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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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Employment Insurance Tax Credit For Employers

In September 2014 Ottawa announced an Employment Insurance (EI) tax credit for employers.

Currently employees pay EI rates of $1.88 per $100 of earnings (up to a maximum of $913.68 for 2014). Employers pay the employee rate multiplied by 1.4.

For the 2015 and 2016 calendar years employers, who pay $15,000 or less in employer EI contributions in the year, will receive a tax credit of $0.39 per $100 of employee earnings.

Here is how the math works:

Currently on $100 of employee income an employer pays $2.63 in employer EI contributions ($100 times $1.88 times 1.4).

For the 2015 and 2016 calendar years on $100 of employee income an employer will pay (after the tax credit is received) $2.24 in employer EI contributions ($100 times 1.60% times 1.4).

The difference between the $2.63 and the $2.24 is $0.39.

The facts on self-employed maternity leave

Money Sense published an article on self-employed maternity leave, taking advantage of the new legislation allowing self-employed people to register for EI. As this article points out, it would be wise to carefully map out what benefits you may or may not clam vs the contribution amounts.

For example, if you do not plan on having more children, the maternity amount is irrelevant. In this case, it would be prudent to consider what other benefits you may claim and if it’s financially worth the contributions. Other option such as critical illness and disability insurance may be more appropropriate. Please read our post on EI for self-employed people.

“I was self-employed when both of my children were born. Since I didn’t contribute to Unemployment Insurance, as it was called back then, I couldn’t claim maternity benefits. I was in the same boat as a lot of small-business owners and contract workers.

Last year the federal government decided to try and level the playing-field by offering self-employed people the option of buying into the Employment Insurance program so they can qualify for mat leave benefits, along with a slew of others including parental, sickness and compassionate care benefits.”

You can read the full article on MoneySense’s website here.

Employment Insurance (EI)

The best place to find information regarding EI (employment insurance benefits) is on the Service Canada website.

Some key points from their website include the following:

Am I eligible for EI regular benefits?

You may be entitled to receive EI regular benefits if you:

  • have paid premiums into the EI Account;
  • lost your employment through no fault of your own;
  • have been without work and without pay for at least seven consecutive days in the last 52 weeks;
  • have worked for the required number of insurable hours in the last 52 weeks or since the start of your last EI claim, whichever is shorter;
  • are ready, willing, and capable of working each day; and
  • are actively looking for work (you must keep a written record of employers you contact, including when you contacted them).

You may not be entitled to receive EI regular benefits if you:

  • voluntarily left your employment without just cause;
  • were dismissed for misconduct; or
  • are unemployed because you are directly participating in a labour dispute (strike, lockout, or other type of dispute).

How much will I get?

We cannot tell you exactly how much you will receive without having processed your application. However, we can tell you that the basic rate for calculating EI benefits is 55% of your average insurable weekly earnings. As of January 1, 2012, the maximum insurable earnings amount is $45,900. This means that you can receive a maximum amount of $485 per week.

Note

The basic rate and the maximum insurable earnings amounts are reviewed each year. For more information on the most recent rates and amounts, visit the Service Canada Web site.

Can I receive too many benefits and be asked to repay part or all of the amounts received when I do my income tax return?

That depends on your situation. EI payments are taxable, no matter what type of benefits you receive. Federal and provincial or territorial taxes, where applicable, will therefore be deducted from your payment.

After filing your income tax return, you may be required to repay your EI benefits based on:

  • your net income; and
  • the amount of EI benefits that you received.

If your 2012 net income from all sources exceeds $57, 375, you will be required to repay 30% of whichever is less:

  • the amount by which your net income exceeds $57, 375; or
  • the total regular benefits paid in the tax year.

You do not have to repay your EI benefits, no matter what type you receive, if:

  • your 2012 net income is less than $57, 375;
  • you received less than one week of regular benefits in the preceding 10 tax years; or
  • you were paid special benefits (maternity, parental, sickness, or compassionate care benefits).

However, if you received both special and regular benefits in the same tax year, you may be required to repay a portion of your regular benefits.

If you received regular benefits that overlap two calendar years, you can be exempt from repayment in the first tax year. However, in the second tax year, you cannot qualify for exemption.

You will be informed by the Canada Revenue Agency (CRA) if you have to repay EI benefits. All details will be included on the Notice of Assessment that the CRA will send to you after reviewing your income tax return.

Employee or Self-Employed?

Another common issue that arises with our clients is the question of  “Employee of Self-Employed?”.  This can have far-reaching effects including severe financial implications if you do not adhere to the regulations.

There are checklists provided by both CRA and the Province of BC which will help you determine the status of employees.

If you are an employer, it is vital that you correctly determine whether people you are hiring qualify as employees or self-employed. An important thing to remember is that you do NOT have a choice in this matter. If the hiree fits the criteria of being an employee, you MUST treat them as such.

On occasion, employers and employees feel that if they both agree, the employee can actually consider him/herself self-employed. This is not permitted.

CRA has a full guide for this determination on their website.

The basic factors to help answer this question are as follows:

Control

Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done.

Tools and equipment

Consider if the worker owns and provides tools and equipment to accomplish the work. Contractual control of, and responsibility for, an asset in a rental or lease situation is also considered under this factor.

Subcontracting work or hiring assistants

Consider if the worker can subcontract work or hire assistants. This factor can help determine a worker’s business presence because subcontracting work or hiring assistants can affect their chance of profit and risk of loss.

Financial risk

Consider the degree of financial risk taken by the worker. Determine if there are any fixed ongoing costs incurred by the worker or any expenses that are not reimbursed.

Responsibility for investment and management

Consider the degree of responsibility for investment and management held by the worker.

Opportunity for profit

Consider whether the worker can realize a profit or incur a loss, as this indicates that a worker controls the business aspects of services rendered and that a business relationship likely exists. To have a chance of a profit and a risk of a loss, a worker has to have potential proceeds and expenses, and one could exceed the other.

The Province of British Columbia also lays out the criteria for establishing the status of workers. Their website provides clear definitions and examples to help you determine what is the correct approach for your business.

One or more of the following factors is often wrongly believed to establish an independent contractor relationship: (examples as posted on the Province of BC site):

  • Agreement:  The act of signing an independent contractor agreement does not necessarily create an independent contractor relationship.  The actual work relationship determines if a person is an employee or independent contractor.  Any agreement to waive employment standards entitlements is prohibited by the Act.
  • Person sets own hours and is not actively supervised:  The business may provide significant levels of flexibility to its employees.
  • Drives his or her own vehicle/provides own tools:  It may be a condition of employment that a person provides a vehicle so as to perform the work.  In some sectors employees are expected to provide their own tools.t levels of flexibility to its employees.

What happens if you make the wrong choice?

If you have been incorrectly treating an employee as self-employed, you will be subject to not only covering all the CPP and EI contributions plus penalties for not filing payroll remittance reports and contributions; penalties for not filing annual T4s, and WorkSafe BC dues and penalties.

If you fail to comply with the deducting, remitting, and reporting requirements, you may be prosecuted. You could be fined from $1,000 up to $25,000, or you could be fined and imprisoned for a term of up to 12 months. A full list of penalties and other consequences is available on CRA’s website.