Some tips on tips…
As you know, customers in restaurants, bars, hotels etc. will often leave tips, which are for the benefit of those who have served them.
There are several ways these tips can get to the employees. The customer may give the tip directly to the customer in cash. More often, it’s added to the electronic payment, and the employer then finds a way to get the cash to the employee. In doing so, the employer may determine how the tips are allocated to each employee; or the employer may turn the tip over to a tip pool, and the allocation is then decided by the employees.
It’s long been acknowledged that tips are part of taxable income, and serving staff are (in concept) supposed to report their tips on their personal tax returns. This may or may not have been reported on their T4s, as mentioned below.
The other issue is whether the tips are considered to be part of the employee’s pensionable or insurable income – in other words, whether or not the employee has to pay CPP or EI contributions on those tips, as well as tax.
CRA’s long had a policy that said that if the employer controls the tips – basically, intervenes in the process of how much the customer tips or how the tips are split out – then they become part of employment income, and CPP and EI then becomes due. These tips would typically be recorded on the T4. See this link for the CRA policy: CLICK HERE
However, if the tips are “direct” (meaning the employer does not get involved), then the employer’s just a passthrough, and CPP or EI contributions don’t apply. These are typically not reported on the T4, and it’s up to the employee to report them.
A new court ruling (CLICK HERE for full ruling) ) seems to have thrown out this notion of “controlled” vs “direct”. The ruling seems to imply that if the employer is involved in getting the tips to the employee – even only collecting via credit card – then the tip gets counted as income, goes on the T4, and EI or CPP needs to be factored in. As far as we can tell, this would more or less apply to ALL tips, except those given directly in cash – which is a pretty small amount.
The implication: Employers may have to revisit how they deal with tips. In the past, the employer could choose not to put it on the T4 – in which case, it was up to the employee to do so. But now, the employer has to deduct EI and CPP contributions from the employee, as well as add in their own contributions. Which can be a total of about 13% going to the government, taking the employee and employer together. We’re sure this will be popular.
[Side note: if you’re using Wagepoint, think about setting up tips as an extra income type, which is taxable, EI- and CPP-able. That will take care of it.]
However…. CRA has not yet changed its policy. Given that there’s been a court ruling, they may have to, in the near future. This will probably become a “CRA project” next year. We’ll keep you posted.
PS. If you’re in Ontario, don’t forget that minimum wage went up to $15.50 an hour on October 1!