Ask an accountant: Tip income

Francesca Giroux, CGA
For the Lakeside Leader

Several questions have come in recently regarding how tips paid by customers to employees or corporations are treated and they are addressed below.

Is the amount that my employee receives for tips as a server in my restaurant included as part of their minimum wage? No, tips are not considered to be included in an employer’s obligation to pay minimum wage. Tips earned are considered to be in addition to the $11.20 minimum wage that employers are obligated to pay their employees.

I am a hair dresser working in a salon and receive tips from my clients in addition to the hourly wage paid by my employer; do I have to include these amounts as income on my tax return? Are these amounts subject to Canada Pension Plan (CPP) and Employment Insurance (EI)? Direct tips (i.e. tips paid directly by the client to the employee) are not subject to CPP and EI; however, the amount of direct tips received must be included in income for tax purposes. Direct tips are beyond employer control so they are not included in your T4, as such it is your responsibility to calculate the tips earned during the year and report it as income on your personal income tax return. Examples of situations in which tips are considered to be direct are when a client leaves money on the table after a meal and the server keeps the whole amount, tips pooled and shared among employees in a manner determined by the employees, and when paying the bill by credit card or debit card a client includes an amount for a tip and the employer returns the tip amount in cash to the employee.

I employ several individuals in my restaurant and use a tip sharing formula to allocate these amounts to my employees. Are the tips that are paid to my employees subject to CPP and EI? Yes, CPP and EI apply to these types of tips which are considered to be controlled tips. Controlled tips are controlled by the employer and the employer is considered to have paid these amounts to the employee. Other examples of controlled tips include when the employer adds a mandatory service charge or a percentage to a client?s bill to cover tips, and tips that the employees are required to turn over to their employer and are later distributed to the employees.

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Information provided is of a general nature. As each individual or company?s situation is unique, you may wish to consult with your CPA for information specific to your own needs.

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