the Canada Pension Plan and Employment Insurance

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It explains how to treat tips and gratuities for the purposes of the Canada Pension Plan (CPP) and the Employment Insurance Act. In particular, it will help determine whether tips and gratuities are part of an employee’s pensionable earnings or insurable earnings, or both.

Employer Responsibilities

Every employer is required by law to deduct CPP and Employment Insurance (EI) premiums from most amounts they pay to their employees. The employer must then remit these amounts to the Canada Revenue Agency (CRA), along with its own share of CPP and EI premiums.

To learn more about employer responsibilities and obligations, go to the Payroll Deductions page .

Is income from tips and gratuities pensionable or insurable earnings, or both?

Tips and gratuities received by employees constitute income earned in respect of employment for the purposes of the Income Tax Act. However, it must be determined whether tips received in the course of employment are considered pensionable earnings under the CPP or insurable earnings under the Employment Insurance Act. To answer this question, it must first be determined whether the tips are considered to have been paid by the employer (controlled tips) or by the customer (direct tips), or whether they are tips that are reported in the province of Quebec.

Controlled tips

The term controlled tips refers to tips that an employer controls, or has in their possession, and must then pay to the employee. Some examples of controlled tips include:

the employer adds a mandatory service charge to the customer’s bill to cover the tip;

the employer adds a percentage to the customer’s bill to cover the tip;

tips are allocated to employees using an allocation formula established by the employer;

the employer includes tips in his income, then in his expenses, and later redistributes them to employees in the form of pay;

employees must return tips to their employer, who then shares them with the employees;

Cash tips that are deposited into the employer’s bank account and become the property of the employer – or even commingled with the property of the employer – and are subsequently paid to employees.

Example 1: Controlled tips

You are a wait staff member at a restaurant and receive tips from restaurant patrons. However, some of the support staff feel that they should receive a share of the tips. The restaurant owner agrees to pool the tips and distribute them to all staff members.

They are therefore subject to CPP and EI contributions deducted at source, provided 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 amount of the tip or how it is distributed. The employer only serves as an intermediary between the customer and the employee. Here are some examples of direct tips:

a customer leaves money on the table at the end of the meal and the server keeps the full amount;

a customer tips directly to a bellhop, doorman, attendant or baggage handler;

tips are pooled and shared among employees according to a formula established by them and not by the employer;

When paying the bill by credit or debit card, a customer includes a tip amount and the employer gives the employee the tip amount in cash at the end of the shift. In exceptional situations, tips may be paid the next day, for example, if there is not enough cash available.

Example 2: Direct tips

You are a server in a restaurant. The owner informs you that if the customer pays by credit or debit card and includes a voluntary tip, he will refund the full amount in cash at the end of each shift.

Direct tips are not subject to CPP and EI contributions. However, an employee may elect to pay CPP contributions on amounts earned in tips from pensionable employment where the tips are not subject to CPP contributions deducted at source. The employee must complete Form CPT20 if they wish to pay CPP contributions.

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

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

Declared tips (province of Quebec only)

Reported tips are tips that an employee must report to their employer under provincial law, in the same way as their controlled tips. Employees who work in a covered establishment in the province of Quebec must report their direct tips to their employer. For the purposes of the Employment Insurance Act, they must include the amount of their reported tips in their insurable earnings, just like their controlled tips.

Quebec is the only province with tax measures requiring employees to declare their tips to their employer. The Taxation Act provides specific guidance to employers in the hotel sector whose employees perform their duties in a covered establishment.

To learn more about tipping in the province of Quebec, go to Revenu Québec – Tips .