Start where the CRA starts: the electronic trail
Electronic payment made tips countable, and the CRA noticed. Its reviews of service businesses lean on processor batches, booking-app payouts and bank deposits, all pulled without asking the owner for anything. So the test of a nail salon filing is simple: do the T4s, the HST return and the T2 agree with records the reviewer already holds?
Our Corporate Tax Filing work builds the return from reconciled books rather than assembling numbers in April. Where techs or the owner need their own returns done, tip income included, Personal Tax Filing runs alongside so the two stories match.
Controlled or direct: what each tip does to payroll
Tax treatment of a tip depends on who controls it, not on whether it went through a machine. When the salon pools terminal tips and decides the split, those are controlled tips: they become pensionable, insurable employment income, run through payroll with CPP and EI withheld, and land on the T4. When the salon merely passes each tech her own terminal tips, untouched, it is acting as a conduit and the tips are direct: no source deductions, and the tech reports them herself.
| How the tip moves | Payroll treatment | Where it is reported |
|---|---|---|
| Salon pools terminal tips and sets the split | Controlled: CPP and EI withheld through payroll | On the tech's T4 |
| Salon passes each tech her exact terminal tips | Direct: no deductions at source | Tech's T1, line 10400 |
| Cash left at the table | Direct: never touches payroll | Tech's T1, line 10400 |
| Tech wants CPP on her direct tips | Voluntary election on Form CPT20 | Filed with the tech's T1 |
The line moves the moment the salon starts directing the money. A tip-out policy the owner sets, or a house rule that pools Saturdays, converts direct tips into controlled ones, and with that comes withholding the salon should have been doing. We look at how tips actually move before year-one T4s go out, not after a payroll examiner does.
Family wages that survive scrutiny
Putting a spouse on the desk or a teenager on weekend cleaning is legitimate and common; done casually, it is also one of the first things a reviewer strikes out. The wage has to be for work actually performed, reasonable for what a stranger would be paid, and actually paid, as a traceable transfer, not a note that the family shares an account. It goes through payroll, CPP applies from age 18, and a T4 is filed like anyone else's.
EI is the subtlety: employment of a non-arm's-length family member is insurable only if its terms would look substantially the same between strangers, and the CRA will rule on it. Getting that ruling right matters in both directions, premiums that were never owed, or benefits a spouse expected but cannot claim. We paper family payroll so every piece holds.
Cash days and the reviewer's arithmetic
Where reported income looks thin, the CRA does not need the salon's ledger; it can rebuild income indirectly from bank deposits, supplier purchases and visible lifestyle. Product buying is a favourite lever in this trade: a reviewer who sees a year of gel, tips and acetone orders can estimate the services they should have produced and compare that to what was reported. The defence is not rhetoric, it is the daily close: drawer counts beside system totals, deposits that match, every e-transfer tagged the day it lands.
The HST return gets the same reconciliation before it goes out, filed sales tied to booking-system totals and processor batches, so the figure the CRA can verify is the figure we filed. Salons that keep that discipline give an indirect analysis nothing to find, and if a letter arrives anyway, CRA Audit & Review Support answers it with the file already organized rather than assembled under deadline.
The calendar, so nothing files late
An incorporated salon files the T2 within six months of year-end, with balance owing due three months after year-end for most small CCPCs. T4s for techs and family staff are due the last day of February. HST returns run annually or quarterly depending on the profile, and a sole-proprietor owner files the T2125 inside her T1 by June 15, with any balance still due April 30. We put the whole sequence on one calendar for salons across Mississauga and the GTA, and quote the work in writing after a free 15-minute discovery call.
