Canada Revenue Agency examinations of employees at a famous Prince Edward Island hospitality firm have increased, highlighting the agency’s increased efficiency in tracking down unreported tip income and the greater risk to those who choose to ignore it.
Canada Revenue Agency sent letters to dozens, maybe as many as 200, employees of Murphy Hospitality Group on Prince Edward Island in January, accusing them of underreporting gratuities for 2014 and 2015. The government organisation claims some people neglected to report tens of thousands of dollars, and is now demanding back taxes on that money, along with potential financial penalties of up to half of what is owing. Several service workers vented their anger to The Globe and Mail about what they see as an abrupt shift in the CRA’s enforcement strategies.
The Canadian Revenue Agency claims it is only doing its job by ensuring that everyone in the country pays their fair amount of taxes. However, the Murphy Hospitality Group’s dominance in the relatively small province has increased the strain on its employees, and it has brought attention to the shifting ways in which service industry workers’ tips can be accounted for, and the increased effort that service industry workers must now expend in order to calculate their true income.
Tip tracking is simplified by the widespread use of debit and credit cards in the modern payment system. A spokesman for the Canada Revenue Agency (CRA), Etienne Biram, said in an email that the “maintains the integrity of the Canadian tax system and the confidence of Canadians in the fairness of the system by “conducting a number of review activities” annually to assess compliance with the law on the part of taxpayers. The CRA’s risk-based strategy to detecting noncompliance is applied across various industries, including the hospitality industry. For many years, auditors in this field have been conducting routine checks all over the United States.”
The Murphy restaurant group, which includes the Gahan House and Brickhouse Kitchen & Bar in Charlottetown, employs hundreds of people across Prince Edward Island and the Maritime provinces. The servers’ main argument is based on an unwritten rule of thumb that has been widely followed in the service industry for decades: the notion that service workers should report a modest amount of their official salary as gratuities, usually equal to 10% of their total compensation.
In the past, when gratuities were typically given in cash, verifying exact numbers was a challenge. The widespread use of debit and credit card payments, however, has led to the availability of detailed tip information from point-of-sale machine logs.
A comparable major audit occurred in St. Catharines, Ontario, earlier this decade, but with the advent of digital payment systems, it is now easier than ever to trace where money goes. The government also performs what it calls “lifestyle studies,” which include looking at things like a taxpayer’s property holdings to determine if they are consistent with their reported income.
The Murphy service employees who contacted The Globe claimed they had reported tips, but that they had been told to do so by someone who lacked industry knowledge. However, tax and service sector professionals caution that this is a risky practise in the modern era, when tips can be easily tracked.
Paul Hewitt, a Toronto-based chartered professional accountant who ran restaurants for nearly 15 years and now advises a number of clients in the service industry on tax and audit issues, explains that “in the past, it might not have made sense to go after a bunch of individual servers to make $1,000 on each one.”
But now, in one convenient location, diners can rate all of a restaurant’s waiters based on their tips.
Mr. Hewitt and other experts in the restaurant industry, such as the lobbying group Restaurants Canada, advise servers to keep meticulous records of any gratuities they get, preferably at the end of each shift.
The Globe has obtained access to three of the CRA letters, has spoken with four affected current and former employees, and has received mail from numerous more; all of these people have requested anonymity out of fear of retaliation from the CRA or their company.
While several employees admitted fault for failing to disclose all of their tips, many were upset by the CRA’s strategy of suddenly going after the unreported earnings of a large number of young, low-income employees in a single region.
The server’s boss is just as perplexed by this strategy. Ben Murphy, COO of the Murphy Hospitality Group, stated in an interview, “There are bigger fish to fry – if they want to collect tax money, they can do it in other ways.” Put out a letter saying, “Starting in 2019, we are going to start enforcing this regulation more strictly,” “if they do decide that this is how they want to go about generating tax money.”
Employees at Murphy Hospitality Group are confused as to how the CRA determined their tips for 2014 and 2015, and they don’t know how to verify these figures on their own. Some employees have voiced concerns that the number may be overstated if it was generated by a point-of-sale system, as this would not take into account “tipping out,” or the process by which tips are distributed to the rest of the service and kitchen personnel at the end of the night. (When asked about this, the CRA stated that “every taxpayer has the opportunity to offer written submissions in response to a proposed tax reassessment.”)
At least one waitress is worried that she won’t be able to afford to return to school next year because of the fines. Some people are worried that they won’t be able to afford the increasingly competitive rental market in Charlottetown if they make their payments. While others worry about becoming bankrupt or, at the very least, having a tough time covering their expenses for several years due to the high initial investment required for a home or family.