A Tip: It Pays to Know the CRA Rules on Gratuities

Written by Daniel Standing, LL.B., Editor, First Reference Inc.

Thankfully for servers who work in restaurants, most patrons aren’t like Mr. Pink from the movie Reservoir Dogs who refused to tip. The practice of tipping used to strictly involve cash, but in more recent times, when customers pay for their meals electronically, they often include a tip, leaving it up to the employer to dole them out. The question at issue in 2022 FCA 151 is whether the employer’s payout of tips to its servers is to be considered contributory salary under the Canada Pension Plan, and insurable earnings under the Employment Insurance regime.

Background

The legislation governing the CPP and EI regimes use the words “earnings,” “salary” and “wages” to describe money that is paid by the employer to the employee as income from pensionable employment that gives rise to employer contributions. This case delved into the question of where tips fit into the picture. The restaurant at the centre of the case took the view that the electronic tips didn’t have to be taken into account when making payments under the legislation, but the Minister of National Revenue took a different view, and the courts agreed.

In this case, the evidence showed that most of the tips were paid electronically when the customer paid for their meal. The restaurant would then portion out the electronic tips to the employees, an amount the Tax Court called the “due backs.” This was paid by converting the money to cash by paying it into the employees’ bank accounts.

Under the legislation, insurable earnings are amounts paid by employers to employees “in respect of employment.” The restaurant said the due-back had nothing to do with the employee’s employment; it was simply an amount paid representing the difference between cash received and tips.

What the courts said

The Tax Court did not agree, relying on a Supreme Court case holding that “in respect of” broadly means “in connection with” or “with reference to.” On that basis, the Tax Court said, the due backs and tips paid to employees by the employer were paid “in respect of their employment.” The Federal Court of Appeal agreed: If they weren’t employed at the restaurant, they would not have received the money. It reasoned that the legislation contains no requirement that the money be tied to hours worked, sales or any other measurable factor.

There was also an argument on the question of whether the restaurant paid this money to the employees, or simply distributed it to them. Again, a Supreme Court case provided the answer. By taking a purposive approach to the legislation, the court said that remuneration and what it means to be “paid” could include a tip paid to the employer for distribution to its employees.

The Restaurant made no further headway in arguing that the method of payment should have a bearing on the outcome. The Court rebuffed this, saying, “Method of payment should not be confused with who has paid.” All that matters, it said, is whether the money is paid “in respect of employment.”

Scrutinizing the Tax Court’s conclusion from this standpoint, the Federal Court of Appeal could find no reviewable error. Instead, it said there was “ample evidence” to support the Tax Court’s conclusions.

The key takeaway for employers

This case highlights the importance for employers to understand and follow the Canada Revenue Agency’s position on the treatment of tips, including how they are controlled and allocated. Otherwise, they could find themselves in arrears for potentially thousands of dollars.