Accounting and tax for restaurants in Canada

Why restaurants are CRA's most-audited sector

CRA's Underground Economy Initiative consistently identifies the food service industry as a high audit-risk sector. The reasons are structural:

• High cash volume: Restaurants handle more cash per transaction than most businesses. Cash is difficult to trace and easy to underreport.
• Low margins: A restaurant with 5% net margins on $1,000,000 of sales earns $50,000. An owner who skims $50,000 in cash effectively doubles their income — CRA knows this.
• Complex tip arrangements: Tips change the payroll picture significantly and are often poorly documented.
• Lifestyle versus reported income: CRA auditors are trained to compare a business owner's visible lifestyle (vehicle, home, vacations) against reported income. A restaurant owner reporting $60,000 in net income while living visibly better triggers a net worth audit.

The solution is not to fear audits — it is to run operations in a way that makes an audit manageable: complete POS records, bank deposits that match sales, documented tips, and clean separation between business and personal finances.

Point-of-sale records: what CRA expects

CRA has specific expectations for restaurant record-keeping, articulated in their guidance on electronic point-of-sale systems. The core requirement is that your records must be complete, accurate, and not alterable after the fact.

Required records

• Daily Z-tape reports (or electronic equivalents): The daily summary report from your POS showing total sales, payment types (cash, credit, debit), voids, and corrections. Print and keep these daily — or export and archive them electronically.
• Individual transaction records: Your POS system should maintain a log of every transaction. If CRA audits you, they may ask for detailed transaction data for specific periods.
• Bank deposit slips and reconciliations: Every cash deposit to the bank should reconcile to your daily cash sales report. Unexplained differences are immediately suspicious.
• Credit and debit card settlement reports: Keep merchant batch reports showing daily credit/debit settlements. These should match your POS reports for card transactions.

Systems that allow record manipulation

CRA has specific concerns about POS systems that allow transactions to be deleted, modified, or voided without maintaining an audit trail. If your system allows a "training mode" that processes real transactions without recording them, or allows voiding completed transactions without leaving a record, you are using a system that creates compliance risk regardless of whether you misuse those features. Modern cloud-based POS systems generally maintain immutable transaction logs that satisfy CRA.

Tips: controlled vs. direct — major payroll implications

How you handle tips has significant consequences for your payroll obligations and your employees' tax reporting.

Controlled tips (employer-collected tips)

Controlled tips are tips that pass through the employer's control before being distributed to employees — mandatory service charges, tips automatically added to large party bills, tips pooled by management and redistributed. Controlled tips are employment income. They must be:

• Added to the employee's T4 box 14 employment income
• Subject to CPP contributions (both employee and employer portions)
• Subject to EI premiums (both employee and employer portions)
• Subject to income tax withholding

This is a significant cost for employers. A restaurant that adds a mandatory 18% service charge to all bills is paying employer CPP and EI on every dollar of that service charge distributed to employees. Budget for this in your labour cost analysis.

Direct tips (customer to employee)

Direct tips are tips given by a customer directly to an employee without passing through the employer — cash left on the table, tips added to credit card payments that go directly to the server without employer redistribution. Direct tips are:

• Not included on the employee's T4
• Not subject to employer CPP or EI obligations
• Still taxable income to the employee — the employee must report them on their T1

Whether a credit card tip is a controlled or direct tip depends on whether the employer distributes it. If tips are added to the server's paycheque by payroll, they are controlled. If the server receives cash at end of shift directly from credit card settlements without going through payroll processing, CRA may treat them as direct. The line is nuanced — get advice specific to your tip policy.

HST on food and beverages

The HST/GST rules for food are notoriously complex, but the restaurant application is relatively simple: food and beverages sold from a restaurant for immediate consumption are taxable. The zero-rating for basic groceries does not apply.

What is taxable

• All dine-in meals and beverages
• All takeout orders (hot or cold food prepared for immediate consumption)
• All delivery orders
• Catering services
• Beverages sold at a counter (hot coffee, smoothies, fresh juice)
• Combination meals (where food and beverages are sold together)

Edge cases

If you sell packaged goods through your restaurant (retail bags of coffee beans, bottled sauces, packaged cookies) for customers to take home and consume later, those may be zero-rated as basic groceries. The test is whether the item is sold for immediate consumption or for later use at home. A whole cheesecake sold to take home is generally zero-rated; a slice served at a table is taxable. Keep these items separately tracked if you sell them.

Delivery platforms

Food ordered through delivery platforms (Uber Eats, DoorDash, SkipTheDishes) is taxable. The platform may or may not be acting as an agent. Understand your agreement with each platform — who collects HST, who remits it, and how the commission and service fees interact with your HST filings. Some platforms remit HST on behalf of the restaurant; others pay the restaurant inclusive of HST and expect the restaurant to remit. Review your platform agreements annually.

Inventory and food cost management

Food cost percentage — cost of goods sold divided by revenue — is one of the most important metrics in restaurant accounting. Industry averages run 28–35% of revenue. Knowing your food cost by category (proteins, produce, dairy, dry goods) lets you identify waste, theft, and pricing issues.

Year-end inventory count

Your accountant needs an accurate inventory count at your fiscal year-end. This is not optional — inventory is on your balance sheet and affects cost of goods sold. A physical count of all food on hand, valued at cost, is required. Schedule year-end near a low-inventory point (end of a slow week, after a special event) to make the count manageable.

Inventory shrinkage

Food waste, spoilage, and theft reduce your actual inventory below what your purchasing records show. Document waste (a waste log tracks items discarded and why) and conduct periodic spot counts between year-end counts. Unexplained inventory shrinkage is a management signal and a CRA concern — if your cost of goods sold seems low relative to reported sales, CRA may question whether all inventory was purchased legitimately.

Alcohol: provincial taxes and HST

Alcohol served in licensed restaurants is subject to HST in addition to provincial liquor markups built into wholesale pricing. In most provinces, restaurants purchase alcohol at a markup already applied by the provincial liquor board (LCBO in Ontario, BCLDB in BC, AGLC in Alberta). The markup is not separately invoiced — it is included in the wholesale price. You then charge your menu price plus HST to customers.

Keep your liquor invoices and reconcile them to your bar sales. A significant gap between what you bought and what you sold — after accounting for waste and complimentary drinks — is both a management issue and a potential CRA concern. Many liquor boards also conduct their own audits of licensed establishments.

Payroll: the largest expense and the most compliance risk

Restaurants typically run labour costs at 30–35% of revenue. The payroll compliance requirements are the same as any employer — CPP, EI, income tax withholdings, T4 slips — but the restaurant environment creates specific challenges.

Minimum wage and overtime

Minimum wage rates vary by province and are updated regularly. Most provinces have eliminated the lower "liquor server" minimum wage that previously applied to tipped workers. Track hours carefully — tip-heavy servers working long shifts can generate significant overtime obligations.

Temporary workers and students

Many restaurants hire students for summer, weekends, and seasonal events. Student employees have the same CPP and EI obligations as any other employee (except CPP if they are under 18 or over 70). There is no payroll deduction exemption for student workers — a common misconception.

Split shifts and scheduling

Provincial employment standards rules about split shifts, minimum shift lengths, and reporting pay vary. Ontario requires at least 3 hours of reporting pay even if an employee is sent home early. Know your provincial rules before setting your scheduling policy.

Franchise accounting

Franchise restaurants have additional accounting complexity beyond standalone operations.

• Royalty fees: Typically a percentage of gross sales, paid to the franchisor weekly or monthly. Fully deductible as a business expense. Keep track of how royalties are calculated — many franchise agreements base royalties on gross sales before any deductions, which matters if there are voids, refunds, or delivery platform commissions that reduce net revenue.
• Advertising/marketing fund contributions: Most franchise agreements require a contribution to a system-wide marketing fund. These contributions are generally deductible but may not be directly controlled by you. The fund is usually managed by the franchisor.
• Initial franchise fee: The upfront fee paid to the franchisor for the right to operate a franchise is a capital expenditure, not immediately deductible. It is typically amortized over the term of the franchise agreement using CCA Class 14 or 14.1 treatment.
• Renewal and transfer fees: Fees paid to renew or transfer a franchise agreement are also capital expenditures, treated similarly to the initial fee.

What your CPA should be doing for your restaurant

Monthly accounting support is worth the investment for a restaurant. What to expect from a CPA serving a food service business:

• Monthly bookkeeping: Reconciling bank accounts, credit card statements, and POS reports. Coding expenses correctly. Identifying unusual items.
• Monthly HST filings: Calculating net HST owing, filing on time, and flagging input tax credit issues.
• Payroll: Running payroll, remitting CPP, EI, and income tax on schedule. Issuing T4s in February.
• Year-end financial statements: T2 corporate return (if incorporated) or Schedule T2125 on the T1 (if sole proprietor). Inventory valuation.
• Owner's personal T1: Including the income from the restaurant, RRSP contributions, and personal tax planning.
• Cash flow advice: Restaurants have notoriously tight cash flow. Monthly reporting helps identify problems early.

Frequently asked questions