5 February 2007 External T.I. 2006-0202891E5 - Tax Withholding on Tips

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: Whether income tax required to be withheld from employee tips distributed through the employer

Position: It depends on whether the employer has control over the how the tips will be paid.

Reasons: Gratuities form part of remuneration from employment for withholding purposes as long as the employer can be considered the payer.

									2006-020289
XXXXXXXXXX 								Jack Szeszycki
(613) 957-8972
February 5, 2007

Dear XXXXXXXXXX:

Re: Tax Withholding on Tips

This is in reply to your letter dated August 25, 2006, requesting the Agency's position regarding the practice within XXXXXXXXXX withholding on servers' tips, other than on direct cash tips provided by the customer. We regret the delay experienced in responding to your enquiry.

You describe a practice whereby tips directed toward a particular server through debit and credit card transactions are paid out at the end of the shift without any amount being withheld on account of income tax, or any other payroll costs. You would like clarification as to whether that practice is acceptable.

The correct reporting of gratuities, and the proper withholding from those amounts, is dependant on the level of employer control over their distribution. Subsection 153(1) of the Income Tax Act requires an employer who makes payments of salary wages, or any other remuneration (including gratuities) to withhold from that payment an amount on account of the payee's tax for the year.

XXXXXXXXXX The Agency's general position as set out in that letter indicates that an employer is considered to have control over the tips where the employer is able to direct how the tips will be paid. This could be done by the employer having a policy whereby the tips are a mandatory service charge added to the clients' bills or pursuant to a sharing arrangement set out in an employment contract that outlines how the tips will be divided. Tips that are included in the employer's business income are also considered to be under the employer's control. Credit card tips directed at a server where the tip amount is not included with the rest of the bill payment as business income of the employer, or subject to a sharing arrangement, would not be considered to be under the control of the employer and therefore would not be subject to payroll withholding.

We would not be in a position to make a specific determination with respect to any particular scenario without reviewing any relevant tip sharing agreements or provincial regulations that may be in place. Should you or a particular employer require assistance in determining whether the tax withholding requirements apply in a particular case we invite you to forward specific details and documentation to the appropriate Tax Service Office ("TSO") for consideration. A list of TSOs is available on the "Contact Us" page of the CRA website.

We trust the above comments are of assistance to you.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch