HST on prepared food: 13%, with one Ontario break
Everything a restaurant sells as prepared food or drink is taxable at 13% HST, dine-in or takeout. Ontario adds one break worth programming correctly: qualifying prepared food and beverages sold for a total of $4.00 or less receive a point-of-sale rebate of the 8% provincial portion, so the customer pays only 5%. A properly configured POS applies that automatically on the small-ticket order; a misconfigured one either overcharges guests or leaves you remitting tax you never collected.
Alcohol never qualifies for the rebate and is always 13%. Gratuities split on one word: a voluntary tip a guest chooses to leave carries no HST, while a mandatory or automatic service charge, the 18% added to a party of eight, is part of the price of the meal and taxable. Banquet contracts and large-party policies need the POS and the invoices aligned on that before the CRA points it out.
Controlled or direct: the tip question that decides CPP and EI
Payroll treatment of tips turns on who controls them. Controlled tips pass through the employer's hands on the employer's terms: mandatory service charges, a tip pool the house administers, card tips distributed under a policy you set. They are pensionable and insurable, so CPP contributions and EI premiums apply and the amounts belong in employment income on the T4. Direct tips go from guest to worker, with the employer at most converting a card amount to cash. No employer CPP or EI applies, though the income remains fully taxable to the employee, who can elect to pay CPP on it personally.
The practical problem is drift. Nearly all tips now arrive electronically, the CRA has been open about its focus on electronic tip records, and a card-tip pool the house distributes on its own rules is usually controlled whether or not anyone intended that. We help you set a written tip policy first, then make payroll match it, which costs far less than a retroactive CPP-and-EI assessment covering several years of tip flow.
| How the gratuity arrives | Tax and payroll treatment |
|---|---|
| Cash left on the table, kept by the server | Direct tip: no employer CPP or EI, no HST; still taxable income to the employee |
| Card tip paid out under a house distribution policy | Usually controlled: CPP and EI apply, amounts belong on the T4 |
| Automatic 18% service charge on large parties | Controlled, and part of the bill, so 13% HST applies to it as well |
| Tip pool run entirely by staff, house never directs it | Direct: the employer stays out of the payroll math |
The returns behind the register
Our Corporate Tax Filing engagement covers the T2, where the combined Ontario small-business rate of roughly 12.2% applies to the first $500,000 of active income. The return is due six months after year-end, with the balance owing three months after year-end for most small CCPCs, and we build the calendar so year-end never collides with your busiest quarter.
HST filing frequency follows sales: annual by default up to $1.5 million in taxable supplies, quarterly between $1.5 million and $6 million, monthly above that. Most single-location restaurants land in quarterly territory, which means four chances a year for the POS, the ledger and the return to disagree; we reconcile all three every period. Payroll remittances run on their own cycle, T4s are due at the end of February, and the owner's return comes through Personal Tax Filing so salary, dividends and the household picture are filed as one piece rather than three.
When the CRA writes
Hospitality draws more than its share of letters: HST desk reviews, payroll examinations, tip questionnaires. What happens in the first two weeks usually decides how far the file goes, and the right response is documents, not adjectives. CRA Audit and Review Support handles representation when a review turns real. For a single-location spot that mostly needs a CPA within reach, CPA Quick Support at $99 a month includes CRA letter review as part of the subscription, so the envelope gets professional eyes the week it arrives.
Source: CRA — Tips and gratuities.
