Protecting a Restaurant from a CRA Payroll Audit

The client

A popular full-service restaurant in downtown Toronto with 35 employees (servers, bartenders, kitchen staff) and annual revenues of $2.5 million.

The challenge

The owner was managing tip income incorrectly. When customers paid by credit or debit card and included a tip, the owner cashed out the tips at end of night and handed cash directly to servers — treating them as "direct tips" and not running them through payroll. The CRA initiated a payroll audit covering the previous two fiscal years and correctly identified that because the tips flowed through the employer's merchant account and were distributed by the employer, they were legally "controlled tips."

The CRA initially proposed a devastating reassessment: both the employer's and the employees' share of unremitted CPP and EI on all credit-card tips for the two-year period, plus gross negligence penalties — over $85,000.

The solution

• Audit representation: we stepped in as the authorized representative and successfully argued against the gross negligence penalties, demonstrating that the owner had relied on outdated industry norms rather than intentionally attempting to evade tax
• Data reconstruction: we painstakingly reconstructed POS data to separate actual controlled tips from statutory holiday pay and other non-tip revenue the auditor had incorrectly included in the initial assessment base
• System overhaul: implemented a new, compliant payroll system. All credit-card tips are now processed through payroll, subject to proper CPP/EI withholding, and reported accurately on T4 slips

The result

Through rigorous data reconstruction and negotiation, we reduced the CRA's final assessment by over 40%, saving the restaurant from potential bankruptcy. More importantly, the new payroll system ensures the business is fully compliant going forward, eliminating the risk of future payroll audits.