Tips are common in the service industry, but there can be some confusion around how to handle them, both in terms of fairness to employees and the tax rules that must be followed.
Tip Pooling and tip splitting
Tip pooling is when some or all of the tips are combined and distributed fairly among all staff at the end of the shift. It could be an equal split between all staff, or based on a percentage of the tips depending on the position an employee holds (server, bartender, bussers, host, etc.).
Tip splitting is a more informal way of sharing tips, where staff who have received tips decide how much and with whom to share their tips.
Some jurisdictions have regulations governing tip pooling and/or sharing. It is important to review the legislation when deciding on how tips will be handled in your business.
Note: in most jurisdictions the owner of the business cannot take a share of the tips unless they fulfill the same duties and tasks as the other employees.
Types of tips
When it comes to the taxation of tips, it all depends on the type of tip.
Controlled tips are tips that the employer controls before giving them to the employee, for example:
- When a mandatory service charge is added to a bill
- When a percentage is added to the bill to cover tips
- Tips given to employees through a tip-sharing process
- Tips that the employees turn over to their employer who then distributes them to the employees
- When the customer adds an amount to a bill paid by debit or credit and the employer provides the amount in cash to the employee on another date (e.g. their next pay)
Direct tips are tips are paid directly to the employee by the customer, for example:
- Money is left on the table, and the server keeps it all
- Money is handed directly to the employee
- The employees rather than the employer decide how to share/pool tips
- When the customer adds an amount to a bill paid by debit or credit and the employer provides the amount in cash to the employee at the end of their shift
Declared tips (Quebec only) are tips an employee working in a regulated business must disclose to their employer. As an employer you must collect the statement of tips form from each employee and use it to calculate source deductions.
Should a business deduct taxes from tips?
Generally, yes, IF the tips are considered controlled tips. Since the employer controls and disburses these tips, it is likely they will be treated as any other remuneration for which source deductions apply such as income tax, EI, CPP etc.
Generally, no, IF the tips are considered direct tips. Where the tip is given directly to the employee (cash) or is done electronically but fully disbursed at the end of the shift to the waiter in question, with no deductions, holds or other interference by the business in the disbursing of the tips.
Direct tips are not required to have CPP contributions or EI premiums deducted; however, an employee can opt in to making CPP contributions by completing Form CPT20 – Election to Pay Canada Pension Plan Contributions.
If you have further questions about tips and taxation, please visit the CRA’s webpage on Tips and Gratuities and/or the Revenu Quebec page.
CFIB Business Advisors are also available to answer questions; please contact them at 1-833-568-2342 or by email at hrnow@cfib.ca
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