Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Are payroll deductions required for pooled tips distributed by the employer to employees?
Position: General comment provided.
Reasons: General Comments.
Shaun Harkin, CMA
April 18, 2006
Re: Technical Interpretation Request: Employee Withholding
Obligations on Tips and Gratuities
We are writing in response to your letter of December 8, 2005, wherein you asked for our opinion on whether withholding for tips and gratuities is applicable in the following situation:
- Employees in a service industry in Ontario deal directly with customers.
- Due to regulations governing the service industry, tips cannot be made directly to specific employees.
- Customers who wish to tip are directed to place their tip (which may be cash or tokens) in a secure nearby box.
- At the end of a time period, which may be a shift, day or week, the employer unlocks the tip boxes, converts tips that are tokens to cash and distributes those tips among the employees.
- The formula used to distribute tips is determined by an agreement amongst the employees.
In particular you ask the following questions:
1) Under the above scenario, would the employer be required to withhold income tax, Canada pension plan or employment insurance premiums from the tips distributed to the individual employees?
2) Would the answer to question one be different if the scenario was changed so that the employer converted the token tips to cash and then provided the total amount to a single employee representative within each work group for distribution?
3) Would the answer to question one be different if the scenario was changed so that the employer's distribution to each individual employee was based solely on hours worked rather than an employee established formula?
4) What would the T4 reporting requirements be under the above?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Since your situation seems to involve specific taxpayers and completed transactions, you may submit the specific details, to the appropriate tax services office for their consideration. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an income tax ruling with respect to proposed transactions. However, we are prepared to offer the following general comments.
Where tips are controlled by the employer the requirements of subsection 153(1) of the Income Tax Act are met. The central question is whether or not the employer was in a position to control the distribution of the tips. Controlled tips include tips the employer pays or that pass through the employer's books before the employee receives them. Some examples of controlled tips are:
- Mandatory service charges added to the client's bill to cover gratuities;
- Percentage added to the total bill, as in the case of banquets or weddings, to cover tips to be paid to servers and the whole team (chef, cook, dishwashers, banquet manager, etc.);
- Tips shared among the staff members according to an agreement provided for in the employment contract and that sets out how the employer will divide up the tips;
- Tips to be divided up according to the conditions of employment determined by the employer; and
- Tips written on credit cards slips that the employer includes in his income and redistributes to the employees concerned in the form of pay.
It would be difficult for us to determine the status of the tips in the scenarios you presented without reviewing the agreement outlining the sharing of the tips and the government regulations pertaining to the unidentified service industry. In each of the scenarios above, it would appear that a strong argument could be made that the employer is in a position to control the distribution of the tips, as the employer is the one who accesses the tip box. The tips are then distributed, either directly or indirectly, to individual employees subject to a sharing agreement. Where tips are considered controlled by the employer, the employer must make appropriate withholdings, in accordance with prescribed rules, and report the amount on the employee's T4.
We refer you to the Tax Court of Canada decision in the Union of Saskatchewan Gaming Employees Local 40005 vs. The Minister of National Revenue, 2004TCC799, where tips left in a tip box were considered insurable earnings for purposes of employment insurance.
We trust the above comments are of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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