Restaurant tax services: HST at the counter, tips on the T4, and audit-proof food costs

HST changes with the order, not the menu

The same kitchen produces sales taxed three different ways. Dine-in is straightforward — 13% in Ontario on everything, including the beer. Takeout is where Ontario's point-of-sale rebate matters: qualifying prepared food and beverages sold for $4.00 or less carry only the 5% federal portion, because the 8% provincial share is rebated at the register. And the basic-groceries rules turn quantity into a tax rate: a single muffin is taxable, while a package of six or more of the same item leaves as zero-rated groceries.

Getting the POS tax tables right once is worth more than any year-end fix, so we audit button mapping — especially the $4 threshold and combo pricing — before the first GST34 we file.

Delivery platforms: read the payout statement before the GST34

App revenue arrives net of commissions, and that single fact causes most restaurant HST errors. Sales must be reported gross — the full menu price the customer paid — with the commission recorded as an expense, not netted out of revenue. A registered restaurant generally remains responsible for remitting HST on the food itself, while the platform charges HST on its commission and fees, which you recover as input tax credits. Each platform presents this differently in its statements, so we map every payout report to the GST34 line by line rather than trusting the deposit amount.

Tips: who controls the money decides the payroll treatment

The distinction that matters is controlled versus direct. Tips the employer controls — mandatory service charges on large parties, employer-pooled amounts redistributed on a formula — are pensionable and insurable earnings: they run through payroll, land on the T4, and carry CPP and EI. Direct tips — cash left on the table, tip-outs the staff organize themselves — are still taxable income the employee must report, but the employer withholds nothing. Card tips sit in between and follow control: an employer who simply passes them through can keep them direct, while one who decides the split has made them controlled. One HST wrinkle: a voluntary tip carries no HST, but a mandatory service charge is part of the bill and is taxable at 13%.

Food cost variance is a sales audit waiting to happen

CRA audits restaurants through indirect verification: take supplier purchases, apply menu markups, and compare the sales that implies against what was reported. If your purchases could plausibly produce $900,000 of revenue and the T2 shows $750,000, the auditor's working theory is suppressed cash sales — and penalties for electronic sales suppression software are severe. The defence is documentation, kept as you go:

• Waste and spoilage logs — what was tossed, dated and quantified.
• Comps, promos, and staff meals — recorded in the POS, never rung out as zero.
• Daily close-outs tied to deposits — every Z-report reconciled to the bank.

We track theoretical versus actual food cost quarterly, so an unusual variance gets an explanation in the file the year it happens, not a reconstruction three years later under audit. Staff meals belong in the same file: rung through the POS at their discounted price with the policy written down, they explain part of the variance instead of quietly inflating it.

The T2, the instalments, and the franchise question

An incorporated restaurant earns the small business deduction — roughly 12.2% Ontario tax on the first $500,000 of profit — with the T2 due six months after year-end and instalments required once tax passes $3,000. Kitchen equipment depreciates in Class 8 at 20%, and dining-room build-outs amortize in Class 13 over the lease term. Owner pay deserves a deliberate choice with every T2: salary is deductible to the corporation and builds RRSP room, dividends skip payroll remittances, and most working owners land on a mix we revisit annually rather than set once. If you operate a US franchise brand, the royalty and ad-fund payments heading south carry withholding questions of their own — we cover those on our cross-border tax page for restaurant owners.

Source: CRA — GST/HST Memorandum 4.3, Basic Groceries.