CRA Requirements for Tips & Gratuities (English)

You have to choose 1 of 2 ways to pay out tips as per the Canada Revenue Agency. (Vietnamese version here)

Employees are expected to report their tip/gratuity income on their personal tax returns if the tips are Direct Tips. Remember to keep track of the tips paid out to your employees in your income records (English / Vietnamese) so that you are not subject to corporate taxes for income that is not yours! Please contact our office for a sales template.

  1. Direct Tips – NOT subject to CPP contributions and/or EI premiums
  2. Controlled Tips – ARE subject to CPP contributions and/or EI premiums

1. Direct tips are gratuities that are paid directly by the client to the employee and that are not subject to any of the forms of control by the employer. The following are some examples of direct tips:

  • When paying the bill by credit card, a client includes an amount for a tip on the credit card and the employer returns the tip amount in cash to the employee daily;
  • When paying the bill by debit card, a client includes an amount for a tip and the employer returns the tip amount in cash to the employee daily;

We use the term ‘direct tips‘ to denote the principle of when the employer has no control over the tip amount and no control over the tip distribution. Direct tips are considered to have been paid by the client and not the employer. In these situations, the employer is merely a conduit for the tip from the client to the worker.

2. Controlled tips are when tips are not paid out daily and/or the tip is controlled by the employer ie. tip allocated to employees using a tip sharing formula determined by the employer etc. These tips are then subject to payroll source deductions and should be included on their payroll and part of their T4. (Remember to report the employee’s tip amount along with their payroll to be included on their pay cheques)

The 2nd choice costs the employer more in terms of company portion EI and CPP as well as WCB so this is done by very few salons/restaurants.