GST/HST on tips and service charges: what Canadian restaurants must collect

Tips and service charges look alike to a customer, and tax law treats them differently. Get it wrong, and you under-collect GST/HST that you still owe, or you over-collect and confuse your staff and your customers. Here is the general approach for restaurants in British Columbia and Ontario. The Canada Revenue Agency's own guidance and your accountant are the authority.

Is a tip subject to GST/HST?

Accounting guides and the Restaurants Canada compliance guide describe the same basic split. A tip that is freely given by the customer, such as cash left on the table or an amount the customer chooses to add on a card machine, is not part of the price of the meal and is generally not subject to GST/HST. The customer decides whether to give it and how much.

What about a service charge or automatic gratuity?

When a restaurant adds a mandatory or suggested amount to the bill as a service charge, for example a set percentage for large parties, the CRA's position, as described in those guides, is that GST/HST applies to it. The customer has no real choice, so it is treated as part of the price. The Restaurants Canada guide reports that the CRA's position extends to situations where a restaurant requires a mandatory tip, for example based on party size.

In practice, if your bill adds "18 percent gratuity for parties of eight or more", treat that line as part of the taxable sales of the meal. If the charge appears on the bill but is called optional, the treatment depends on the facts, so ask your accountant.

How does this fit with provincial tip law?

Provincial law has a different test. In Ontario, the Employment Standards Act treats a charge as a tip or gratuity if a reasonable person would expect that it is kept by or shared among the employees. So the same service charge can be taxable under GST/HST and also be staff money under the Ontario tip rules. The two do not conflict. You collect the tax on the charge, remit it, and pay the charge to staff as tips, without deducting the tax from them. Ask your accountant how to record it, so that the tax is paid out of your business and not out of the staff's share.

In British Columbia, check the Employment Standards Act and the provincial sales tax guidance on gratuities. Accountants differ on some details, so ask for written advice for your case.

What should the bill say?

Be clear. If a charge is mandatory, call it a service charge, say what it is for and where the money goes, and put it on the menu and booking page. If a charge goes to staff, say so. If it stays with the business, do not call it a tip or a gratuity. Misleading wording invites complaints, and in Ontario it can create a tip-law problem.

How do you set up your point of sale?

1. Separate the lines. Have a service charge line distinct from the tip line.
2. Tax the service charge, if your accountant agrees.
3. Leave voluntary tips untaxed, whether entered on the terminal or on paper.
4. Make the report match. Your sales report should show the taxable sales, the service charge and the tips separately.
5. Test with a sample bill before the busy season.

How do you pay out tips and charges?

Pay staff their tips as the law requires, and keep records of the totals collected and paid. Tips are not wages, so they are not subject to the same deductions, but income tax rules for staff and reporting rules apply. Your accountant or payroll provider will help you with how to report tips.

What about card processing fees on tips?

Provincial rules limit what an employer can deduct from tips for card fees. In Ontario, the Ministry of Labour's guide sets out what is allowed. Check the current rule, and do not deduct more than the law allows.

What about the tax on a bill split among several people?

Each person pays tax on the part of the bill they are buying, and the same rules apply to a service charge. If your point of sale splits a bill, check that the service charge is split along with it.

What are the common mistakes?

• Calling a mandatory charge a tip.
• Charging tax on voluntary tips.
• Not charging tax on a service charge.
• Paying staff less than the full charge.
• Recording both in one line, so the report cannot separate them.

Where can you check?

Read the CRA's guidance on restaurants and on the treatment of gratuities and service charges, ask your accountant, and keep a short note of the decision for your records.

More guides for your business:

• Hiring temporary foreign workers for a restaurant in BC or Ontario: where the low-wage rules stand in 2026
• Music licences for restaurants and bars in Canada: SOCAN, Re:Sound and what you pay for
• Writing a restaurant cancellation and no-show policy: wording that holds up in BC and Ontario

More in the Canadian guides for food businesses.