Tips are in the news, again! Recently, a restaurant’s tips policy made it all the way to the Federal Court of Appeal to decide whether the service staff tips are subject to Canada Pension Plan (CPP) and Employment Insurance (EI). With customers increasingly tipping electronically, the decision in this appeal is very relevant.
The Federal Court of Appeal (FCA) dismissed the appeal brought forth by the restaurant, Ristorante a Mano1 (taxpayer), concluding that CPP and EI applied to electronic tips paid by the restaurant to its servers. This conclusion was based on the court’s finding that the electronic tips were considered contributory salary and wages paid by the employer to the employee.
The appeal was concerned with the fact that the employer had possession of the electronic tips, which were ultimately “due-back” to the server’s net of administrative costs. The cash tips received directly by the servers were not the subject of the appeal because the cash tips were never in possession of the employer, and thus were not considered salary and wages paid by the employer for purposes of CPP and EI.
The taxpayer put forth the argument that the due‑back amounts were simply a conversion of the electronic tips into cash and not a distribution of controlled tips. This argument was advanced by the taxpayer even though the taxpayer had a level of influence over the tip payment policy.
The FCA denied the taxpayer’s appeal on the basis that the test was whether the tips were in the employer’s possession and paid to the servers in respect of their employment. As the electronic tips were routed through the employer’s bank account to the employees, the court concluded that the electronic tips were, in fact, within the employer’s possession and paid by the restaurant in respect of employment.
The FCA ignored the Canada Revenue Agency’s (CRA’s) documented administrative position regarding controlled tips2 when rendering its decision and concluded that many factors associated with the due‑back amount are not relevant in determining whether the employer paid amounts within its possession to the employees in respect of their employment. As stated in paragraph 41 of the FCA decision:
To be clear, in determining whether a tip is an amount paid by an employer, and whether that amount is in respect of employment, factors such as when the amount is paid (daily, weekly, at the end of a pay period or at some other time), whether the employee is paid all or some portion of their own tips or pooled tips, whether the employer keeps a portion of the tips, or whether the tips are distributed under a collective agreement, a written contract, an oral agreement or otherwise, may be of little or no relevance in a particular case and are not determinative.
This decision joins other cases, notably, Andrew Peller Limited v. MNR,3 Lake City Casinos Limited v. The Queen,4 Canadian Pacific Ltd. v. MNR 5 and BLAJ Hospitality v. MNR.6 These court cases seem to provide significant evidence that any tips that are within the possession of the employer and paid to an employee must be included in an employee’s calculation of CPP and EI.
As the court case for Ristorante a Mano went to the Federal Court of Appeal and deals mostly with electronic tips paid by way of a due‑back amount, this court case is particularly relevant to businesses dealing with tips and gratuities today. This case also highlights the fact that the courts are not bound by the CRA’s administrative position when interpreting the law.
Businesses are collecting significantly more tips electronically and because of this FCA decision, businesses will need to decide if electronic tips will forever become part of the employer’s payroll system. The withholding of CPP and EI on electronic tips would be a significant change to industry practices that could result in further loss of employees. In addition to this, the restaurant itself will have increased costs associated with the employer’s portion of the CPP and EI contributions. The restaurant industry is already faced with significant challenges resulting from labour shortages and inflation. This unwelcome court decision is another blow to an industry that is working hard to overcome substantial obstacles.
The CRA has not provided any commentary in response to the FCA decision to ignore the CRA’s administrative policy. In the meantime, businesses will need to re‑evaluate their tipping and gratuities policy to align with the FCA decision, ensuring that tips and gratuities are not within the possession of the employer and paid to the employees. Otherwise, consideration may need to be given to withholding CPP and EI.
- Ristorante a Mano v. The Queen (2002 FCA 151)
- The term “controlled tips” refers to tips that an employer controls or possesses and then must pay to the employee (https://www.canada.ca/en/revenue-agency/services/tax/canada-pension-plan-cpp-employment-insurance-ei-rulings/cpp-ei-explained/tips-gratuities.html)
- 2015 TCC 329
- 2007 FCA 100
-  1 SCR 678
- 2008 TCC 398
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