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Early on in my career, I started going out for lunches and dinners with key contacts and clients. Providing gratuities, or tips as they’re better known, for good service was, of course, customary. I wondered if it was a requirement for the servers to pay tax on their received tips. The short answer was yes and still is.

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I also learned that the reporting of tip income by recipients is very inconsistent and the subject of myths. A number of people, even seasoned tax professionals, would tell me — and continue to do so — that as long as the recipients reported something, say 10 per cent of their wage, the Canada Revenue Agency (CRA) would leave them alone. Not true and never has been.

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The CRA has long provided administrative guidance about the requirement to report tip income. For employers, especially if the tips are originally in their control, the CRA has provided guidance regarding proper tax withholdings from such amounts. Tips are indeed taxable income and need to be reported in their entirety.

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For the recipient, there are often good reasons to fully report your tip income.

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The first is that you’re breaking the law by purposely not reporting it. In a worst-case scenario, it could be considered criminal tax evasion, resulting in significant financial penalties and possible jail time. Don’t purposely under-report.

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Second, the reporting of your tip income can possibly make you eligible for certain types of government programs. For example, I’m aware of some servers who didn’t report their tip income, so their income was too low to qualify for all the government handouts when COVID-19 came along.

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Lastly, it can increase your income for the purposes of loan and mortgage eligibility.

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A basic policy in the design of any country’s tax system is that any economic enrichment received by a taxpayer is taxed. The exceptions to such a basic rule are what cause many of the complications.

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For example, in Canada, lottery winnings are not taxable; only one-half of capital gains are included in taxable income; and dividend income received by individuals is taxed at a lower overall rate to give credit for the underlying corporate tax that has already been paid on such distributions. These are all deliberate policy choices.

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Tip income has intentionally not been excluded from being subject to tax in Canada. That is correct. There aren’t any good and obvious policy reasons to exclude tips from tax.

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That’s why I was surprised when Donald Trump promised to introduce a rule to not tax tips and overtime in the United States during the election campaign last year. I guffawed at such a promise since, again, I couldn’t understand any good tax policy reasons to do that.

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I also wondered how such a law, if implemented, would be administered and to what occupations such an exclusion would apply. For example, perhaps a lawyer could issue an invoice for services rendered for US$100, but mandate a non-taxable “tip” of US$100,000. Would the law encourage that kind of abuse?