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Canada Revenue Agency Is Coming For Your Undeclared Income From Tips

Audits of food servers will continue "until an improvement in compliance is noticed."
6okean via Getty Images

If you earn income through tips and don't report it, watch out.

It's becoming increasingly easy for Canada Revenue Agency (CRA) to catch unreported tip income, and the agency says it plans to continue targeting those who don't pay up.

In an email to HuffPost Canada, a CRA spokesman denied recent news reports that the agency is engaged in a crackdown on bar and restaurant servers. Karl Lavoie said there has been no increase in audits in this sector in recent years.

But he noted that bars and restaurants have been identified as being at "higher risk" of non-compliance on taxes.

"When a sector has been identified as being at high risk for non-compliance, the CRA will focus audit efforts in this sector until an improvement in compliance is noted," said Lavoie.

The CRA says it doesn't directly go after servers' earnings; rather, audits of servers are usually an extension of a review of a particular bar or restaurant.

In one recent instance, the CRA targeted Murphy Hospitality Group, which owns restaurants around Prince Edward Island. Management reportedly told media that as many as 200 staffers may have been audited by the agency.

One staffer, a 25-year-old woman struggling to pay off student debt, was hit with a $15,000 tax bill, the Charlottetown Guardian reported.

"It's pretty crazy that they're coming after the poor young population who are in school and just trying to support themselves,'' Anita Casey told the newspaper.

She said she had "actually claimed a good portion of (her) tips" on her taxes to begin with.

The company's COO Ben Murphy expressed concern that his employees were targeted this way.

"It's been a rule for X amount of years or whatever, but to go retroactive and start enforcing it two years ago? A lot of these people are paying their way through school or paying off their student loans," he told the Guardian.

Failing to report income from tips used to be easier to get away with, back when much restaurant and bar business was done in cash. But experts say that with the growing popularity of digital payments, tax collectors are gaining the advantage.

"The CRA uses a variety of tools and techniques to identify unreported income, including third-party data. Most food and beverage establishments use electronic point of sales systems that provide detailed information on transactions, including the amount of tips paid," the agency said.

Not just going after the little guys, CRA insists

The CRA has repeatedly taken criticism, sometimes even from MPs in the governing Liberal party, that it excessively targets "low-hanging fruit" like restaurant servers while ignoring wealthy businesses and people who use complex schemes to send money offshore to avoid taxation.

But in the wake of revelations of widespread offshore tax avoidance in the Panama Papers and Paradise Papers, that appears to be changing — at least gradually.

The two last federal budgets have increased the resources the CRA has to go after offshore tax evasion, Lavoie noted.

"The CRA now has audit teams dedicated to offshore non-compliance, and another dedicated to wealthy Canadians. The Agency also now risk assesses all large multinational companies every year."

The Canadian Press/Lars Hagberg

The agency points to its recent execution of search warrants in Calgary, Greater Toronto and West Vancouver related to tax evasion documented in the Panama Papers as proof it is taking offshore tax havens seriously.

"This investigation is one of the 42 international/offshore tax evasion cases that CRA is currently investigating which involve complex structures and potentially multi-million dollars in taxes evaded, which is consistent with our priority of focusing on sophisticated and well organized tax evasion schemes," Lavoie said.

However, some have suggested that the Panama Papers raids were mostly for show.

"I can't help but think this news release is largely a (public relations) exercise," tax lawyer David Rotfleisch of Rotfleisch & Samulovitch told Canadian Accountant. "After two years, three search warrants are served. Is this really significant news?"

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