In Canadian restaurants, tip culture is strong, but tax and payroll treatment depends on how the payment is structured. The same percentage on a receipt can be optional gratuity in one case and taxable service charge in another.
This guide gives a practical setup sequence: define classification first, then run tax math, then lock POS and payroll mapping.
Quick Summary
- Voluntary tips are usually outside GST/HST.
- Mandatory service charges are generally taxable.
- CRA payroll handling depends on direct vs controlled tip structure.
- Separate POS coding prevents most month-end reconciliation issues.
- Province-level tax rates change totals, but classification logic stays the same.
Why This Matters in 2026
Statistics Canada released the December 2025 CPI update on 2026-01-20.
When input costs move while check averages are flat, many teams add or expand service-charge policies quickly.
If classification is unclear, that quick change creates tax and payroll cleanup work later.
Canada Rule Baseline
1) GST/HST: voluntary vs mandatory
CRA guidance separates voluntary gratuities from mandatory charges. Where the customer freely decides the amount, gratuity is usually outside GST/HST. Where the business imposes the amount, the charge is generally part of taxable consideration.
2) Payroll: direct tips vs controlled tips
CRA distinguishes direct and controlled tips for payroll obligations. Controlled tips are typically treated as CPP/EI-relevant earnings and need proper payroll handling.
3) Income reporting
Tips and gratuities are taxable income for workers. Your internal process should align payment flow, payroll coding, and reporting records.
Pricing Math (Ontario HST Example)
Assumptions:
- Menu subtotal:
CAD 20.00 - Mandatory service charge:
18% - HST rate example:
13%
Step 1) Add mandatory charge:
serviceCharge = 20.00 x 0.18 = 3.60
taxableSubtotal = 23.60Step 2) Apply HST:
HST = 23.60 x 0.13 = 3.07
guestTotal = 26.67For margin checks, use pre-tax subtotal and keep tax pass-through separate.
Local Execution: Downtown Toronto vs Suburban Calgary
| Operating context | Typical pressure | Practical move |
|---|---|---|
| Downtown Toronto full-service | Higher labor density and guest expectation on tip clarity | Use explicit receipt wording and audit controlled-tip payroll mapping weekly |
| Suburban Calgary family-casual | Stronger value focus and mixed check size | Keep optional tip prompts simple for small tables; define mandatory policy only for clear large-party cases |
The legal framework is national, but communication and threshold design should follow local check behavior.
POS + Payroll Checklist
- Create distinct POS lines:
voluntary tip,mandatory service charge. - Map mandatory service charge to taxable sales treatment.
- Confirm payroll setup for controlled tip distributions.
- Standardize one front-of-house explanation script.
- Reconcile first month of receipts, payroll, and tax reports together.
Guest-Facing Wording
Optional model:
“Gratuity is optional and at your discretion.”
Mandatory model:
“An X% service charge is added for parties of N+ and shown on the bill.”
Avoid hybrid wording that implies both mandatory and optional treatment.
20-Minute Weekly Audit Loop
- Review 20 checks with service-charge activity.
- Verify tax treatment and payroll category for each line type.
- Track guest dispute reasons and adjust wording once per cycle.
- Keep threshold changes and wording changes in separate tests.
Related Guides
- Canada GST/HST Restaurant Pricing Guide
- Canada Menu Pricing Guide
- Canada Menu Pricing Calculator
- Canada Restaurant Labour Cost Calculator
- Canada Restaurant Prime Cost Calculator
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