The pilot project targeted 145 servers working in just four restaurants in St. Catharines, Ont., a blue-collar city on the Niagara Peninsula, south of Toronto.
Auditors reviewed two years' worth of income and found that every individual had hidden some portion of their tips from the taxman, with about half reporting no tips whatsoever.
In the end, the blitz flushed out $1.7 million in unreported tips and gratuities — almost $12,000 for each person.
"Industry insiders often tell servers that they only need to report 10 per cent of their ... wages as tip income," says an internal report on the project.
"Our results indicate that tips are more likely to be 100 per cent to 200 per cent of ... wages. In essence, they are only reporting five per cent to 10 per cent of earned tips/gratuities."
The auditors conclude: "The amount of unreported income was very surprising."
The Canadian Press obtained a heavily censored copy of the 2010 report under the Access to Information Act, after an 18-month delay by the Canada Revenue Agency that violated legislated deadlines.
The study does not identify the restaurants or waiting staff that were subject to the special audits.
The St. Catharines' blitz was among dozens of pilot projects across the country that targeted the underground economy, estimated to be worth as much as $36 billion in 2008, according to a Statistics Canada study prepared for the revenue agency.
The other projects, which also reported in 2010, focused on the trucking industry, house-flipping, electronic sales suppression or cash-register zapping — even Quebec's maple-syrup industry.
The tax agency has long known that the hospitality industry is rife with tax-reporting abuse, partly because tipping is often done using untraceable cash.
The Statistics Canada study, using macro-economics rather than direct measurements, estimated undeclared tips were worth some $1.3 billion in 2008 — a small fraction of the underground economy.
The pilot project in St. Catharines drilled down to actual restaurants and hospitality workers as a reality check.
Revenue agency staff began the blitz with an information campaign at 311 dining and drinking establishments in the city, warning serving staff and bartenders of the consequences of failing to declare tip income.
The direct audits of the 145 servers six months later resulted in each person paying an average of $1,553 in extra income tax, an amount auditors called "respectable" given that many were students with access to special credits that kept their overall taxes low.
"We also believe that auditing this type of restaurant has a significant 'word of mouth' effect with the servers in the local industry," says the report, which urged a national version of the project.
A spokeswoman for the Canada Revenue Agency said officials are still reviewing the pilot project before deciding next steps.
"Once the project has been thoroughly evaluated, the results and findings will enable the CRA to determine whether to expand it at a national level," said Mylene Croteau.
A 2006 survey of 96 hospitality workers, commissioned by the Canada Revenue Agency, found that many were advised by their tax accountants to declare a mere fraction of their real tip income.
The same survey also reported the workers "do not perceive a real risk of getting caught for improperly reporting tips, as very few of them know or have heard of someone getting audited."
Statistics Canada says there were about 190,000 food and beverage servers in Canada last year, about 80 per cent of them female. Many are young and in their first job, often students who later leave the industry. Most report making less than $20,000 a year.
The head of a restaurant group says many serving staff likely would not have to pay any taxes, even were they forced to declare more tip income, because they fall under tax-free thresholds and can access tax credits.
"A lot of them aren't making a heck of a lot of money," said Garth Whyte, president of the Canadian Restaurant and Foodservices Association.
Whyte said the industry is bracing for a growing labour shortage by 2020, when the pool of 15-to-20-year-olds is expected to decline by 300,000. The shortage is likely to buoy wages over that time, he said.
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