Gratuities or tips received by employees are income earned from employment. However, it must be determined whether these tips are pensionable and/or insurable, that is, whether the employer should be withholding CPP and/or EI. This depends on whether the tips are considered to have been paid by the employer. Administratively, CRA looks at whether the tips are controlled by the employer or are considered to have been paid by the customer (a direct tip).
A December 16, 2015 Tax Court of Canada case examines whether tips paid to a restaurant’s workers were subject to CPP and EI. The restaurant’s annual revenues were approximately $6.5 million and the tips totalled $1 million.
The workers divided the tips under a formula which varied over time, with all workers, including the “front-of-the-house” employees (servers and the related support staff), and “back-of-the-house” employees (kitchen staff, managers, and the catering sales coordinator) participating. The employer had withheld and remitted CPP and EI on tips paid to the “back-of-the-house” employees, so only “front-of-the-house” employees were under Appeal.
The Employer testified that, although they deposited and paid out the tips, they considered these funds to be held in trust for the employees (likening it to GST/HST held for the Crown). The “back-of-the-house” staff were entitled to a portion of the tips, computed as a percentage of revenues, under their employment contracts. The “front-of-the-house” employees’ contracts were silent on the matter of tips, and they shared actual tips from patrons, less the portion paid to the “back-of-the-house” staff. Their tips were paid out (in cash for some time, eventually transitioning to cheques) separate from their wages and outside the payroll system.
The Court found that CPP and EI applied to tips paid by the employer. The Court found that “mere distribution” of the gratuities by the employer, with neither control nor ownership, is sufficient to constitute payment by the employer. The Court also noted that CRA’s published interpretations (for example, at www.cra-arc.gc.ca/tx/hm/xplnd/tps-eng.html) differentiate between controlled and direct tips, but that this may not be the correct test – the only determinant is whether the employer paid the tips to the employees.
As the employer had paid the tips to the employees, CRA was correct to assess CPP and EI.
Action Item: Consider whether your business is properly withholding and remitting CPP and EI on tips and gratuities earned by your workers.
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