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Are your employees’ tips subject to CPP and EI withholdings?

A recent Tax Court of Canada case revisited the topic of employee tips and whether the employer is responsible to withhold CPP and EI on the tip amount earned by employees.

If the employer controls the tip amount or controls the distribution of the tip, then CPP and EI should be withheld.  An employer is considered to have control in these situations:

  • 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 or her 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.

If the employee receives a tip directly from customers, then the employer is not responsible to withhold CPP and EI.  An employee is considered to receive direct tips in these situations:

  • 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;

Please visit the Canada Revenue Agency’s webpage on Tips and Gratuities for more information.

 

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