- Employer responsibilities
- Is income from tips and gratuities part of an employee’s pensionable or insurable earnings, or both?
- More information
- Legislative references
This article is for employers and their employees who receive tips and gratuities. It explains how to treat tips and gratuities for purposes of the Canada Pension Plan (CPP) and the Employment Insurance Act. In particular, it addresses whether income from tips and gratuities is part of an employee’s pensionable earnings, insurable earnings, or both.
All employers are required by law to deduct CPP contributions and employment insurance (EI) premiums from most amounts they pay to their employees. Employers must remit these amounts to the Canada Revenue Agency (CRA), along with their share of CPP contributions and EI premiums.
For more information on employer responsibilities and obligations, go to our Payroll page.
Is income from tips and gratuities part of an employee’s pensionable or insurable earnings, or both?
Tips and gratuities that employees receive are considered income earned in respect of employment for purposes of the Income Tax Act. However, you must determine whether tips received during employment are considered pensionable earnings under the CPP, or whether they are insurable earnings under the Employment Insurance Act, or both. The answer depends on whether the tips are considered to have been paid by the employer (controlled tips), whether they are considered to have been paid by the client (direct tips), or whether they are declared tips in the province of Quebec.
The term controlled tips refers to tips that an employer controls or possesses and then must pay to the employee. The following are some examples of controlled tips:
- the employer adds a mandatory service charge to a client’s bill to cover tips
- the employer adds a percentage to a client’s bill to cover tips
- tips that are allocated to employees using a tip-sharing formula determined by the employer
- tips that an employer includes in his business income, then expenses and redistributes to employees in the form of pay
- tips that the employees turn over to their employer who then distributes them to the employees
- cash tips that are deposited into the employer’s bank account and become, or are even commingled with, the property of the employer and then paid out to the employees
Example 1: Controlled tips
You are part of the serving staff in a restaurant. You receive tips from the restaurant’s customers. However, some of the support staff feel that they should receive a share of those tips. The restaurant owner agrees to put in place a tip pool to make sure the tips are distributed among all staff members.
Controlled tips are part of the employee’s total remuneration. Since they are controlled by the employer, the employer is considered to have paid these amounts to the employee. This means that CPP contributions and EI premiums must be deducted at source, if the employee is employed in pensionable or insurable employment or both.
Note for employees: For information on how to report tips and gratuities shown in box 14 of your T4 slip, go to Line 101, Employment income.
Direct tips are paid directly by the customer to the employee. The employer has no control over the tip amount or its distribution. The employer is merely a conduit for the tip from the customer to the employee. The following are some examples of direct tips:
- a customer leaves money on the table at the end of the meal and the server keeps the whole amount
- a guest gives a tip directly to a bellhop, door person, car attendant, porter, etc.
- the employees and not the employer decide how the tips are pooled or shared among employees
- a customer includes an amount for a tip when paying the bill by credit or debit card and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations the cash tips could be paid out the day after, for example, if there was not enough available cash on hand
Example 2: Direct tips
You are part of the serving staff in a restaurant. The restaurant owner informs you that if a customer pays by credit or debit card and includes a voluntary tip, the restaurant will return the full tip amount back to you in cash at the end of each shift.
Direct tips are not subject to CPP contributions or EI premiums. However, an employee can choose to make CPP contributions on tip amounts earned in the course of pensionable employment where the tip income is not subject to CPP contributions at source. The employee has to fill out Form CPT20 if they want to make CPP contributions.
It is possible for an employee to receive both controlled and direct tips. In such a situation, only the controlled tips are part of the employee’s pensionable or insurable earnings, or both.
Note for employees: For information on how to report tips and gratuities that are not shown on your T4 slip, go to Line 104, Employment income not reported on a T4 slip.
Declared tips (in the province of Quebec only)
Declared tips are the amount of tips that provincial law requires an employee to declare to their employer along with their controlled tips. Employees working in a regulated establishment in Quebec must declare their direct tips to their employer. For the purposes of the Employment Insurance Act, the amount of their declared tips is included in their insurable earnings, along with their controlled tips.
Quebec is the only province that has tax legislation requiring employees to declare their tips to their employer. The Taxation Act provides specific guidance for employers in the hospitality sector whose employees carry out their duties in a regulated establishment.
For more information on tips in the province of Quebec, go to Revenu Québec – Tips.
- For information on how to report income such as tips and gratuities that are not shown on your T4 slip, go to Line 104, Employment income not reported on a T4 slip.
- For information on how to report tips and gratuities shown in box 14 of your T4 slip, go to Line 101, Employment income.
- For information on how to report and file information slips, see RC4120, Employers’ Guide – Filing the T4 Slip and Summary, Chapter 2 – T4 slips
To get more information call 1-800-959-5525.
- Section 12, Canada Pension Plan
- Subsection 2(1), Insurable Earnings and Collection of Premiums Regulations