There are many industries or jobs where employees receive Tips and Gratuities (i.e. hair stylist, barbers, servers, door person, bellhop, porter, car attendant, etc.). And often there are questions about whether these have to be reported and, of course, how to report them. If you are employed in one of these jobs, here are some things you need to know:
- All income that you earn in Canada through employment should be reported on your personal tax return; including tips and gratuities. Some employers will keep track of them and report it on your T4 for you while others will not.
- Regardless of whether your employer does or doesn’t, according to CRA, it is the responsibility of the TAXPAYER to keep track of how much you receive and report it accordingly. If you file your own tax return, these would be reported on Line 104 of the T1 General.
The Employer’s responsibility is to deduct CPP contributions and EI premiums plus pay their share of these however the following question needs to be asked first.
What does that mean? In laymen’s terms, we need to determine whether the tips are considered to be paid by the employer, CONTROLLED TIPS, or whether they are considered to have been paid by the client, DIRECT TIPS.
CONTROLLED TIPS are where the tips are tracked and distributed by the employer and as such, are considered to be paid by the employer. Some examples include:
- the employer adds a mandatory service charge or percentage to a client’s bill to cover tips; i.e. at a restaurant, sometimes there is a automatic tip added for parties greater than 6 or 8 people
- tips are allocated to employees using a sharing formula determined by the employer; i.e. this is sometimes the case where servers share their tips with kitchen staff
- the employer includes the tips in their business income, later expenses and redistributes in the form of pay
- the employee is required to turn over all tips collected to their employer which are later distributed back to the employee
- cash tips are deposited into the employer’s bank account and become the property of the employer prior to being paid out to employees
As you can see from these examples, the employer has CONTROL over the tips. When this happens, the tips are to be included in the Employee’s pay or remuneration and are subject to CPP and EI.
DIRECT TIPS are where the tips are paid to the employee directly by the client and the employer has no control over them, as noted above. Some examples include:
- 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 the employee
- tips that are pooled and/or shared among employees in a manner determined by the employees as opposed to the employer
- if the client pays by credit or debit card and includes a tip, the employer returns the tip amount in cash to the employee
DIRECT TIPS, as you can see, is where the employer has no control over the tip amount or over the distribution. In this case, the tips are considered to be paid by the client, not the employer and they are not subject to CPP and/or EI.
Employees do have the option of electing to make CPP contributions on tips. This requires you to complete a CPT20 form.
There are also times where employees will have both controlled and direct tips. If this happens, only the controlled tips are included in the CPP and/or EI.
For taxpayers, before electing to make CPP contributions, always seek the advice of a Professional Accountant. It’s always best to see what will benefit you and your budget the most before contributing.
For employers reading this, I also recommend that you seek advice of a Professional Accountant before determining which method you are using and/or should be using.