Gratuities or tips received by employees are income earned in respect of employment for purposes of the Income Tax Act
However, it must be determined whether tips received in the course of employment are considered pensionable earnings under the CPP and/or are insurable earnings under the EIA. This answer depends on whether the tips are considered to have been paid by the employer (controlled tips), whether they are considered to have been paid by the client (direct tips) or whether they are declared tips in the province of Quebec.
Controlled tips are gratuities that are controlled by the employer. Since they are controlled by the employer, the employer is considered to have paid these amounts to the employee. The following are some examples of controlled tips:
- The employer adds a mandatory service charge to a client's bill to cover tips;
- The employer adds a percentage to a client's bill to cover tips;
- Tips allocated to employees using a tip sharing formula determined by the employer;
- Tips that an employer includes in his business income, later expenses and redistributes to employees in the form of pay;
- Tips that the employees are required to turn over to their employer and are later distributed to the employees;
- Cash tips that are deposited in the employer's bank account and become the property of (or even commingled with the property of) the employer and subsequently paid out to the employees.
The term 'controlled tips' within this article denotes the principles of employer control/employer possession over the tips and the employer's obligation to pay the tip to the employee as expressed by the courts.
Controlled tips form part of the employee's total remuneration and are subject to CPP contributions and EI premiums being deducted at source, provided that this person is employed in pensionable and/or insurable employment.
Direct tips are gratuities that are paid directly by the client to the employee and that are not subject to any of the forms of control by the employer as mentioned above under the heading controlled tips. The following are some examples of direct tips:
- A client leaves money on the table at the end of the meal and the server keeps the whole amount;
- A client gives a tip directly to a bellhop, door person, car attendant, porter; etc.
- Tips pooled and/or shared among employees in a manner determined by the employees (as opposed to the employer);
- When paying the bill by credit card, a client includes an amount for a tip on the credit card and the employer returns the tip amount in cash to the employee;
- When paying the bill by debit card, a client includes an amount for a tip and the employer returns the tip amount in cash to the employee;
We use the term 'direct tips' to denote the principle of when the employer has no control over the tip amount and no control over the tip distribution. Direct tips are considered to have been paid by the client and not the employer. In these situations, the employer is merely a conduit for the tip from the client to the worker.
Direct tips are not subject to CPP contributions and/or EI premiums. However, an employee can elect to make CPP contributions on tip amounts earned in the course of pensionable employment where the tip income is found not to be subject to CPP contributions at source. The individual will complete a form CPT20
to elect to pay the CPP contributions.
It is possible for an employee to receive both controlled and direct tips. In such a situation, only the controlled tips will form part of the employee's pensionable and/or insurable earnings.
- Declared tips are the amount of tips that provincial law requires an employee to declare to his or her employer along with their controlled tips. In the province of Québec, the Taxation Act provides specific guidance for employers in the hospitality sector whose employees carry out their duties in a regulated establishment. Employees working in a regulated establishment in the province of Québec must declare their direct tips to their employer. For the purposes of the EIA, employees in the province of Québec working in a regulated establishment will have the amount of their declared tips included in their insurable earnings along with their controlled tips. Currently, Québec is the only province that has tax legislation requiring employees to declare their tips to their employer.
In the Province of Québec
When calculating an employee's source deductions of income tax, QPP contributions, the employer contributions to the health services fund and to the financing of the CNT, and compensation tax, you must add the amounts of the following tips to the employee's basic salary or wages:
1. tips that result from tippable sales and that are reported to you by the employee during the pay period on the Register and Statement of Tips (form
tp-1019.4-v) or an equivalent document
2. tips that are unrelated to tippable sales (for example, tips the employee received as a hotel valet, porter, door attendant or cloakroom attendant), and that are reported to you by the employee on the register and statement of tips or an equivalent document
3. tips that, because they constitute service charges added to a customer's bill, are distributed to the employee for the pay period and do not have to be reported on the register and statement of tips or an equivalent document
4. tips that you allocated to the employee for the pay period because the amount of tips reported was less than 8% of tippable sales (or was less than the percentage set by Revenu Québec further to a request for a reduction in the allocation rate)
When you cannot make all the source deductions because an employee's basic salary or wages (in cash) are insufficient, deduct amounts in the following order: the employment insurance premium, federal income tax, the QPP contribution, the QPP premium, union dues, Québec income tax.
Natasha Smyth, B.SC.(Agr.), CPM
For more information contact Info@onpayroll.ca