Navigating Tips and Gratuities in Canada: A Guide for Employers and Employees
Understanding how tips and gratuities are treated in Canada can be complex, particularly when it comes to payroll deductions and reporting. This guide, drawing on information from the Canada Revenue Agency (CRA), aims to clarify the distinctions between different types of tips and their implications for both employers and employees.
The sources explain that this information is crucial for determining whether income from tips and gratuities is part of an employee's pensionable earnings under the Canada Pension Plan (CPP) or insurable earnings under the Employment Insurance Act, or both.
Employer Responsibilities
First and foremost, employers have specific legal obligations regarding payroll. By law, employers must deduct CPP contributions and Employment Insurance (EI) premiums from most amounts they pay to their employees. These amounts, along with the employer's share of CPP and EI, must then be remitted to the CRA. For more comprehensive information on employer responsibilities and obligations, the sources suggest consulting the CRA's Payroll page.
Is Tip Income Pensionable or Insurable? It Depends!
While all tips and gratuities received by employees are considered income earned from employment for Income Tax Act purposes, their treatment for CPP and EI varies significantly. The key factor is how the tips are paid and whether the employer exercises control over them. The sources categorise tips into three main types: controlled tips, direct tips, and declared tips (which are specific to the province of Quebec).
1. Controlled Tips
What they are: Controlled tips refer to tips that an employer controls or possesses before paying them to the employee. This means the employer has a hand in handling or distributing the tips.
Examples of controlled tips include:
Mandatory Service Charges: When an employer adds a mandatory service charge or a percentage to a client's bill specifically to cover tips.
Employer-Determined Tip Pools: Tips that are allocated to employees using a tip-sharing formula decided by the employer.
Integrated Business Income: Tips that an employer includes in their business income, then expenses, and subsequently redistributes to employees as part of their pay.
Employer-Handled Cash Tips: Situations where employees turn over their cash tips to their employer, who then distributes them. This also includes cash tips deposited into the employer's bank account, becoming or commingling with the employer's property before being paid out to employees.
Consider this scenario (Example 1 from the sources): You work as serving staff in a restaurant and receive tips from customers. If the restaurant owner decides to implement a tip pool to ensure tips are distributed among all staff members, these tips are considered controlled tips.
How they are treated: Since controlled tips are managed by the employer, the employer is deemed to have paid these amounts to the employee. Consequently, CPP contributions and EI premiums must be deducted at source from these amounts, provided the employee is in pensionable or insurable employment.
For employees: If your tips are controlled, they will typically be shown in Box 14 of your T4 slip. For reporting purposes, you would reference Line 10100, Employment income.
2. Direct Tips
What they are: Direct tips are those paid directly by the customer to the employee, with the employer having no control over the tip amount or its distribution. In these cases, the employer simply acts as a conduit for the tip from the customer to the employee.
Examples of direct tips include:
Customer Leaves Cash: A customer leaves money on the table at the end of a meal, and the server keeps the entire amount.
Direct Cash to Staff: A guest directly gives a tip to a bellhop, door person, car attendant, or porter.
Employee-Managed Pools: The employees themselves, not the employer, decide how tips are pooled or shared amongst themselves.
Credit/Debit Card Tips Returned in Cash: A customer includes a tip amount when paying by credit or debit card, and the employer returns the full tip amount in cash to the employee at the end of the shift (or exceptionally the next day if cash isn't immediately available).
Consider this scenario (Example 2 from the sources): You are serving staff in a restaurant. If the restaurant owner informs you that any voluntary tip a customer pays by credit or debit card will be returned to you in full cash at the end of each shift, these tips are considered direct tips.
How they are treated: Direct tips are not subject to CPP contributions or EI premiums. However, employees have the option to make CPP contributions on these tip amounts if they were earned in the course of pensionable employment and not already subject to CPP contributions at source. To do this, an employee must fill out Form CPT20.
For employees: Tips that are considered direct tips will not be shown on your T4 slip. For reporting purposes, you would use Line 10400, Employment income not reported on a T4 slip.
It's important to note that an employee can receive both controlled and direct tips. In such situations, only the controlled tips will be part of the employee's pensionable or insurable earnings (or both) and subject to deductions at source.
3. Declared Tips (in the Province of Quebec Only)
What they are: Declared tips are a specific category applicable only in the province of Quebec. They refer to the amount of tips that provincial law requires an employee to declare to their employer, in addition to any controlled tips they receive. Employees working in a regulated establishment in Quebec must declare their direct tips to their employer.
Quebec is the only Canadian province with tax legislation that mandates employees to declare their tips to their employer. The sources refer to the Taxation Act for specific guidance for employers in Quebec's hospitality sector whose employees work in regulated establishments. Further information can be found via Revenu Québec.
How they are treated: For the purposes of the Employment Insurance Act, the amount of declared tips in Quebec is included in an employee's insurable earnings, alongside any controlled tips they receive.
Important Reminders for Employers and Employees
Employee Reporting: As highlighted above, employees need to know how their tips are categorised to report them correctly on their tax returns. Tips shown in Box 14 of a T4 slip go on Line 10100, while tips not reported on a T4 slip (i.e., direct tips) go on Line 10400.
Employer Reporting: Employers can find information on how to report and file information slips in RC4120, Employers' Guide – Filing the T4 Slip and Summary, Chapter 2 – T4 slips.
