Tips and gratuities


Introduction

This article is for employers and their employees who receive tips and gratuities. It explains how to treat tips and gratuities for purposes of the Canada Pension Plan (CPP) and the Employment Insurance Act. In particular, it addresses whether income from tips and gratuities is part of an employee's pensionable earnings, insurable earnings, or both.

Employer responsibilities

All employers are required by law to deduct CPP contributions and employment insurance (EI) premiums from most amounts they pay to their employees. Employers must remit these amounts to the Canada Revenue Agency (CRA), along with their share of CPP contributions and EI premiums.

For more information on employer responsibilities and obligations, go to our Payroll page.

Is income from tips and gratuities part of an employee's pensionable or insurable earnings, or both?

Tips and gratuities that employees receive are considered income earned in respect of employment for purposes of the Income Tax Act. However, you must determine whether tips received during employment are considered pensionable earnings under the CPP, or whether they are insurable earnings under the Employment Insurance Act, or both. The answer depends on whether the tips are considered to have been paid by the employer (controlled tips), whether they are considered to have been paid by the client (direct tips), or whether they are declared tips in the province of Quebec.

Controlled tips

The term controlled tips refers to tips that an employer controls or possesses and then must pay to the employee. The following are some examples of controlled tips:

Controlled tips are part of the employee's total remuneration. Since they are controlled by the employer, the employer is considered to have paid these amounts to the employee. This means that CPP contributions and EI premiums must be deducted at source, if the employee is employed in pensionable or insurable employment or both.

Note for employees: For information on how to report tips and gratuities shown in box 14 of your T4 slip, go to Line 10100, Employment income.

Direct tips

Direct tips are paid directly by the customer to the employee. The employer has no control over the tip amount or its distribution. The employer is merely a conduit for the tip from the customer to the employee. The following are some examples of direct tips:

Direct tips are not subject to CPP contributions or EI premiums. However, an employee can choose to make CPP contributions on tip amounts earned in the course of pensionable employment where the tip income is not subject to CPP contributions at source. The employee has to fill out Form CPT20 if they want to make CPP contributions.

It is possible for an employee to receive both controlled and direct tips. In such a situation, only the controlled tips are part of the employee's pensionable or insurable earnings, or both.

Note for employees: For information on how to report tips and gratuities that are not shown on your T4 slip, go to Line 10400, Employment income not reported on a T4 slip.

Declared tips (in the province of Quebec only)

Declared tips are the amount of tips that provincial law requires an employee to declare to their employer along with their controlled tips. Employees working in a regulated establishment in Quebec must declare their direct tips to their employer. For the purposes of the Employment Insurance Act, the amount of their declared tips is included in their insurable earnings, along with their controlled tips.

Quebec is the only province that has tax legislation requiring employees to declare their tips to their employer. The Taxation Act provides specific guidance for employers in the hospitality sector whose employees carry out their duties in a regulated establishment.

For more information on tips in the province of Quebec, go to Revenu Québec – Tips.

More information

For employees

For employers

To get more information call 1-800-959-5525.

Legislative references

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