Guide to Building a Compliant Tip System

Ensure payout compliance

Many restaurants and bars with gratuity payouts are seeing an alarming trend in Canada Revenue Agency (CRA) audits this year - the CRA is auditing restaurants to see if they are collecting and remitting Employment Insurance (EI) and Canada Pension Plan (CPP) contributions on money that servers, bartenders and other tipped workers have received through electronic transactions.

Featured in the Financial Post

According to an article by the Financial Post, one Nova Scotia restaurant found itself in hot water after the CRA determined it failed to withhold EI and CPP from staff’s gratuity earnings. But why?

Well, it’s 2023 - most customers are no longer leaving cash tips, but electronic tips. These tips are collected by the restaurant and then shared in a formalized procedure, as you already know.

The tricky part is around those steps in the formalized procedure that facilitates collection of the electronic tip from the customer to payout of the servers’ due-backs and other staff. The CRA, after an audit of several previous years, took the view that servers’ due-backs were subject to source deductions, including EI and CPP contributions.

The case went all the way to the Federal Court of Appeal. The primary issue before the court was whether or not the due-backs were properly regarded as sums paid to employees "in respect of" their employment. Due to the fact that a server's due-back has "little or no relation to the server's net tip," the restaurant argued, the payments are not related to a server's employment and are not taxable earnings. It's simply the difference between electronic tips owed and meals paid in cash.

The three-judge appellate panel expressed its disagreement by pointing to a landmark 1983 decision of the Supreme Court of Canada that stated that the words ““in respect of” have wide scope and import such meanings as ‘in relation to,’ ‘with reference to’ and ‘in connection with.” In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.

Essentially the Court concurred and concluded that that the due-backs were "insurable earnings" under the EI Act and "contributory salary and wages of the employee paid by the employer" under the CPP.

‍

The tricky part is around those steps in the formalized procedure that facilitates collection of the electronic tip from the customer to payout of the servers’ due-backs and other staff.

‍

What are the implications? 

What does this now-viral case mean for hospitality operators? This decision that was made in August of 2022 has set legal precedent moving forward and operators can no longer afford a plea of ignorance. In order to be compliant, you need to implement a direct tip structure instead of a controlled tip structure (where the employer is in possession and in control of the tips). Not only can our solution help, but we’ve also worked with a leading taxation lawyer to develop a webinar of compliance best practices. Check out our compliance webinar down below, to learn more.

‍

Webinar: Ensure gratuity compliance

We hosted a webinar in partnership with Restaurants Canada on ensuring tip payout compliance. View the webinar here.

‍

AnyDayFinancial is powered by XTM Inc. To learn more visit here.

‍