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 Law
This article provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your particular circumstances.