Tip management and EI/CPP Withholdings

Note: If your staff earn a total of less than about $50,000 a year in tips (that's the equivalent of 20 staff, earning $10 per day, 5 days per week, 50 weeks per year) then it's probably not worth your effort trying to save money on EI/CPP withholdings. However, if you're a big business, this is for you!

Introduction

Every time you add a tip onto your purchase at a coffee shop/bar/restaurant/salon etc. and pay using a credit card then the employer needs to pay EI and CPP contributions on that gratuity (if you're wondering how much, take a look at our gratuity calculator). It's great that many employers are happy to stump up these costs to benefit their staff. However, there's a trend of businesses refusing to accept credit card tips to eliminate this significant expense.

We wondered if tippl could help. Tip payment via tippl is fundamentally different, and we weren't sure how we fit in to either Canada Revenue Agency policy or Canadian case law. We worked with local law firm Ritchie, Kwo & Wright to understand where tippl fits and whether we can save businesses money.

We found that managing employee tips efficiently and in compliance with Canadian tax laws can be a complex endeavour for employers! But, with the streamlined solution to facilitate tip payments that tippl offers, it might also be possible for employers to avoid withholdings under the Canada Pension Plan ("CPP") and Employment Insurance Act ("EIA") on tips paid by their customers to their employees (the "Withholdings").

We explore this possibility below.

Why structure matters

Under Canada Revenue Agency policy, the question of whether tips are subject to CPP contributions and EIA premiums depends on whether the tips are classified as "controlled" or "direct". Controlled tips (those distributed by the employer) are subject to these withholdings, whereas direct tips (those paid directly by customers to employees) are not.

Case law provides some nuance on this point. The central question is who is the "payer" of the tips? For example, even if the employees remain, at law, the owner of their tips at all times, if the employer comes into possession of the tip funds before remitting them to employees, the CRA/a court could still determine that the employer is the payer.

Structure to consider

If you or your employees wish to avoid paying the Withholdings, there are a number of steps you could discuss implementing with your tax and legal advisors.

Employee-led committees: Employees could form a committee to oversee tip distribution policies. These committees should have sole authority over how tips are allocated and when the tips are paid out (unless discretion for payout is passed on to the specific employees themselves), ensuring that the employer does not dictate or control the process.

Tip bank account: Employers might establish a separate bank account exclusively for tip payments, where only employee committee members are signatories. Best practice would be to open this at a different bank from the one the employer typically banks with. This reduces employer control over the funds and minimizes the possibility of commingling with employer accounts.

Things to avoid

Employers should consider discussing the following potential practices with their tax and legal advisors which could lead to CRA scrutiny or legal challenges:

• Commingling funds: If tip money is mixed with company funds or reflected in corporate accounting records, the remission of the tips to employees would require Withholdings. Employers should not record funds that they hold as agent for their employees as their own funds on their books.
  • With tippl customers pay gratuities in a separate transaction from their main purchase, and monies can be paid into a bank account used solely for handling gratuities.
• Separate payroll mechanisms: Similarly, if tip payments are integrated into regular payroll systems or processed through employer accounts, the remission of the tips to employees would require Withholdings.
  • tippl can pay out funds for you, separate from payroll.
• Knowledge of tip amounts: While some knowledge of tip amounts may be unavoidable, employers will want to minimize their involvement with regard to these funds to the extent possible.
  • tippl reduces employer involvement with tip funds.

Final thoughts

Avoiding Withholdings can result in substantial savings for employees and employers. However, it also comes with risks. To mitigate the risks employers should consult their legal and tax advisors to ensure compliance with provincial employment and tax/EIA/CPP law. We worked with Ritchie, Kwo & Wright, and they wrote a short article on tipping themselves.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

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