Do I have to charge HST on tips on services? What about CPP, EI and Income Tax?

Canada Revenue Agency informs that:

“Tips or service charges are not usually added to a bill. In general, consumers tip acalifornia-tips-and-gratuity-law.jpg percentage of the amount of a bill to service providers such as to waiters, waitresses, barbers, hairdressers, and taxi drivers. The percentage and whether the tip is calculated on the amount of the bill before or after taxes depends on the practice of the particular consumer.”

“A tip or gratuity that is freely given by a customer, for example, cash not recorded on a bill, is not subject to the GST/HST. However, if you add a mandatory or a suggested amount to the customer’s bill as a service charge, you have to charge GST/HST on that amount.”

However, are tips subjected to source deductions?

“Gratuities or tips received by employees are income earned in respect of employment for purposes of the Income Tax Act. However, it must be determined whether tips received in the course of employment are considered pensionable earnings under the CPP and/or are insurable earnings under the EIA. This 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.”

Controlled tips are gratuities that are controlled by the employer. Since they are controlled by the employer, the employer is considered to have paid these amounts to the employee.  Are tips and gratuities out of control and hurting chartering? Tips ...An example of controlled tips is (among other situations) when the employer adds a mandatory service charge to a client’s bill to cover tips. Controlled tips form part of the employee’s total remuneration and are subject to CPP contributions and EI premiums being deducted at source, provided that this person is employed in pensionable and/or insurable employment.

Direct tips are gratuities that are paid directly by the client to the employee and that are not subject to any of the forms of control by the employer as mentioned above under the heading controlled tips. A typical situation (among others) is when a client leaves money on the table at the end of the meal and the server keeps the whole amount.

Direct tips are considered to have been paid by the client and not the employer. In these situations, the employer is merely a conduit for the tip from the client to the worker; thus, direct tips are not subject to CPP contributions and/or EI premiums, BUT they are taxable income..However, an employee can elect to make CPP contributions on tip amounts earned in the course of pensionable employment where the tip income is found not to be subject to CPP contributions at source.

Declared tips (currently a situation applicable to the Province of Quebec) are the amount of tips that provincial law requires an employee to declare to his or her employer along with their controlled tips. In the province of Quebec, the Taxation Act provides specific guidance for employers in the hospitality sector whose employees carry out their duties in a regulated establishment. Employees working in a regulated establishment in the province of Quebec must declare their direct tips to their employer. For the purposes of the EIA, employees in the province of Quebec working in a regulated establishment will have the amount of their declared tips included in their insurable earnings along with their controlled tips. Currently, Quebec is the only province that has tax legislation requiring employees to declare their tips to their employer.

(Adapted from appropriate topics from the CRA website)

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