Tips and Gratuities in Canada: Payroll Rules for Restaurant Owners
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Who Controls the Tip Decides the Payroll Treatment
Tips are a large part of what restaurant staff take home, and they come with more rules than most owners realise. Whether you have to deduct CPP, EI and income tax depends on one question: does the employer control the tip? Provincial employment law then limits what you can do with tips at all, including how a tip pool works and whether you can share in it.
Getting this wrong means either under-deducting payroll and owing the CRA, or treating staff tips as your revenue. This guide covers the CRA rules, Ontario’s employment standards and the bookkeeping. It is part of our guide to restaurant bookkeeping and accounting in Canada.
Key Takeaways
- Controlled tips, such as card tips paid out through payroll, mandatory service charges and employer-run tip pools, are subject to CPP, EI and income tax deductions and go in box 14 of the T4.
- Direct tips, such as cash left on the table or a pool run entirely by employees, are not run through payroll. Employees report them on their own return.
- In Ontario, employers cannot keep or deduct from employee tips except for statutory deductions, court orders and a tip-sharing arrangement.
- Owners can share in an Ontario tip pool only if they regularly do the same work as the employees who share in it.
- Card tips you collect are a liability until paid out, never revenue.
Controlled Tips vs Direct Tips
The CRA splits tips into two kinds, and the payroll treatment follows from that split. The CRA’s guidance defines controlled tips as tips the employer controls or possesses and then must pay to the employee.
| Controlled tips (through payroll) | Direct tips (not through payroll) |
|---|---|
| Mandatory service charges added to the bill | Cash left on the table and kept by the server |
| Tips deposited into the employer’s bank account and paid out later | Tips handed directly to staff |
| Tip pools where the employer sets the sharing formula | Tip pools run and shared by employees themselves |
| Tips calculated as a percentage of sales by the employer | Card tips returned to the employee in full, in cash, at the end of the shift |
The test is about control, not payment method. A card tip can be a direct tip if it is handed back in full and the employer has no say over it, and a cash tip becomes controlled once it goes into an employer-run pool.
How Each Kind Goes Through Payroll
Controlled tips are treated as employment income. You deduct CPP contributions, EI premiums and income tax on them, remit those deductions with the rest of your payroll, and report the tips in box 14 of the employee’s T4 along with their wages. They also count as insurable earnings on a Record of Employment.
Direct tips are still taxable income for the employee, but you do not deduct anything on them. The employee reports them on line 10400 of their return and can choose to contribute to CPP on them using form CPT20.
Because controlled tips increase each pay’s deductions, remember them when you calculate what to send the CRA. Our guides to payroll remittance in Canada and how to do payroll in Canada cover the mechanics.
Ontario Rules on Tips and Tip Pools
Ontario’s Employment Standards Act protects employee tips. An employer cannot withhold tips or make deductions from them, except:
- deductions required by law, such as income tax, CPP and EI on controlled tips;
- deductions ordered by a court;
- amounts redistributed to other employees under a tip-sharing (tip pool) arrangement.
The employer can decide who shares in a tip pool and how it is split, without employees’ consent. Owners, partners, directors and shareholders can share only if they regularly perform, to a substantial degree, the same work as some or all of the employees who share in the pool. Ontario also allows a limited deduction for credit card processing fees on tips (not debit), and requires employers with a written tip-sharing policy to keep a copy for three years after it stops being used.
Under the ESA, tips are not wages, so they do not count toward minimum wage. Other provinces have their own rules, so check the employment standards where you operate.
Sales Tax and Service Charges
A voluntary tip is not part of the price of the meal, so no GST/HST applies to it. A mandatory service charge, such as an automatic gratuity on large tables, is part of what the customer must pay, so it is generally subject to GST/HST. It is also a controlled tip when it is paid out to staff. Our GST/HST guide covers how to report it.
Recording Tips in Your Books
When customers add tips to card payments, that money lands in your bank account, but it is not yours. Record card tips to a tips payable liability account, not to sales. When you pay them out, through payroll or in cash, the liability goes back to zero. Reconcile the account every pay period: a balance that grows means tips are being collected but not paid out, which is exactly what an employment standards complaint looks for.
Keep the tip-sharing policy, the daily tip reports from your POS and the payout records together. They are your evidence if staff, the CRA or the Ministry of Labour ask questions.
Want Tips Handled Correctly Every Pay Run?
We run payroll for restaurants, including controlled tips, remittances and T4s, and keep the tips liability reconciled in your books. See our payroll services or get in touch.
