Court Ruling Impacts Federal Withholdings on Electronic Tips

Tips collected electronically may now require CPP and EI withholdings.

A recent court decision (Ristorante a Mano Limited v. Canada (National Revenue) has a significant impact on all employers who collect and distribute tips electronically and on the employees who receive them. The Federal Court of Appeal (FCA) has upheld a Tax Court of Canada decision that Canada Pension Plan (CPP) and Employment Insurance (EI) withholdings must apply to tips paid electronically, regardless of when or how they are distributed to employees.

Previous Tip Withholding Guidelines

While tips received by an employee have always been considered taxable income, a distinction between controlled vs direct tips determined whether or not they were pensionable and insurable as well. Direct tips, where a customer gives money directly to the employee physically or electronically (including when the employer collected tip amounts electronically and returned tips in cash at the end of a shift) were not pensionable or insurable.  To contrast, controlled tips, where an employer collects and distributes tips amongst its employees or has some other control (ie. a mandatory service charge) are insurable and pensionable.

Moving Forward

Following this FCA decision, electronically collected and distributed tips are now pensionable and insurable earnings for which CPP and EI withholdings must apply. The court reasoned that with electronic tips, the employer would collect and distribute these funds, they come as a direct result of employment; therefore, CPP and EI apply. While this is a deviation from existing CRA direction regarding electronically collected tips, this court decision will lead to a change in enforcement. Note that CPP and EI withholdings still do not apply for direct cash tips.

Employer Responsibilities and Repercussions

Employers of any kind who collect and distribute tips electronically should apply proper withholding amounts or face penalties. A penalty of 10% of the amount not deducted (or 20% for multiple offences in one year) may apply to employers who do not make these deductions.

Here to Help

At Bateman MacKay, we are here to help employers with their tax, accounting and business advisory needs. If you have questions about proper withholdings on employee wages or other corporate tax issues, reach out to a Bateman MacKay Business Advisor.

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