Taxation - Here's a TIP


Here’s a Tip


Point of sale software tracks gratuities as they pass through the hands of both restaurant owners and servers.


Electronic point of sale (POS) software on a tablet carried by a restaurant server has revolutionized the way restaurant patrons are seated, orders taken and sent to the kitchen or bar, and the way customers are billed at the end of their visit. Order information is also streamed wirelessly to the central POS system where the invoice is created and the customer’s payment recorded. Payments usually include a gratuity for the server in the form of cash on the table or added to the credit or debit card amount processed at the POS “cash register” or on the wireless debit card device or tablet. When a patron pays using a debit or credit card, the amount deposited to the bank will include the gratuity recorded on the POS.

Owners and Servers Should Be Aware

Electronic POS systems now track all the data associated with a transaction including any gratuities.
This means that all data regarding gratuities is recorded and available to the Canada Revenue Agency (CRA).
For example, POS systems record the:
• identity of all servers 
• total of all tips accrued to the server 
• total sales and tips per server calculated to determine a percentage 
• funds deposited to bank accounts, with all details establishing types of sales, methods of payment and gratuities.

Canada Revenue Agency Guidelines

The CRA states: “Gratuities or tips received by employees are income earned in respect of employment for purposes of the Income Tax Act.” The CRA further states: “it must be determined whether tips received in the course of employment are considered pensionable earnings under the CPP (Canada Pension Plan) and/or are insurable earnings under the EIA” (Employment Insurance Act) (There are exceptions for Quebec not addressed within this article.)

Because employers are required by law to deduct CPP contributions and EI premiums from most amounts paid to employees, it is important to understand that the CRA recognizes two classes of tips: controlled tips and direct tips.

Controlled Tips

Controlled tips are those controlled by the employer (i.e., considered by the CRA as remuneration to the employee) and thus subject to CPP and EI deduction requirements. Examples include:
• a mandatory service charge added to the bill by the management to cover tips
• a percentage of the bill added to cover tips amounts received by employees based on a tip-sharing formula established by the employer 
• tips that are collected by the employer and therefore included in the employer’s revenue, are then expensed by the employer and paid out to employees (i.e., the employer creates a tax-deductible expense for the business) 
• tips turned over to the employer and later redistributed to the employees 
• cash tips deposited in the employer’s bank account as the employer’s property before being paid out to the employees.

Direct Tips

Direct tips are those paid directly to the employee by the patron without passing into the control of the employer. Examples include any tips:
• left on the table or otherwise given directly to the employee 
• pooled and shared in a manner determined by the employees 
• included in a credit or debit card payment and returned by the employer to the employee in cash.

Direct tips are not subject to CPP contributions or EI premiums. Employees can, however, elect to make CPP contributions if the tips are received in the course of pensionable employment.

Owners

During the course of the business day, restaurant owners usually receive sufficient cash payments to pay the servers in cash at the end of each shift. To avoid issues with the CRA in the event of an employee or business audit, owners should maintain detailed records of gratuities paid to each server at the end of every shift. It may even be appropriate to have the server sign off that the funds have been received. An owner who does not record payouts will have difficulty supporting the difference between bank deposits and recorded sales. In the event of an audit, the CRA could suggest the difference be attributed to the owner’s draw and thus be added to the owner’s income.

Further, owners must establish whether the tips are “controlled” or “direct” in order to determine whether the appropriate source deductions must be accounted for and submitted.

CRA requires servers to report both controlled and direct gratuities.

Servers

Servers are required to report tip income on their income tax return regardless of whether it is controlled or direct. Servers who underreport tip income will find it difficult to refute the CRA’s figures when the reassessment is based on POS data supplied from their place of employment. Further, the POS system is able to distinguish the dollar value of the server’s sales and tips (and therefore tips as a percentage of sales) from the server’s sales that have no tips attached. Armed with this data, CRA could conceivably calculate the “table tips” by applying the determined percentage to sales without tips recorded on the POS system per server. Servers who have failed to report adequate income could find themselves in for a surprising reassessment.

Inform the Staff

Once owners have determined whether the tips are “controlled” or “direct,” a meeting with servers should be convened to ensure the servers are aware of the CRA’s position regarding tips and the implications that the detail provided by the POS has for the employer and for the employees’ personal tax filings. It might be worthwhile to clarify this information in writing for all employees. The most important thing is that the CRA requirements are clear to both employers and employees alike.

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