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Citation: 2003TCC384
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Date: 20030607
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Dockets: 2002-912(EI)
2002-913(CPP)
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BETWEEN:
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S & F PHILIP HOLDINGS LTD. OP SOOKE HARBOUR,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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REASONS FOR JUDGMENT
Rowe,
D.J.T.C.C.
[1] The appellant
appeals from two decisions – both dated January 25, 2002 – issued by the
Minister of National Revenue (the "Minister") wherein an earlier
assessment was varied with respect to the 1998 taxation year and the assessment
for the 1999 year was confirmed as it related to named workers. The decisions
were issued pursuant to subsection 93(3) of the Employment Insurance Act (the
"Act") and subsection 2(1) of the Insurable Earnings and
Collection of Premiums Regulations (EI Regulations) and section 12 and
subsection 27.2(3) of the Canada Pension Plan (the "Plan"),
respectively. In said decisions, the Minister decided certain amounts of
employment insurance (EI) premiums and Canada pension plan (CPP) contributions
were owing in connection with services performed for the appellant in the 1998
and 1999 taxation years by the individuals listed on Schedule A attached to
each Reply to the Notice of Appeal (Reply).
[2] Counsel agreed
both appeals would be heard on common evidence. The issue in these appeals is
whether tips form part of the workers’ insurable and/or pensionable earnings
from employment with the appellant during 1998 and/or 1999. The appellant is
also referred to in these reasons as Sooke Harbour House or Harbour House.
[3] Frédérique
Philip testified she is a Director and Officer of the appellant corporation
which owns and operates Sooke Harbour House, a highly-rated resort hotel with
28 rooms and a internationally-acclaimed restaurant that has grown to its
present status from a 5-room bed and breakfast business when it was purchased
in 1979. Located in Sooke, on Vancouver Island, in British Columbia, Philip
stated Harbour House had only 4 workers in the beginning but the staff now
totals approximately 80 and is comprised of individuals employed in every
aspect of the resort facility including administration, reception, gardening,
chambermaid service, cooking and food service. The only workers affected by the
issue in the within appeals are those who were employed in the dining room or
who had performed services directly related to the dining room. Philip stated
that tips are those amounts given as gratuities to employees of Harbour House
by guests. In the early years, tips were mainly in the form of cash and would
be retained by the recipients without any participation or intervention by the
appellant. Later, the use of credit and debit cards increased dramatically and
patrons began adding tips to the amount of their bill and either charging the
total sum to their credit card or using a debit card connected to their bank
account. As a consequence, Philip explained it was necessary for Harbour House
to become involved in processing the credit card slips in a manner that would
enable the servers to receive the amount the guest had intended them to receive
but which was now imbedded in the total of the credit card charge. Philip
stated the workers – over the course of many years – had established an
arrangement concerning distribution of tips in order to take into account the
indirect contribution of persons working as bussers, dishwashers, chefs or
other members of the kitchen staff. Pursuant to the entrenched system, all tips
‑ regardless of the intended recipient – were placed into a pool for
distribution - in accordance with certain percentages – to all persons who were
part of the foodservice team. Philip stated all workers agreed Harbour House
would retain 10% of the total amount in the tip pool to cover the cost it
incurred in the form of merchant/transaction fees charged by credit card
companies to facilitate a financial transaction arising from the use of a
particular card as well as the extra work created by having to separate the
amount of the tips from the actual bill for food and beverages and then
distributing the appropriate share thereof to those workers entitled to share
the pool money. Philip stated Harbour House received a copy of a letter ‑ Exhibit A-1
– dated November 4, 1999 – directed to the Canadian Restaurant and Foodservices
Association by which she became aware that provincial legislation prohibited
the deduction – by an employer - of credit card administration fees from
employees’ gratuities and Harbour House – thereafter - paid the entire amount
of tips into the pool for distribution among the workers. Philip explained the
method now followed by Harbour House is to calculate – at the end of the
evening – the total amount of tips paid by patrons of the dining room and to
place that amount ‑ in cash – into a drawer where it is removed by a
server - chosen by the waiting staff as their representative - and then the
money is divided and distributed among entitled workers in accordance with
their own arrangement without any further participation by Harbour House. As a
result of the new system, there is no longer any need for the appellant to
write 30 or 40 cheques every two weeks in accordance with amounts provided to
it by the workers’ representative as calculated in accordance with the formula
for distribution adhered to by the recipients. Philip noted that in Europe –
generally – and in France – specifically – the guest has no choice whether to
tip because the fixed percentage of 15% is automatically added to the bill.
However, without that regime, Philip stated Harbour House incurred merchant
fees or financial transaction costs levied by credit card companies ‑ ranging
from 2-4% - with respect to all amounts processed in order to provide the
workers with the intended amount of the tips. Therefore, it would cost the
appellant between $20 and $40 to process $1,000 in credit card charges in order
to act as a conduit for payment of gratuities to workers. Philip stated she had
a conversation with an auditor at Canadian Customs and Revenue Agency (CCRA)
who informed her she should remit EI premiums and CPP contributions in respect
of those amounts. She recalled there had been reference to an Interpretation
Bulletin and that the discussion had also concerned the definition of a
"controlled gratuity". In her view, there was no controlled gratuity
at Harbour House since there was no service charge added to any bill nor was
there a fixed percentage attributable to tips arising from the use of the
banquet room nor was there any agreement in that regard with the waiting staff.
In addition, Philip stated she was never involved with any tips that had been
left in the form of cash since those sums were distributed by the workers
themselves without any need for intervention on behalf of Harbour House. Philip
was referred to certain assumptions of fact set forth in paragraph 5 of the
Reply in the EI appeal. With respect to the assertion by the Minister that any
cash tips, although received directly by the workers, were recorded on a Daily
Tip Sheet maintained by the appellant, Philip stated that was not correct in
that said sheet was maintained by the wait staff and then provided to Harbour
House administration as a basis upon which cheques would be issued - in the
appropriate amounts - to certain persons. Philip agreed the tips paid by use of
credit cards or debit cards were also recorded on the sheet and one worker
would ensure the names of all staff working that day were included on the form.
During 1998 and 1999, Philip agreed Harbour House retained 10% of the amount of
the tips as recorded on the sheet but explained it was the workers who
calculated the amount due to each of them and not Harbour House management.
Philip agreed with the assumptions of the Minister at subparagraphs 5(i) and
5(j), respectively, that the workers received a cheque every two weeks for the
amount of their tips and another cheque every two weeks – commencing the
following week - for the amount of their wages but emphasized the gratuities
were never the property of Harbour House since it had always acted only as a facilitator
to transform the amount of the tips – paid by credit cards as part of the
overall bill - into actual payment to members of the wait staff.
[4] In cross-examination, Frédérique Philip stated
the system agreed to by all dining room and kitchen staff - whereby Harbour
House retained 10% of the total of the tips – had been in place throughout the
entire relevant period. Counsel referred Philip to a tip sheet – Exhibit R–1 -
pursuant to which the bussing staff and kitchen staff was entitled to receive 15%
and 10%, respectively, of the total tips. The balance was divided among members
of the wait staff. Philip agreed Harbour House had accepted the use of
said sheet for that purpose and that the corporate accountant verified the
amounts of the credit card charges prior to preparing the cheques for
distribution. Philip stated the tip-sharing method had evolved among the
workers – from time to time – over the course of 20 years. Any worker could
have decided to retain his or her tips directly and to have refrained from
participating in the pooling system but it was reasonable to assume he or she
would have encountered difficulty with other workers as a result. In such a
case, Philip stated she would have informed any worker intending to pursue this
course of action that it was a matter requiring discussion with the rest of the
staff and, unless there could be consensus, she would not have permitted this
departure from the normal pooling arrangement, as to do so would have created
disharmony. Philip was referred to a spreadsheet – Exhibit R-2 – and described
it as an example of a document that was produced every two weeks in order to
pay tips to the workers. As a matter of course, the cheque for the amount of
tips was larger than the other one issued by Harbour House for payment of
wages.
[5] In re-examination, Frédérique Philip stated the
tips were now paid – in cash – to the staff the following day because the
amount of cash received in the course of an evening might be insufficient to
pay the total due once the credit card slips were tallied in respect of
gratuities.
[6] Linda Danielson testified she is a waitperson
and has worked evenings at Harbour House - since 1980 – as a cleaning person,
chambermaid, office worker, cook and server. During recent years, she had
observed that 98% of all dining room bills were paid by credit card so there
was only a small amount of cash available for distribution to wait staff. With
regard to division of tips, she stated that over the course of many years, the
workers had determined the appropriate method of sharing tips – including
kitchen and bussing staff - without any involvement by Philip. She stated the
staff was aware there was a cost to Harbour House in facilitating payment
of those tips that had been included as part of the credit card payment for the
meal. Later, the new system of utilizing cash for distribution of tips came
into effect but Danielson stated there was never any instruction from Philip
concerning the method by which tip money was to be distributed. She stated the
wait staff had always been able to agree on a tip-sharing system and there had
never been a dissenter among the workers as that would have led to disharmony.
Usually, four waitpersons worked at a time and each person reported the amount
of tips - received in cash - in accordance with the honour system forming part
of the overall pooling and distribution arrangement.
[7] In cross-examination, Linda Danielson was
referred to Exhibit R-1 and stated she did not know who had produced that form
- used by the Harbour House accountant to prepare cheques in order to
distribute tips to workers - but a representative of the wait staff photocopied
the document – as needed – for ongoing use. Danielson explained that when new
staff members arrived, a member of the existing wait staff would inform them of
the method used to divide and distribute all tips received from dining
room/banquet patrons.
[8] Counsel for the
appellant submitted that merely because the Income Tax Act requires
employees to include gratuities into their income does not transpose any
obligation on the employer other than to state the amount of tips when issuing
a T4 slip to a worker. Counsel submitted the appellant become involved in
an administrative accounting process whereby the tip portion of a credit card
charge was paid into a pool for the subsequent benefit of the intended
recipient as to do otherwise would be to retain funds not belonging to Harbour
House. The workers agreed - among themselves - to pay 10% of the amount of the
total tips being processed in order to cover the cost of the credit card
transaction fees and extra accounting fees incurred by the appellant to verify
amounts and to issue cheques to several workers every two weeks separate from
the regular payroll period. Counsel submitted the mutual decision to use this
mechanism to provide workers with their tips was not a condition of employment
nor could it be regarded in the same sense as a term of a collective agreement
within the context of bargaining between an employer and its unionized staff.
[9] Counsel for the
appellant submitted that with respect to the issue of CPP contributions,
it was apparent the CCRA auditor proceeded on the basis Harbour House was
controlling the tips in a manner contemplated by the wording of the relevant
Interpretation Bulletin. However, counsel submitted the wording of the relevant
provision does not encompass the fact situation in the within CPP appeal and
further requested the Court consider the application of a specific test - in
the process of determining whether contributions are due under the Plan -
because that legislation has a different purpose than the Act.
[10] Counsel for the
respondent submitted the wording of the relevant provision of the EI
Regulations under the Act requires an employer to pay EI premiums
based on the total of all amounts paid to an employee by the employer in
respect of employment. Counsel agreed that if the evidence had disclosed that
none of the tip money had ever passed through the hands of Harbour House and
had been retained directly by the workers for distribution among themselves,
those amounts would not have formed part of insurable and/or pensionable
earnings. In collecting the money and proceeding to distribute it to individual
workers in return for an administration fee of 10%, counsel argued there was
control exercised by the appellant.
[11] Counsel agreed
there is a different wording utilized in the relevant provisions of the Plan
but submitted the tips should also be considered as being subject to the
appropriate contribution by Harbour House in its capacity as the employer.
[12] First, I will
deal with the issue whether tips formed part of the workers’ insurable earnings
from employment with the appellant requiring premiums thereon to be paid by the
employer – Harbour House - pursuant to subsection 82(1) of the Act.
[13] The following
definition is found in subsection 2(1) of the Act, as follows:
“insurable earnings” means the total amount of the
earnings, as determined in accordance with Part IV, that an insured person has
from insurable employment;
[14] The relevant portion of subsection 2(1) of the Regulations
reads:
2.(1) For the purposes of the definition
“insurable earnings” in subsection 2(1) of the Act and for the purposes of
these Regulations, the total amount of earnings that an insured person has from
insurable employment is
(a) the total of all amounts, whether wholly or
partly pecuniary, received or enjoyed by the insured person that are paid to
the person by the person’s employer in respect of that employment ...
[15] In the case of Canadian
Pacific Limited v. A.G. (Can), [1986] 1 S.C.R. 678, the Supreme Court of
Canada considered the issue of whether tips should be taken into consideration
in calculating unemployment insurance premiums payable by the employer pursuant
to the provisions of the Unemployment Insurance Act, 1971,
1970-71-72 (Can), c. 48, in effect at that time. In a 4-3 decision, the Supreme
Court held the amounts paid as tips should be taken into account when calculating
the unemployment insurance premiums. La Forest J. – writing for the majority –
referred to the question before the Court and set forth the relevant facts, as
follows:
The issue raised in this case relates to
the manner in which these premiums are to be calculated. More precisely, as
Pratte J. of the Federal Court of Appeal put it, [1984] 1 F.C. 859, at p. 860,
"in calculating these premiums, is it necessary to take into consideration
amounts which an employer paid its employees after receiving them from its
customers, who had paid them to the employer of their own accord, to be
distributed to the employees as tips?"
The appellant, Canadian Pacific Limited,
operates several hotels, including the Château Frontenac in Quebec City. The
collective agreement that governed the labour relations of the employees at the
Château Frontenac at the relevant time stipulated that it was agreed that when
the organizer of a function such as a convention or a banquet leaves tips to
the hotel for distribution, eighty percent (80%) of these tips are to be
distributed by the hotel to the employees governed by the collective agreement
who have worked during these functions.
In compliance with this stipulation, the
appellant distributed certain monies to its employees. It is undisputed that
these amounts came from clients of the appellant who, without any obligation on
their part, paid them to the appellant for distribution to its employees as
tips. The Minister of National Revenue took these amounts into consideration in
calculating the premiums that the appellant was required to pay for the year
1978.
[16] After reviewing
the relevant legislative provisions requiring an employer to pay unemployment
insurance premiums, La Forest J. – at p. 683 and following of his reasons –
continued:
What is important to determine, therefore,
is the meaning of the expression "insurable earnings" in the English
version of the Act, "rémunération assurable" in the French
version. These expressions may not be entirely precise, though it seems to me
that they would have a broader meaning than, for example, salary. Pratte J.
gave them a broad meaning. He relied especially on two English decisions where
the expression "earnings" was used, one, Penn v. Spiers & Pond
Ltd., [1908] 1 K.B. 766, by the English Court of Appeal and the other, Great
Western Railway Co. v. Helps, [1918] A.C. 141, by the House of Lords.
In Penn v. Spiers & Pond Ltd.,
supra, the English Court of Appeal was faced with a question similar to
that in the present case, namely: in calculating compensation payable under the
English Workmen's Compensation Act of the time, must one take into
consideration tips received by the employee? The relevant provision required
that the compensation be calculated in terms of "earnings in the employment".
The court decided that tips came within the purview of this expression.
Cozens-Hardy, M.R., giving the judgment of the court, stated (at p. 769):
It has often been pointed out in this
Court that the measure of compensation under the Act is not wages, but
earnings. This is conceded by the respondents, who admit that the value of the
board must be taken into account. It is not every kind of earnings which can be
taken into account. They must be earnings in the employment. If the workman by
the exercise of his talents during his leisure hours, as, say, a conjurer or a
musician, gains money, the money thus gained will increase his income, but not
his "earnings", within the Act. "Earnings in the
employment" do not always come from the employer. It is common knowledge
that there are many classes of employees whose remuneration is derived largely
from strangers. A hall porter at an hotel and a driver of a postchaise are
sufficient illustrations. It would be absurd to say that the money received
from the hotelkeeper or the post-master alone represents the rate per week at
which the workman was being remunerated.
The House of Lords came to the same
conclusion in Great Western Railway Co. v. Helps, supra. Here is what
Lord Dunedin says of the matter, on p. 145:
The whole point, therefore, is, do these
tips fall within the statutory expression of "earnings"? If you were
to ask a person in ordinary common parlance what this porter earned, the answer
would be: "Well, I will tell you what he gets; he gets so much wages from
his employers, and he gets on an average so much in tips".
My Lords, it has been sought in the
argument addressed for the appellants to limit the meaning of
"earnings", to what the workman gets by what I may call direct
contract from his employers. The simple answer is that the statute does not say
so; it uses the general term "earnings" instead of the term
"wages" or the expression "what he gets from his employer",
and as a matter of fact the employer, in a case where there is a known practice
of giving tips, obviously gets the man for rather less direct wages than he
would if there was not that other source of remuneration to the man when he is
in his post.
[17] At pp. 685-687,
La Forest J. continued as follows:
That Parliament used the word
"earnings" in the English version is clearly indicative of its
intention having regard to decisions on the meaning of the word in a statute of
the same nature, i.e., one dealing with social security. It should be noted
that the Unemployment Insurance Act, 1971 also provides that benefits
payable to employees who have lost their employment are to be calculated in
terms of a percentage of their insurable earnings. Section 24(1), as amended by
1976-77 (Can.), c. 54, s. 35, reads as follows:
24.(1) The
rate of weekly benefit payable to a claimant for a week of unemployment that
falls in his benefit period is an amount equal to sixty-six and two-thirds per
cent of his average weekly insurable earnings in his qualifying weeks.
(Emphasis added.)
In this country, Marceau J., acting as
umpire in the case of Association des employés civils v. Minister of
National Revenue, NR 1168, March 29, 1983, came to the same conclusion in a
case having considerable similarities to the present. He made the following observations:
In choosing the term
"remuneration", and not the commonly used terms "salary" or
"wages", Parliament certainly wanted to express its intention to
cover more than just the fixed salary attached to the job, and this "more
than just the salary" can only be the amounts, calculated as a percentage
or on some other basis, that an employee receives from his employer, over and
above a basic salary, in return for the services he provides. The method chosen
by the employer to obtain from his clients the amounts which he is to pay to
his employees (a percentage included in the calculation of a total price or
added to a basic price), and the fact that the size of the amount remains to be
determined, have nothing to do with the question; what matters is that these
are amounts payable and promised by the employer in return for the employee's
work.
The conclusion I have arrived at is, in my
view, strongly supported by other provisions of the Act. Section 3(1) defines
insurable employment in the following terms:
3.(1) Insurable employment is employment that is
...
(a) employment in Canada by one or more employers,
under any express or implied contract of service or apprenticeship, written
or oral, whether the earnings of the employed person are received from the
employer or some other person and whether the earnings are calculated by
time or by the piece, or partly by time and partly by the piece, or otherwise;
(Emphasis added.)
See also s. 2(1)(k) which defines
"insurable earnings" as comprising "the total amount of the
earnings from insurable employment".
The regulations adopted under s. 90(1)(i)
of the Act also support my view. This section gives the Minister power to make
regulations, and in particular:
90.(1) The
Minister ... make regulations
(g) for defining and determining
earnings and pay period;
...
(i) for calculating and determining the amount
of insurable earnings of insured persons and the amount of premiums payable:
By virtue of this provision, the Minister
established a regulation that gives greater precision to the meaning of the
expression "insurable earnings" in the following manner:
3.(1) The amount from which an insured person's
insurable earnings shall be determined is the amount of his remuneration,
whether wholly or partly pecuniary, paid by his employer in respect of a
pay period, and includes
(a) any amount paid to him by his employer
as, on account or in lieu of payment of, or in satisfaction of
(i) a bonus, gratuity, retroactive pay
increase, share of profits, accumulative overtime settlement or an award.
(Emphasis added.)
The opening words of this provision raise
the question regarding the meaning of the word earnings that has already been
discussed. The expression "remuneration ... paid by his employer" in
the English version, "rétribution ... qui lui est payée par son
employeur" in the French version, may also appear equivocal. According
to Le Petit Robert (1984), rétribution means "ce que l'on
gagne par son travail", a definition that does not give much
assistance. But the word "remuneration" in the English version throws
more light on the subject. In Skailes v. Blue Anchor Line Ltd., [1911] 1
K.B. 360, the English Court of Appeal interpreted this expression for the
purposes of the Workmen's Compensation Act of the time as
comprising not only a bonus paid to a purser by his employer, but also the
profits from the sale of liquor to passengers on board. If one adopts this
approach, it seems to me that the word can also include a tip paid to the
employer for distribution to his employees. As to the word "paid",
which can equally well mean mere distribution by the employer or payment of a
debt owing by him, I would simply observe that if one gives the word
"remuneration" a broad meaning, one must also give a broad meaning to
the Word "paid".
[18] The current
definition of insurable employment is found at paragraph 5(1)(a) of
the Employment Insurance Act and the wording is identical to that used
in the former legislation. With respect to the wording of the relevant Regulation
made under the former legislation, La Forest J. – at pp. 689-690 – commented:
Section 3(1)(a)(i), therefore,
clarifies or expands the meaning of earnings by telling us that it includes
"any amount paid to him by his employer ... in satisfaction of ... a
... gratuity" (emphasis added). In my view, that is precisely the
situation we have in this case. The word "gratuity" in the English
version is the ordinary synonym for tip. The word gratification in the
French version certainly includes a tip.
The interpretation I have given to
"insurable earnings" is consistent with the purpose of the Act, which
is to pay, to persons who have lost their employment, benefits calculated in
terms of a percentage of their insurable earnings. Otherwise, an employee who
received a good part of his earnings as tips would not benefit to the same
degree as his colleagues who receive the whole of their earnings directly from
the pocket of their employer. By adding to the definition of remuneration a
whole series of benefits an employee receives by reason of his employment, the
regulations clearly indicate that the expression should be given a broad
interpretation. Moreover, as noted, a law dealing with social security should
be interpreted in a manner consistent with its purpose. We are not concerned
with a taxation statute. The cases of Penn v. Spiers & Pond Ltd. and
Great Western Railway Co. v. Helps, supra, are merely examples of the
principle that I have just stated.
I would add that if the appellant is
obliged to pay premiums solely in relation to the part of the earnings of his
employee that comes out of his pocket, then it is in a better situation than
other employers who pay these premiums in relation to all the earnings accruing
to the employee from his work. The employer obviously benefits from the fact
that some of his employees are in a position where they can obtain tips. He is
able to retain their services at a better price. It, therefore, appears unjust
that he should also be able to divest himself of a part of the obligation that
all other employers must carry, or to restrict the amount of benefits of his
employees whose earnings come in good part from tips.
[19] In concluding
that the tips should be included into the calculation of UI premiums, La
Forest J. continued – on p. 690 – by stating:
It is true that these arguments are in a
measure applicable equally to employees who personally receive tips, even
though s. 3(1) of the Regulations does not mention these. However, those
who drafted the Regulations no doubt concluded that it was necessary to proceed
in this way for administrative reasons. See on this issue the case of Association
des employés civils v. Minister of National revenue, supra. It is almost
impossible to levy premiums on tips obtained in this manner and it is for that
reason that the Regulation does not take them into account. It goes without
saying that insurable earnings include many tips collected in ways other than
the ones collected in this case. For example, those added when paying a bill by
credit card. (underlining mine)
[20] The dissenting
opinion in Canadian Pacific, supra, written by Chouinard J. (Beetz and
McIntyre JJ. concurring) is instructive, particularly by taking into account
the similarity of the circumstances with those applicable to the within
appeals. At p. 691, Chouinard J. set out the facts, as follows:
By an agreement appended to the collective
agreement between the union and the employer, it was agreed that the latter
would receive such tips and distribute them to the employees. The union and the
employer agreed on this course of action in the interests of efficiency and
economy, in view of the number of employees working at banquets and the
problems which would result from dividing and distributing tips.
The following facts were not in dispute.
The customers decided whether tips should
be left.
The amount of the tips was entirely in the
discretion of the customers.
Appellant made no service charge to its
customers.
None of the amounts paid by the customers
as tips were included in appellant's income.
The total amount of the tips was passed on
to the employees.
All appellant did was distribute the tips
to the employees in accordance with the agreement.
Respondent added the following
information, which was not disputed by appellant:
[TRANSLATION] The tips in question were paid to the
Château Frontenac Hotel at banquets or receptions organized by it: at such
times the hotel billed the customer for the amount indicated by him (generally
12 to 15 percent) and received the amount in question.
According to the collective agreement with
its employees, the hotel then distributed the amounts in question as follows:
80 percent of such tips to employees covered by the collective agreement who
had worked at the meetings in question and 20 percent to non-unionized
employees. The hotel issued a cheque to each employee who had worked at this
type of reception, in an amount corresponding to his share of the sum which the
customer had agreed to pay the hotel for tips.
Employees working at these banquets also
received an hourly wage fixed by the collective agreement.
[21] In Canadian
Pacific, counsel for the respondent had argued that the hotel had paid the
sums at issue to the workers pursuant to an obligation imposed on it by the
terms of the collective agreement. The response of Chouinard J. – at p. 701 –
is as follows:
I cannot agree with the propositions of
counsel for the respondent. Of course, payment is a method of extinguishing
obligations: but there has to be an obligation. In the case at bar, the
employer's obligation is at most that of an agent. If it receives amounts for
its employees from customers, it is obliged to pass them on. However, if it
receives nothing from the customers it does not owe its employees anything.
[22] It could be
argued that the appellant in the within appeals was merely acting as a trustee
for that portion of each patron’s payment attributable to gratuities and that
it was under a legal obligation to pay over such amount for distribution among
the entitled workers. However, that fulfillment of an obligation – even
pursuant to some trust arrangement - still involves the act of making a
payment. In the within appeals, Harbour House issued cheques to workers - in
specific amounts - representing their appropriate share of the total tips
received from patrons. The payment was pecuniary in nature and arose totally
within the context of employment. Because the arrangement was more casual than
the one in Canadian Pacific, supra, case does not mean it is any less
significant because it clearly governed the actions of the employees and
Harbour House - the employer - with respect to an important facet of their
employment. Although not particularly surprising for a resort like the hotel
operated by Harbour House, the tips given by customers were often equal to – or
greater than – the wages or salary paid by the appellant. Obviously, the tip
component was an important part of their overall earnings upon which EI
premiums were based and upon which entitlement to EI benefits would be
calculated should a worker become unemployed. It seems there was a clear
intention to include tips into the calculation of insurable earnings because
the relevant provision of the EI Regulation refers to "the total of
all amounts, whether wholly or partly pecuniary, received or enjoyed" by
the worker that are "paid" by the employer "in respect of"
that employment. The Supreme Court of Canada in the case of Nowegijick v.
The Queen [1983] 1 S.C.R. 29, held that the words, “ in respect of” are
words of the widest possible scope of any expression that is intended to convey
a connection between two related subject matters.
[23] In the within EI
appeal, had all customers merely handed over the tips to the servers and,
thereafter, members of the wait staff had placed the respective amounts into a
pool to be distributed subsequently in accordance with their own agreement,
there would have been no involvement by the appellant and no amount would have
been paid - by it - to the workers. Any offering up of a gratuity by a patron
to a server would have been a transaction fully concluded at that point.
Certainly, it would still have been an amount received by the worker as a
consequence of having been employed in the Harbour House dining room and - in
that sense - would probably have been an amount "in respect of"
employment but the other ingredient would not have been present, namely payment
of the amount of the tip – to the worker - by the employer. Harbour House –
albeit with the full concurrence of the workers - undertook the distribution of
tip money – for an administration fee of 10% - by issuing cheques to entitled
workers. In so doing, Harbour House made the decision to facilitate
distribution of the tip money by fully integrating the requisite payments into
the regular payroll mechanism and following the usual procedures related to
preparation and issuance of cheques to employees on a bi-weekly basis. The
modern usage of credit cards has placed those employers engaged in the restaurant
and food services industry in the situation where they must bear yet another
burden as a consequence of having to incur the cost of credit/debit card
transaction fees and the extra administration associated with issuing cheques
to cover the amount of the tips extracted – in a notional sense – from the
total amount of the charge approved by the customer in satisfaction of the
total amount of the bill including taxes and gratuity. Perhaps an amendment to
provincial labour standards legislation is required into order to permit
deduction by an employer of the actual amount of the credit card transaction
fees so as to permit the employer to pay the relevant server/recipient the net
amount of the tip after taking into account the applicable transaction fees.
[24] I am aware the
relevant Regulation under the former Unemployment Insurance Act -
defining insurable earnings - specifically included a "gratuity". In
my view, the current definition found in subsection 2(1) of the EI
Regulations under the current Act is even broader in that it refers
to "the total of all amounts" paid "in respect of" that
employment.
[25] I cannot find any
basis upon which to distinguish the decision of the Supreme Court of Canada in Canadian
Pacific, supra, and find the decision of the Minister ‑ wherein
the assessment issued pursuant to the provisions of the Act was
confirmed – is correct.
[26] The next matter
to be decided concerns the CPP appeal. The issue is whether the tips form part
of the workers’ pensionable earnings from employment with the appellant. The
position of the Minister is that since the tips are recorded and controlled by
Harbour House and then paid to the workers, those tips constitute earnings from
pensionable employment, as defined in subsection 12(1) of the Plan, and
as determined pursuant to subsection 5(1) and section 5 of the Income Tax
Act, thereby requiring contributions to have been made by the appellant
with respect to said tips.
[27] The amount of an
employee’s contribution under the Plan is established by subsection
8(1), as follows:
Every employee who is employed by an
employer in pensionable employment shall, by deduction as provided in this Act
from the remuneration for the pensionable employment paid to the employee by
the employer, make an employee's contribution for the year in which the
remuneration is paid to the employee of an amount equal to the product obtained
when the contribution rate for employees for the year is multiplied by the
lesser of
(a) the employee's contributory salary and wages
for the year paid by the employer, minus such amount as or on account of the
basic exemption for the year as is prescribed; and
(b) the employee's maximum contributory
earnings for the year, minus such amount, if any, as is determined in
prescribed manner to be the employee's salary and wages paid by the employer on
which a contribution has been made for the year by the employee under a
provincial pension plan.
[28] The amount of the
employer’s contribution is governed by section 9:
Every employer shall, in respect of each
employee employed by the employer in pensionable employment, make an employer's
contribution for the year in which remuneration for the pensionable employment
is paid to the employee of an amount equal to the product obtained when the
contribution rate for employers for the year is multiplied by the lesser of
(a) the contributory salary and wages of the
employee for the year paid by the employer, minus such amount as or on account
of the employee's basic exemption for the year as is prescribed, and
(b) the maximum contributory earnings of the
employee for the year, minus such amount, if any, as is determined in
prescribed manner to be the salary and wages of the employee on which a
contribution has been made for the year by the employer with respect to the
employee under a provincial pension plan.
[29] The amount of
contributory salary and wages is defined by the following relevant portion of
subsection 12(1):
The amount of the contributory salary
and wages of a person for a year is his income for the year from pensionable
employment, computed in accordance with the Income Tax Act, ...
[30] The relevant
section of the Income Tax Act is subsection 5(1) and it reads:
Income from office or employment – Subject to this Part, a taxpayer’s income for a
taxation year from an office or employment is the salary, wages, and other
remuneration, including gratuities, received by the taxpayer in the year.
(emphasis added)
[31] According to
Interpretation Bulletin CPP-1 – Tips and Gratuities dated June 10, 1971 -
there are two basic ways in which gratuities may be received and – generally –
determine whether the recipient contributes to the Plan as an employee
or as a self-employed person. The Bulletin refers to "direct
gratuities" as those amounts received directly by people - such as waiters
- in return for a service and also include an amount which a customer adds to
the bill - by using a credit card – with instruction to the cashier to pay it
directly to the particular person who rendered the service. The Bulletin also
includes into the category of direct gratuities an amount paid voluntarily by a
guest – either individually or as a representative of a group – to the employer
or to a delegated employee for distribution among the employees who performed
the service provided there is no contractual arrangement between the employer
and the employees concerning the method of distribution. Under circumstances
where tips can be regarded as a direct gratuity, the Minister accepts that the
recipients thereof may treat the amounts so received in the same manner as
self-employed earnings and pay contributions thereon by paying both parts of
said contribution.
[32] According to the
Bulletin, the Minister considers controlled gratuities to be those tips which
are controlled by an employer or, because of a contractual arrangement, pass
through the employer’s hands en route to the person who rendered the service.
Provided these conditions are met, the amount of those tips constitutes salary
or wages on which contributions to the Plan should be made on their
behalf by the employer. The circumstances contemplated are set out in paragraph
4 of the Bulletin as follows:
(a) when a service charge is added to the customer’s
bill to cover gratuities;
(b) when a percentage is added to a banquet bill to
provide tips for waiters and other staff;
(c) when tips are pooled according to the contract of
employment, to be later shared with other employees;
(d) when tips received are turned over to the
employer as a condition of employment.
[33] The evidence in
the within CPP appeal makes it clear that none of those conditions applied to
the method of distribution utilized by Harbour House during 1998 and 1999. The
tips were pooled in accordance with an arrangement between the workers - based
on established tradition – and accepted by the appellant as part of its
business policy. The tips were not turned over to the appellant as a condition
of employment but were inextricably bound up with the payment for the patron’s dining
room bill and the amount of the gratuity could be liberated only by
Harbour House agreeing to process that component of the overall bill
payment through its debit/credit card system. There was no fixed amount added
to the patron’s bill ‑ whether in the dining room or for banquet
services - so the amount added as a gratuity would vary and it is highly
improbable that any patron would be aware of the system of pooling and
distributing tips among all serving staff and kitchen workers.
[34] Counsel for the
appellant submitted the CCRA auditor had indicated to Frédérique Philip the
reason for the CPP assessment was that the Minister had taken the position the
tips received by Harbour House employees constituted "controlled
gratuities" within the purview of the Interpretation Bulletin CPP-1. Since
the facts clearly establish the amounts do not fit into that category, counsel
requested that the assessment - issued under the Plan - be vacated.
[35] The issue is not
whether the assessment – and subsequent confirmation thereof by the Minister –
is based correctly on the wording of that Bulletin or on the opinion of an
official in the CCRA audit department. Instead, one must regard the provisions
of the Plan and the Income Tax Act - as set out earlier - in
order to determine whether the assessment is soundly based in law.
[36] Ordinarily, one
would regard "salary and wages" as not including any amount received
by way of gratuities. Usually, it requires a specific definition for the
particular purpose of a provision in order that tips would be considered as
forming part of any salary and/or wages as the remuneration paid by an employer
on a periodic, regular basis, based on an hourly, weekly, daily, monthly or
annual rate or is tied to piecework or commission both of which are readily
calculable according to the work performed. In general usage,
"salary" is the word usually associated with the remuneration paid to
full-time professionals, office workers, public servants, namely, white-collar
workers. On the other hand, tradesmen, construction workers, machinery and
equipment operators, factory employees, and others – not exercising a
supervisory function - who fall within the category of blue-collar workers
ordinarily receive payment based on an hourly rate. The term "contributory
salary and wages" is utilized in sections 8, 9 and 12 of the Plan. By
using the word “contributory” as an adjective preceding "salary and
wages", it changes the ordinary meaning of that term due to the particular
objective sought by the legislation. Precisely how that meaning has been
changed for purposes of the Plan is disclosed by examining section 12
wherein the amount of an employee’s "contributory salary and wages"
is defined as "the income of the person for the year from pensionable employment,
computed in accordance with the Income Tax Act". There is no doubt
that all workers - in 1998 and/or 1999 - were engaged in pensionable employment
with the appellant and that their salary and wages – excluding tips – had been
the subject of contributions by both the employees and the employer.
[37] It is helpful to
re-examine the wording of subsection 5(1) of the Income Tax Act and to
note that it defines a taxpayer’s income as including "salary, wages and
other remuneration, including gratuities, received by the taxpayer in the
year". Harbour House workers were required to include all tips into their
income whether received directly from patrons or paid to them through the
distribution mechanism administered by the appellant’s accounting staff. However,
those tips received directly and retained and distributed by the workers among
themselves - without any of those funds passing through the hands of the
appellant - could be subject to CPP contributions by the workers based on the
rate applicable to self-employed persons. As a result, it is doubtful that any
employer – including the appellant in the within appeals – would have any
knowledge of the amount of those tips retained directly by the workers unless
there was voluntary disclosure by all members of the staff. However, those
amounts of tips administered by the appellant and paid – in the form of cheques
– to entitled workers were ascertainable and were sums required to be included
in the computation of income of the employee in accordance with the Income
Tax Act. The fact that other money received directly from a patron was also
required to be reported by the employee/taxpayer when filing a return of income
does not preclude the known amount of tips paid by the appellant from being
included within the definition of the contributory salary and wages applicable
to a worker. The term "remuneration", as used in sections 8 and 9 of
the Plan is broader than "wages" and/or "salary" and
includes a "reward; pay for services rendered" or "recompense
for toil" by extension of the definition of the verb
"remunerate", according to The Canadian Oxford Paperback Dictionary,
Oxford University Press Canada 2000. The term "remuneration" was also
considered to have a broad meaning as discussed in the reasons for judgment of
La Forest J. in Canadian Pacific, supra.
[38] The amounts of
the tips distributed by Harbour House to the workers during 1998 and 1999 were
known and formed part of the information contained on the T4 slip issued
to each worker for purposes of the Income Tax Act. Therefore, those
amounts should have formed part of the contributory salary and wages of each
employee – not because the tips ordinarily fall within that category – but
because each of the cheques issued by the appellant - in payment of the amount
due in tips - constituted part of the worker’s income and had to be reported as
such in accordance with the Income Tax Act. The overarching requirement
contained in section 9 of the Plan pertaining to the amount of the
employer’s contribution, is that the remuneration has to be paid to the
employee by the employer. As a result, those tips received without any
participation by Harbour House in either their receipt or distribution would
not meet that requirement. Further, the wording of section 12 of the Plan
refers to the amount of the contributory salary and wages of a person for the
year as being "his income for the year from any pensionable employment,
computed in accordance with the Income Tax Act". I interpret
the words, "computed in accordance with the Income Tax Act" to
mean that the income is "to be computed", or "shall be
computed" rather than restricting usage of the term solely to the past
tense. Certainly, the obligation to report the tips as income rests on the
employee but to the extent the employer has paid remuneration – in the form of
tips - to an employee in respect of his or her pensionable employment, then the
amount of the tips paid, already subject to inclusion into an employee’s income
in accordance with the Income Tax Act, is capable of also being used in
the calculation of the appropriate amount of both the employer's and employee's
contribution under the Plan.
[39] I have considered
the objectives of the Act as opposed to the Plan. Certainly, the
matter of qualifying for EI benefits – if and when needed – is a more pressing
concern to a young waitperson or other member of the overall serving and
kitchen staff than any angst associated with contemplation of retirement some
30 or 40 years down the road. In that sense, there is room for two different
approaches to be taken. One, is to regard the provisions of the Plan as
applicable only to that identifiable component of remuneration attributable to
salary and wages because that can be seen as more consistent with an intent by
Parliament to confine contributions to that source without concern for any
additional income received in the form of gratuities. However, in the modern
workplace, there are many persons employed within the food and service
industries who have chosen to make it a career and who will depend on the
appropriate calculation of pensionable earnings throughout their working life
in order to receive the proper amount of pension ultimately payable under the Plan.
The worker – Linda Danielson – testified she had worked for Harbour House –
at various jobs - for 18 years and had earned her income - during 1998 and 1999
- as a waitperson serving patrons in the dining room and/or at banquets. When
one is engaged in an occupation in which a significant portion – or perhaps the
majority – of income is received from strangers who – without obligation - pay
money in return for service having been provided within the context of
employment that is otherwise pensionable, it seems reasonable to include the
amount of those tips into the calculation of CPP contributions on the part of
both the employer and the employee in accordance with the relevant provisions
of the Plan. Those tips received directly by the worker – without the
knowledge and/or participation of the employer in any subsequent distribution
thereof – must be reported – as income - by the workers in their tax returns.
Any amount received from that source could – at the option of the employee,
according to Interpretation Bulletin CPP-1 – become eligible for an additional
contribution to the Plan based on the rate applicable to self-employed
persons, even though obviously derived from employment. Probably, as was noted
by La Forest J. in Canadian Pacific, supra, in discussing the levy of
unemployment insurance premiums on tips, the policy not to compel CPP
contributions in respect of tips identifiable as direct gratuities – even
though they constitute reportable income - was based on an appreciation of the
administrative headaches associated with that procedure and the relative insignificance
on any ultimate impact upon the calculation of workers’ total pensionable
earnings.
[40] All of the
foregoing strikes me as somewhat complex if the intention of Parliament is that
the relevant provisions of the Act and the Plan should be capable
of being understood by young persons bussing tables or chopping vegetables in
the kitchen of an establishment within the food service industry. It is also
burdensome on the operators of those businesses since provincial law – in
British Columbia, at least - seems to prohibit deducting even the actual amount
of the credit/debit card transaction fees – 2%-4% - from the total amount of
the tips prior to distribution to the workers. In addition, the employers are
required to pay EI premiums and CPP contributions on amounts that were not paid
by them to their employees in the form of salary or wages in the ordinary sense
but were received – instead - from strangers who were not privy to the
employer/employee relationship. Although anomalous, these requirements probably
can be rationalized by considering the big picture and assigning these
additional expenses to the overall cost of doing business. Today, almost every
business accepts payment by credit/debit cards and bears the relevant
transaction fees, installation and monthly charges for the appropriate
apparatus as a consequence of having undertaken that course for the convenience
of customers or in order to increase sales volume or just to remain viable
within a highly- competitive marketplace.
[41] As earlier noted,
the decision issued by the Minister confirming the assessment issued on October
5, 2000 - pursuant to the Act - is correct and the appeal therefrom is
hereby dismissed.
[42] In accordance
with the foregoing reasons, the appeal from the decision of the Minister
confirming an assessment issued on October 5, 2000 - pursuant to the Plan
- is also dismissed.
Signed at Sidney, British Columbia, this 7th
day of June 2003.
D.J.T.C.C.
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