Employers must comply with both labour standards and source deduction rules
While most Canadian jurisdictions do not have rules covering employee tips in their labour standards laws, a growing number are adding them. In June, Ontario became the latest province to do so.
As of Jun. 10, the Employment Standards Act, 2000 prohibits employers in Ontario from taking employees’ tips and other gratuities unless another law or a court order allows it or the employer is collecting and redistributing the money among employees under a tip-sharing (also called tip-pooling) policy.
Ontario joins New Brunswick, Newfoundland and Labrador, Prince Edward Island and Quebec in writing into law that tips are the property of the employees who earn them and that employers cannot require employees to share their tips with them.
While the laws vary, they all stipulate tips are not part of employee wages and employers cannot use them when calculating whether they are paying workers at least the minimum wage rate.
New Brunswick, Ontario, P.E.I. and Quebec also specify employers may set up tip-pooling policies in their workplaces, although the rules for them differ among the provinces. Ontario, for example, allows employers to decide if there will be tip pooling, which employees will take part and how the money will be distributed.
By contrast, Quebec prohibits employers from imposing tip pooling. Instead, employees who want to take part may ask their employer to manage it. Employees who are hired after a tip-pooling policy is in place must participate in it.
Quebec also requires employers to include tips that employees have to report to them and tips that employers have to attribute to employees under the province’s Taxation Act when calculating statutory holiday pay, vacation pay and any wages in lieu of notice. It is the only province that requires employees to report tips to their employer.
Beyond labour standards rules, employers have to comply with Canada Revenue Agency (CRA) requirements for tips. Under CRA rules, some tips are employment income and are subject to Canada Pension Plan (CPP), employment insurance (EI) and income tax source deductions and some are not.
It depends on whether the CRA considers the tips to be controlled (i.e., the employer pays them to the employee) or direct (i.e., the client pays them to the employee). The CRA states that employers control tips when they:
• automatically add a service charge or a percentage to a customer’s bill to cover gratuities or tips
• have a policy requiring employees to pool their tips or turn their tips over to the employer and the employer later shares them with employees based on a formula the employer establishes
• include tips or gratuities in their business income and later expense and redistribute them to employees
• have cash tips deposited into their bank account and later pay them out to employees.
If an employer controls the tips, payroll must include them in an employee’s income for calculating CPP contributions, EI premiums and income tax deductions. The tips must also be reported in box 14 on a T4 at year end.
If an employer does not control the tips, the CRA does not consider them employment income and payroll does not have to include them in an employee’s earnings for calculating source deductions. This can occur when:
• a customer leaves a tip on a table after a meal and the employee keeps the entire amount or a customer pays a tip directly to a porter, bellhop, car attendant, door person, etc.
• a customer includes an amount for a tip when using a credit or debit card to pay a bill and the employer passes on the tip in cash to the employee
• employees share tips in a way that they, rather than the employer, determine.
Even though employers are not required to deduct or pay their share of CPP or EI for direct tips, the CRA allows employees to pay CPP contributions on them on their own if they so choose. To do so, an employee must complete a form CPT 20, Election to Pay Canada Pension Plan Contributions and send it to the CRA with their personal income tax return.
In addition, the CRA requires employees to declare direct tips when they file a personal income tax return. In the interest of good employee relations, employers may wish to advise employees of the CPP option and income tax requirement.
If employees receive both controlled and direct tips, payroll must take source deductions from and report at year end only the portion of the tips that the employer controls.
Quebec differences
For employers and employees in Quebec, the CRA also requires that tips that an employee has to report to an employer under provincial law be included with controlled tips. As such, the tips are subject to EI premiums and federal income tax source deductions.
Quebec’s Taxation Act requires employees in the restaurant and hotel sector who receive tips, whether directly or indirectly, to report them to their employer each pay period.
To do so, employees must complete form TP-1019.4-V, Register and Statement of Tips (or an equivalent document) and give it to their employer at the end of every pay period. Tips they have to report include those that they directly receive from customers and those that they share in under a tip-sharing arrangement, as well as other unrelated tips (e.g., tips a cloakroom attendant or hotel valet receives).
Employees do not have to report tips from take-out counters or deliveries or tips resulting from service charges added to customers’ bills. From the amount they report on the form, they subtract any tips they gave to other employees under a tip-sharing arrangement.
If the amount of tips that an employee reports in a pay period is less than eight per cent of the employee’s sales upon which tips are expected (called “tippable sales”), the employer must allocate an amount to the employee as tips to make up for the difference. Employers and employees can apply to Revenu Québec for a reduced allocation rate if they believe it is too high for their establishment.
Not all employees are subject to the tip-allocation requirement. Revenu Québec exempts employees such as valets, door attendants, porters and car attendants, who do not make tippable sales in a pay period.
Besides deducting EI and federal income tax from the tips employees report, payroll has to include them for calculating Quebec Pension Plan (QPP) contributions, Quebec Parental Insurance Plan (QPIP) premiums and provincial income tax deductions.
They are also included for employer contributions to the province’s health services fund, labour standards levy and training and development fund, as well as for workers’ compensation premiums.
Payroll must also include the tips that employers allocate in all source deduction and employer contribution calculations, except those for EI, QPIP and federal income tax.
Even though employees do not report tips that are part of a service charge added to customers’ bills and later distributed to them, the tips are still subject to source deductions.
At year end, payroll must report employee tips on an RL-1. In boxes A and S, include all of the tips that an employee reported to the employer, as well as all of the tips that were part of a service charged added to customers’ bills and later distributed to the employee. Report allocated tips in boxes A and T.
Employers in Quebec must also submit form TP-1086.R.1-V, Employer’s Statement of Tips and Tippable Sales, when they file their Summary of Source Deductions and Employer Contributions at year end.
It provides Revenu Québec with a list of employees who had tippable sales, how much they had in sales, the amount of tips they reported, the amount their employer allocated and the amount that their employer controlled.
To stay on top of all of the tip requirements, payroll professionals should regularly review CRA and Revenu Québec requirements (if applicable), as well as any provincial labour standards rules that may apply.
As of Jun. 10, the Employment Standards Act, 2000 prohibits employers in Ontario from taking employees’ tips and other gratuities unless another law or a court order allows it or the employer is collecting and redistributing the money among employees under a tip-sharing (also called tip-pooling) policy.
Ontario joins New Brunswick, Newfoundland and Labrador, Prince Edward Island and Quebec in writing into law that tips are the property of the employees who earn them and that employers cannot require employees to share their tips with them.
While the laws vary, they all stipulate tips are not part of employee wages and employers cannot use them when calculating whether they are paying workers at least the minimum wage rate.
New Brunswick, Ontario, P.E.I. and Quebec also specify employers may set up tip-pooling policies in their workplaces, although the rules for them differ among the provinces. Ontario, for example, allows employers to decide if there will be tip pooling, which employees will take part and how the money will be distributed.
By contrast, Quebec prohibits employers from imposing tip pooling. Instead, employees who want to take part may ask their employer to manage it. Employees who are hired after a tip-pooling policy is in place must participate in it.
Quebec also requires employers to include tips that employees have to report to them and tips that employers have to attribute to employees under the province’s Taxation Act when calculating statutory holiday pay, vacation pay and any wages in lieu of notice. It is the only province that requires employees to report tips to their employer.
Beyond labour standards rules, employers have to comply with Canada Revenue Agency (CRA) requirements for tips. Under CRA rules, some tips are employment income and are subject to Canada Pension Plan (CPP), employment insurance (EI) and income tax source deductions and some are not.
It depends on whether the CRA considers the tips to be controlled (i.e., the employer pays them to the employee) or direct (i.e., the client pays them to the employee). The CRA states that employers control tips when they:
• automatically add a service charge or a percentage to a customer’s bill to cover gratuities or tips
• have a policy requiring employees to pool their tips or turn their tips over to the employer and the employer later shares them with employees based on a formula the employer establishes
• include tips or gratuities in their business income and later expense and redistribute them to employees
• have cash tips deposited into their bank account and later pay them out to employees.
If an employer controls the tips, payroll must include them in an employee’s income for calculating CPP contributions, EI premiums and income tax deductions. The tips must also be reported in box 14 on a T4 at year end.
If an employer does not control the tips, the CRA does not consider them employment income and payroll does not have to include them in an employee’s earnings for calculating source deductions. This can occur when:
• a customer leaves a tip on a table after a meal and the employee keeps the entire amount or a customer pays a tip directly to a porter, bellhop, car attendant, door person, etc.
• a customer includes an amount for a tip when using a credit or debit card to pay a bill and the employer passes on the tip in cash to the employee
• employees share tips in a way that they, rather than the employer, determine.
Even though employers are not required to deduct or pay their share of CPP or EI for direct tips, the CRA allows employees to pay CPP contributions on them on their own if they so choose. To do so, an employee must complete a form CPT 20, Election to Pay Canada Pension Plan Contributions and send it to the CRA with their personal income tax return.
In addition, the CRA requires employees to declare direct tips when they file a personal income tax return. In the interest of good employee relations, employers may wish to advise employees of the CPP option and income tax requirement.
If employees receive both controlled and direct tips, payroll must take source deductions from and report at year end only the portion of the tips that the employer controls.
Quebec differences
For employers and employees in Quebec, the CRA also requires that tips that an employee has to report to an employer under provincial law be included with controlled tips. As such, the tips are subject to EI premiums and federal income tax source deductions.
Quebec’s Taxation Act requires employees in the restaurant and hotel sector who receive tips, whether directly or indirectly, to report them to their employer each pay period.
To do so, employees must complete form TP-1019.4-V, Register and Statement of Tips (or an equivalent document) and give it to their employer at the end of every pay period. Tips they have to report include those that they directly receive from customers and those that they share in under a tip-sharing arrangement, as well as other unrelated tips (e.g., tips a cloakroom attendant or hotel valet receives).
Employees do not have to report tips from take-out counters or deliveries or tips resulting from service charges added to customers’ bills. From the amount they report on the form, they subtract any tips they gave to other employees under a tip-sharing arrangement.
If the amount of tips that an employee reports in a pay period is less than eight per cent of the employee’s sales upon which tips are expected (called “tippable sales”), the employer must allocate an amount to the employee as tips to make up for the difference. Employers and employees can apply to Revenu Québec for a reduced allocation rate if they believe it is too high for their establishment.
Not all employees are subject to the tip-allocation requirement. Revenu Québec exempts employees such as valets, door attendants, porters and car attendants, who do not make tippable sales in a pay period.
Besides deducting EI and federal income tax from the tips employees report, payroll has to include them for calculating Quebec Pension Plan (QPP) contributions, Quebec Parental Insurance Plan (QPIP) premiums and provincial income tax deductions.
They are also included for employer contributions to the province’s health services fund, labour standards levy and training and development fund, as well as for workers’ compensation premiums.
Payroll must also include the tips that employers allocate in all source deduction and employer contribution calculations, except those for EI, QPIP and federal income tax.
Even though employees do not report tips that are part of a service charge added to customers’ bills and later distributed to them, the tips are still subject to source deductions.
At year end, payroll must report employee tips on an RL-1. In boxes A and S, include all of the tips that an employee reported to the employer, as well as all of the tips that were part of a service charged added to customers’ bills and later distributed to the employee. Report allocated tips in boxes A and T.
Employers in Quebec must also submit form TP-1086.R.1-V, Employer’s Statement of Tips and Tippable Sales, when they file their Summary of Source Deductions and Employer Contributions at year end.
It provides Revenu Québec with a list of employees who had tippable sales, how much they had in sales, the amount of tips they reported, the amount their employer allocated and the amount that their employer controlled.
To stay on top of all of the tip requirements, payroll professionals should regularly review CRA and Revenu Québec requirements (if applicable), as well as any provincial labour standards rules that may apply.
