Bookkeeping for Restaurants in Canada: What Actually Changes
A restaurant owner called us in February with a shoebox, a laptop, and a question. The books said the business lost money. The bank account said otherwise. Somewhere between the point of sale system, the delivery apps, and the tip pool, about $80,000 of sales had stopped being sales and turned into deposits nobody had coded.
That gap is normal in food service, and it is not usually dishonesty. It is that restaurant bookkeeping is genuinely different from bookkeeping for almost every other small business. You have hundreds of tiny transactions a day instead of a dozen invoices a month. You have inventory that spoils. You have two sales tax outcomes on the same menu. You have money moving through your till that is never yours.
We spent years in the CRA’s audit division, and cash intensive businesses were a large part of the work. Restaurants came up constantly, not because owners cheat, but because the records are hard to keep and easy to lose. Here is what actually changes when the business sells food, and what an auditor looks for when the file lands on a desk.
The short answer
Restaurant bookkeeping runs on daily sales summaries from your point of sale system rather than on individual invoices, on an inventory count that turns food purchases into cost of goods sold, and on a payroll process that treats tips as three separate things. Get those three right and the rest is ordinary bookkeeping. Get them wrong and your margins are fiction.
Everything else in this guide sits underneath those three. If you only fix one thing this month, fix the daily sales summary.
Your point of sale system is the source document
In most small businesses the source document is an invoice. In a restaurant it is the day. You do not book 340 separate meals. You book one daily sales summary that carries gross sales by category, sales tax collected, tips collected, discounts and comps, the payment breakdown by cash, debit, credit and gift card, and the cash counted at close.
The bank deposit is not that summary. It arrives days later, net of processor fees, chargebacks and platform commissions, and it will never tie to a day’s sales on its own. Booking the deposit as revenue is the single most common error we see in restaurant files, and it understates both sales and expenses at the same time, which is why it hides for so long. A monthly bank reconciliation is what surfaces the gap.
The CRA is explicit about the records behind this. Records and supporting documents that were originally produced in electronic format have to be kept in an electronic readable format, even if you have paper printouts, and they have to be kept at your place of business or your residence in Canada unless the CRA gives you written permission otherwise. The rules are on the CRA’s acceptable format for records page and its page on where to keep your records and for how long.
Read that carefully, because it catches restaurants more than anyone. A roll of Z tapes in a drawer is not the record. The point of sale data that produced those tapes is the record, and it has to stay readable for six years. If you switch systems, you have to export and keep the old data. We have watched an owner lose four years of sales detail because the old terminal was returned to the vendor at the end of a lease, and the CRA does not accept the vendor’s contract as a reason.
The wider retention rules are the same ones every Canadian business lives under, and we covered them in our guide to small business record keeping in Canada.
Your menu does not have one sales tax rate
This is the part that surprises new owners. Food is not simply taxable or not taxable. It depends on what it is, where it is sold, and in Ontario, how much it costs.
Start with the general rule. The CRA’s GST/HST memorandum on basic groceries says that food or beverages sold at an establishment where all or substantially all of the sales are of the taxable kinds are themselves taxable, with narrow exceptions for food sold in a form not suitable for immediate consumption. In plain language, once you are running a restaurant, the bagel you sell is taxable even though the identical bagel in a grocery store is not. The same memorandum sets the well known threshold on baked goods: cakes, muffins, pies, pastries, tarts, cookies, doughnuts and similar items are zero rated when sold in quantities of six or more, and taxable as single servings below that.
The Ontario point of sale rebate
Then Ontario adds a second layer. The province gives a point of sale rebate of the 8 percent provincial part of the HST on qualifying prepared food and beverages where the total price, before HST, is not more than $4.00. The CRA administers it and sets out the mechanics in its info sheet on the Ontario point of sale rebate.
What that means at the till is that a $3.50 salad carries 5 percent, not 13 percent, and a $4.50 salad carries 13 percent. The rebate applies to the whole qualifying order, not to each item, so a $2.99 burger and a $0.99 soda at $3.98 together stay at 5 percent, and the same two items at $4.05 do not. Alcohol never qualifies. The rebate applies whether the food is eaten in or taken away.
Two practical consequences follow. First, your point of sale system has to be configured with the right tax code on every menu item, and it has to handle the combined $4.00 test rather than testing items one at a time. Second, your GST/HST return has two acceptable presentations for the same result. You can report the full 13 percent on line 103 and claim the rebate you credited on line 107, or report the net 5 percent on line 103 and claim nothing on line 107. Both are correct. Mixing them across periods is what produces a reconciliation that never closes.
If you are not registered yet, the trigger is the same $30,000 of worldwide taxable revenue over four consecutive calendar quarters that applies to every business, and we walked through the timing in our guide to how to register for GST/HST in Canada. Most restaurants pass it in their first year.
Why the quick method often suits a restaurant
Here is a point most restaurant advice misses. Restaurants are not on the CRA’s list of businesses barred from the GST/HST quick method, and the economics can favour them, because a large share of what a kitchen buys is raw food that is zero rated. Zero rated purchases carry no GST/HST, so they generate no input tax credits to give up. A business that has few input tax credits to surrender is exactly the business the quick method rewards. It is worth running the comparison rather than assuming it is only for consultants.
Tips are three different things, and payroll treats each one differently
Tips are where restaurant payroll goes wrong, and the fix is entirely mechanical once you know the categories. The CRA sets them out on its page on tips received by employees.
Controlled tips are tips you as the employer control or possess and then pay out to staff. A mandatory service charge on a large table, a tip pool the house collects and redistributes, and tips on credit card slips that flow through your bank account before reaching the server are all controlled. You withhold income tax, CPP contributions and EI premiums on them, and you report them in box 14 as employment income, in box 24 as EI insurable earnings, and in box 26 as CPP pensionable earnings.
Direct tips are paid by the customer to your employee, with no control by you over the amount or the distribution. Cash left on the table is the clean example. You withhold nothing, you report nothing on the T4, and your employee reports the income on line 10400 of their own return. An employee who wants CPP coverage on those amounts can elect it themselves using Form CPT20.
Declared tips exist only in Quebec, where provincial law requires employees in regulated hospitality establishments to declare their direct tips to the employer. Income tax and EI come off, CPP does not.
The distinction is not about who ultimately gets the money. It is about whether the money passed through your hands. That is why the shift to card payments quietly moved so many restaurants from a direct tip world into a controlled tip world without anyone noticing. If the tip lands in your merchant account and you pay it out on the next pay run, it is controlled, and the CPP and EI are yours to remit along with the employer share.
We have seen this assessed more than once, and it is expensive because the employer share is added on top of amounts the business already paid out. If you have never looked at how your card tips flow, look this week. The rest of the payroll setup, the RP account, the TD1 forms and the remittance deadline on the fifteenth of the following month, is the same as it is for any employer, and we covered it in payroll for your first employee in Canada.
Food cost is meaningless without an inventory count
Most restaurant owners track food cost as purchases divided by sales. That is not food cost. That is spending. Cost of goods sold is opening inventory plus purchases minus closing inventory, and without the count at each end you are measuring what arrived on the truck rather than what left the kitchen.
The CRA requires the count anyway. Its page on inventory and cost of goods sold says you need to do an annual inventory, and that for income tax purposes there are two acceptable ways to value it: the fair market value of your entire inventory, or the lower of cost and fair market value item by item. Whichever you pick, you use it consistently.
Do the count monthly rather than annually. It takes a competent kitchen manager about ninety minutes and it converts your profit and loss statement from a guess into a management tool. A restaurant that counts monthly finds theft, spoilage and portion drift in the month it happens. A restaurant that counts once a year finds a variance it can no longer explain, which is the version an auditor eventually sees.
Separate your purchase categories while you are at it. Food, beverage, alcohol and supplies behave differently and have different margins, and a single “cost of sales” account tells you nothing you can act on. This is the same discipline behind reading your numbers monthly that we set out in monthly financial insights.
Three expenses restaurants get wrong
The 50 percent meal limit does not apply to your food
Every Canadian business owner has heard that meals are only 50 percent deductible. That limit does not apply to the food you sell. The CRA’s page on line 8523, meals and entertainment lists the exceptions, and the first one is a business that regularly provides food, beverages or entertainment to customers for compensation, giving a restaurant as its example. Your food purchases are cost of goods sold at 100 percent. The 50 percent limit still applies when you take a supplier out for lunch, so the two have to sit in different accounts. Our guide to small business write offs in Canada covers the general rule for everyone else.
Staff meals are a payroll question, not a food question
Free or subsidized meals for staff are generally a taxable benefit. The CRA’s page on meals provided by the employer gives one clean way out: a subsidized meal is not a taxable benefit if the employee pays a reasonable charge, meaning one that covers the cost of the food, its preparation and its service, and you can justify that the amount is reasonable. That is why a shift meal charged at cost is clean and a free staff menu is not. Whichever you run, price it deliberately and write down how you set the number.
Gift cards are not sales until they are redeemed
Selling a gift card is not a sale. Under section 181.2 of the Excise Tax Act, explained in the CRA’s policy statement on gift certificates, the issuance or sale of a gift certificate for consideration is deemed not to be a supply, and the certificate is deemed to be money when it is later given for goods or services. So you charge no GST/HST when you sell the card, and you charge it when the meal is eaten.
In the books, the card sale is a liability, not revenue. December is where this bites. A restaurant that books gift card sales as December revenue reports a strong month, pays tax on money it has not earned, and then reports a weak January when the cards are redeemed and the food goes out the door.
Delivery apps: your sales are the gross, not the deposit
Third party delivery changed restaurant bookkeeping more than anything since debit cards, and almost every set of books we take over has it wrong.
The platform collects the full menu price plus tax from the customer, keeps a commission that often runs between 15 and 30 percent, and deposits the remainder. If you book the deposit, you have understated your sales by the commission, understated your expenses by exactly the same amount, and understated the GST/HST you are accounting for on those sales. Your net income can still look plausible, which is precisely why nobody catches it.
The correct treatment is to book the gross sales and the sales tax as reported on the platform’s own statement, book the commission and the delivery fees as expenses, and reconcile the deposit as the difference. Every major platform publishes a periodic statement with those figures. Pull it every month and tie it to the deposits. If your bookkeeper is not doing this, ask them how they are handling platform commissions, and listen carefully to the answer.
What we looked at first in a restaurant file
The auditor’s problem with a restaurant is that a large share of revenue can arrive as cash, and cash leaves no trail of its own. So the work becomes indirect. Rather than testing the sales you reported, an auditor tests whether the sales you reported are plausible.
The tests are ordinary and they are hard to argue with. Purchases of a single controlling ingredient against the portions on the menu. Alcohol purchased against alcohol sold. Staffing hours and seat counts against covers. Point of sale voids, refunds, comps and no sale keystrokes, especially clustered on particular shifts or terminals. Deposit patterns against the days of the week your own data says are busy. None of these prove anything by themselves. Together they produce a range, and if reported sales fall well below the range, the file gets a lot more attention.
There is also a specific offence that every restaurant owner should know exists, because point of sale vendors have been prosecuted for selling the software. Electronic suppression of sales software, known as a zapper or as phantomware, deletes or modifies sales transactions from a point of sale system without leaving a record. Since 1 January 2014, using, possessing or acquiring it carries an administrative penalty of $5,000 on a first infraction and $50,000 on any subsequent one, and manufacturing, developing or selling it carries $10,000 and $100,000, on top of criminal offences and any tax and interest owing. The CRA’s summary of the electronic suppression of sales software sanctions sets out the amounts, and the penalties themselves sit in section 163.3 of the Income Tax Act.
We raise it not because we think you would install one, but because owners inherit systems. If you bought an existing restaurant with its terminals, or your system came from a vendor you cannot reach any more, it is worth confirming what is on it. The penalty attaches to possession.
The honest reassurance is that a well kept restaurant file is not a difficult audit. Daily summaries that tie to deposits, an inventory count each month, a tip policy written down, and a sales tax setup that matches the menu will answer most questions before they are asked. If you want the wider view of how files are selected in the first place, we wrote about what triggers a CRA audit.
The monthly rhythm that keeps a restaurant clean
None of this needs to be complicated. It needs to be the same every month.
Post a daily sales summary from the point of sale system for every trading day, including the days you were closed, so a gap is visible. Reconcile the merchant deposits, the delivery platform statements and the cash deposits to those summaries weekly rather than monthly, because a weekly variance is findable and a monthly one is archaeology. Count inventory on the last day of the month. Run payroll with the tip categories separated. Reconcile every bank and credit card account before you look at the profit and loss statement, not after.
Then read four numbers: food cost as a percentage of food sales, labour as a percentage of total sales, prime cost, which is those two added together, and the sales tax you owe against the cash you actually have. A restaurant that watches those four monthly rarely gets a surprise from the CRA or from its own bank account.
If your books are already a long way behind, the order matters more than the speed, and we set out the catch up sequence in our guide to bookkeeping cleanup in Canada. If you are earlier than that and still building the basics, start with our beginner’s guide to small business bookkeeping in Canada.
Frequently asked questions
Do restaurants charge HST on all food in Ontario?
Not at the same rate. Ontario provides a point of sale rebate of the 8 percent provincial part of the HST on qualifying prepared food and beverages where the total price before tax is $4.00 or less, so those orders carry only the 5 percent federal part. Orders above $4.00 carry the full 13 percent, and alcohol never qualifies for the rebate.
Do I have to deduct CPP and EI on tips?
It depends on whether the tips passed through your hands. Controlled tips, which include tip pools you administer and card tips that flow through your merchant account, require income tax, CPP and EI withholding and go on the T4. Direct tips paid straight from the customer to the employee require no withholding and no T4 reporting, and the employee reports them on line 10400 of their own return.
How do I record delivery app sales in my bookkeeping?
Record the gross menu price and the sales tax from the platform’s statement as your sales, record the platform’s commission and fees as an expense, and treat the deposit as the net of the two. Booking only the deposit understates both your revenue and your expenses and misstates the GST/HST on those sales.
Are staff meals a taxable benefit in Canada?
Generally yes, unless the employee pays a reasonable charge. The CRA treats a subsidized meal as non taxable where the employee pays an amount that covers the cost of the food, its preparation and its service, and where the employer can justify that the charge is reasonable. Free shift meals are usually a taxable benefit.
How long does a restaurant have to keep point of sale records?
Six years from the end of the last tax year the records relate to, and the electronic data itself has to be kept, not just printed tapes. Records originally produced in electronic format must be kept in an electronically readable format even if you have paper copies, which means exporting and retaining the data when you change point of sale systems.
Want your restaurant’s books to tie out every month?
Restaurant bookkeeping is not harder than other bookkeeping, it is just less forgiving, because the errors compound daily rather than monthly. If your deposits have stopped matching your sales, or you have never been confident about the tip treatment, that is a fixable problem and usually a quicker one than owners expect. Our bookkeeping for restaurants and cafes service is built around the daily summary and the monthly count, and our tax for restaurants and food service page covers the filing side. If you would rather just talk it through first, get in touch.
