Some restaurant owners have asked for clarification on whether credit card tips must be included on T4 slips, and whether they must make source deductions on those gratuities.

In a Feb. 16, 2006 letter to CRFA, the Canada Revenue Agency (CRA) explained its policies on "controlled" versus "direct" tips, making it clear that employers involved in any form of tip redistribution must deduct employment insurance premiums from employee tips.  CRA also confirmed that in cases where there is insufficient cash on hand to pay out tips during an employee’s shift, employers may delay payout of tips to workers until the next day, without incurring payroll taxes on those tips.  

What you need to know:

• Controlled tips are still subject to payroll tax deductions.  Tips are considered controlled where the employer is able to direct how those tips will be paid, for example, by adding a service charge to a customer’s bill.

• Direct tips, however,  are not subject to payroll tax deductions.  These include tips where the customer voluntarily pays an amount and the worker receives it directly, even in circumstances where the tip is paid on a credit card.  

From the CRA letter:

"While it is possible for tips left on credit cards to be considered insurable earnings, the central question is whether or not the employer was in a position to "control" the distribution of the tips.  If it is determined that the credit card tips are controlled they will be included in insurable earnings.  Furthermore, if credit card tips are controlled, they will be subject to tax deductions at source.

Controlled tips are those 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 clients' bills or pursuant to a sharing arrangement set out in an employment contract (written or verbal) that outlines how the tips will be divided.  Tips that are included in the employer's business income are also considered controlled tips.

Direct tips are gratuities that are not considered to be controlled and where the client voluntarily pays an amount and the worker receives it directly.  If a client leaves a tip on a credit card and it is not included in the employer's business income or subject to a sharing arrangement, the tip would be considered to be direct.  An extension of this position would be where an employer might, for cash flow reasons, delay paying out the tips to the workers until the next day.  In these situations, the employer is merely a conduit for the tips from the client to the worker.  These types of tips are not considered to be controlled tips by the employer and as a result are not insurable."

Mr. Ray Cuthbert
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency

Operators with any questions regarding this issue, including determining whether a tip is controlled or not, should contact the Canada Revenue Agency at 1-800-959-5525 (English) or 1-800-959-7775 (French).