Server Tips, EI and CPP Contributions
On August 31, 2022, the Federal Court of Appeal (the “FCA”) released its decision in Ristorante A Mono Limited vs the Minister of National Revenue (“Ristorante”).
In this decision, the FCA upheld the previous Tax Court of Canada decision, which found that the waiting staff’s gratuities or “tips” that were collected by the restaurant operator electronically, using point-of-sale technology, and then later paid to the relevant employee constituted contributory salary and insurable earnings under subsection 9(1) of the Canadian Pension Plan (the “CPP Act“) and sections 67 and 68 of the Employment Insurance Act (the “EIA”). As a result, the employer was held liable for the CPP and EI contributions payable relating to the tips paid.
This decision suggests that it is important for business owners to understand how collecting tips on behalf of employees may impact their legal obligations relating to CPP and EI contributions.
As the FCA stated in this case, whether this obligation exists depends heavily upon the facts of each case and whether those facts suggest that the amounts in question were paid by an employer to an employee in respect of their employment.
Background – Server Tips, EI and CPP Contributions
In Ristorante, the taxpayer business owner (the “Employer”) was a restaurant providing dine-in services located in Halifax, Nova Scotia. As part of the Employer’s restaurant operations, it employed waiting staff (or servers) to provide table service to its patrons. As is commonly the case, the Employer offered an electronic tipping option to its patrons utilizing the point-of-sale device in addition to a cash tipping option.
In this case, the waiting staff and the Employer entered into an agreement whereby the Employer agreed to collect the tips paid electronically at the time-of-sale and then to payout the amounts owing to the employees on the following business day. As part of the agreement, portions of the tips collected were distributed toward a “tip-out” payment for the kitchen staff and paying processing fees. In addition, the Employer also required waiting staff to adhere to strict procedures for recording both electronic and cash tips received from customers, while logging other daily sales records.
The Minister of National Revenue (the “MNR”) took the position that the tip amounts collected and later paid to wait staff were contributory salary and insurable earnings subject to the CPP Act and EIA. At the Tax Court of Canada, the Judge agreed with the MNR and upheld the CRA’s assessment against the Employer. As a result, the Employer appealed to the FCA.
Holding – Server Tips, EI and CPP Contributions
In upholding the Tax Court of Canada’s decision, the FCA found that both the CPP Act and the EIA should be interpreted liberally in light of the Acts’ purposes. The FCA held that whether a disputed payment amount is captured by these Acts is determined by asking “whether, based on the relevant facts in the case, the amount in question is paid by the employer in respect of their employment”.
Here the Court found that temporarily holding the tips before transferring to the waiting staff was sufficient to be considered paid by the employer and that the tips would not have been received but for the waiting staff’s employment. Accordingly, the FCA confirmed the CRA’s assessment and the Tax Court’s ruling that the Employer was liable for the outstanding EI and CPP contributions relating to the paid-out tips.
Key Take Aways – Server Tips, EI and CPP Contributions
(1) Determining if tip amounts received by employees are subject to EI or CPP remittance requirements will depend on whether:
- the tip is considered “paid by the employer”, and
- the tip received is “in respect of” the employee’s employment.
If both questions are answered in the affirmative, the employer should likely include these amounts in calculating employee CPP and EI contributions and remittances.
(2) When will tips be considered as “paid by the employer”?
The FCA stated that if tips come into the possession of the employer and are then transferred to the employee they will be considered as paid by the employer.
(3) When will tips be considered “in respect of” employment in relation to insurable earnings?
The FCA interpreted “in respect of” to have a broad meaning similar to “in relation to”. As a result, tips will be considered to be in respect of their employment if “but for their employment as servers by the appellant, the servers would not receive any tips paid to them.”
The Tax Court of Canada decision, and the Federal Court of Appeal upholding this decision will likely have significant impacts for restaurants all around Canada. For those who have not counted these tips for CPP and EI purposes, you may come forward using the Voluntary Disclosure Program to potentially correct the errors with no penalties, and a break on the interest. For those interested, we are here to help! Give us a call today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.