash gratuity, your tips aren’t considered a lucky windfall. You have to report them in addition to your salary – even if you don’t have receipts.
The Tip Project: A Red Flag and Favourite Tax Audit Trap of the CRA
Workers in service jobs are under constant scrutiny. The Canada Revenue Agency maintains lists of hotels, restaurants, spas, and hair salons. Through the matching program it can target all the employees of a specific bar, hotel, or spa, and compare salaries and “other income reported”. One overly honest waitress or bellhop can condemn the rest of staff to a reassessment or a tax audit.
Even worse, the Agency may send agents into the fields on what they call a “Tip Project”. The agent will pose as a customer and visit the hotel, restaurant, or bar on the busiest day of the week at the busiest time. The agent will observe how much the server or bellhop appears to receive in tips. (In some cases, the agent will even offer the server an exceptionally large tip).
The agent will then use the tips earned during that “peak period” as the benchmark for the tips earned on a consistent basis, and issue an income reassessment based on that amount for all the servers or bellhops in the restaurant or hotel. It’s up to the servers and bellhops to prove the assessment is wrong and they are not concealing income. Not easy especially when a field agent has first-hand evidence.
Even more insidious, the Agency may single out one of the servers or bellhops for reassessment and then offer to waive penalties, interest, and prosecution if that person agrees to amend his or her tax return to show the proper amount of gratuity income and taxes owing. The CRA will then use that evidence to reassess all the other servers or bellhops for unreported gratuities of the same amount, trying to build more cases of potential tax fraud or tax evasion.
At the end of the day, the field trip puts more tax dollars into the Agency’s coffers from those they deem are evading taxes on their income tax return.
How can you protect yourself?
Keep a daily record of the tips you receive. Jot them down in a pocket notebook.
Report all gratuities accurately on your tax return.
Share your “process” with your co-workers and suggest they do the same.
Retain all your records so that you can refute an inflated reassessment or being charged with committing tax evasion.
Immediately contact a tax lawyer if you are approached by the CRA to “cut a deal”. You have the right to retain counsel to protect yourself against self-incrimination, regardless of what the CRA may say. For instance, the Agency may suggest that it would be better to handle this one-to-one, or even threaten more serious consequences if you retain a lawyer.
Remember, don’t trust the Agency to honour a verbal agreement and contact a lawyer to avoid paying a higher amount of taxes than required.
DioGuardi offers solutions for tax problems such as:
Unreported income
Unfiled tax returns
Payment arrangements
Unpayable tax debt
Tax dispute litigation
Criminal tax defense
Wills, Estates & Trusts
DioGuardi Law offers these will, estate and trust services for individuals and business-owners:
Wills
Preparation of trust agreements
Powers of attorney
Estate administration
Probate
Representation in estate driven litigation
Real Estate
DioGuardi Law can assist you with all your real estate needs including:
Newly constructed/Resale
Purchases and Sales
Title transfers
Leases
Private mortgages
Refinancing
Condominiums
Vacant land
Tax Debt Relief
When your tax balance is too large to be affordable, DioGuardi Law can protect your home, your cash flow and your financial assets from the Taxman. It is essential that we begin planning a strategy before the CRA registers a lien against your properties or seizes financial accounts, and before you engage with an insolvency trustee.
Business & Tax Planning
DioGuardi Law has the experience to provide:
Resident and non-resident corporate restructuring
Optimum use of holding corporations
Continuity and succession planning
Tax-free transfers
Losses and ABIL planning
Making interest tax deductible
Small business planning
Corporate & Commercial Law
DioGuardi Law have represented business clients for the last 50 plus years and have supported their legal requirements on an on-going basis by offering the following services:
Incorporations and corporate governance
Corporate reorganizations and transactions for the directors and shareholders
Negotiation and drafting of agreements, professional corporations, minute book maintenance
Brigitte DioGuardi
B.A., LL.B
Brigitte obtained her Law Degree from the University of Sheffield in the United Kingdom. Upon her return, she qualified for the Bar and was called to the Law Society of Ontario (formerly the Law Society of Upper Canada) in 2002. She was also a member of the Bar of British Columbia and headed up the Vancouver office of DioGuardi Tax Law. Fluently bilingual in English and French, Brigitte has broad experience in the areas of:
Joyce Bruno has worked as executive legal assistant to Paul Dioguardi for 35 years and continues to offer her expertise and experience to the Dioguardi Law firm. Joyce’s role has evolved over the years and has acquired and developed many skills. She is an invaluable asset in case management and ensures the smooth running of our office.
Paul DioGuardi
B.A., LL.B, KING’S COUNSEL, SENIOR COUNSEL
Paul obtained his Law Degree from Queen’s University in 1964. He is a member of the Bars of Ontario, British Columbia and the Turks and Caicos Islands, a British tax free territory in the West Indies. He has over 50 years of experience and was trained at the Ottawa head offices of Revenue Canada and the Tax Litigation Section at the Department of Justice. Paul has had and continues with an extensive career in various areas of law such as:
