EIA and CPP contributions, and tippl

This fact-sheet is not legal or tax advice. Employers must get their own legal and tax advice.

Tip Management and EI/CPP Withholdings

Managing employee tips efficiently and in compliance with Canadian tax laws can be a complex endeavour for employers. Tippl Inc. offers a streamlined solution to facilitate tip payments, but it might also be possible for employers to avoid withholdings under the Canada Pension Plan ("CPP") and Employment Insurance Act ("EIA") on tips paid by your customers to your employees (the "Withholdings").

We explore this possibility below.

Why structure matters

Under Canada Revenue Agency policy, the question of whether tips are subject to CPP contributions and EIA premiums depends on whether the tips are classified as "controlled" or "direct". Controlled tips (those distributed by the employer) are subject to these withholdings, whereas direct tips (those paid directly by customers to employees) are not.

Case law provides some nuance on this point. The central question is who is the "payer" of the tips? For example, even if the employees remain, at law, the owner of their tips at all times, if the employer comes into possession of the tip funds before remitting them to employees, the CRA/a court could still determine that the employer is the payer.

Structure to consider

If you or your employees wish to avoid paying the Withholdings, there are a number of steps you could discuss implementing with your tax and legal advisors.

Employee-led committees: Employees could form a committee to oversee tip distribution policies. These committees should have sole authority over how tips are allocated and when the tips are paid out (unless discretion for payout is passed on to the specific employees themselves), ensuring that the employer does not dictate or control the process.

Tip bank account: Employers might establish a separate bank account exclusively for tip payments, where only employee committee members are signatories. Best practice would be to open this at a different bank from the one the employer typically banks with. This reduces employer control over the funds and minimizes the possibility of commingling with employer accounts.

Restrictions

Employers should consider discussing the following potential practices with their tax and legal advisors which could lead to CRA scrutiny or legal challenges:

Commingling funds: If tip money is mixed with company funds or reflected in corporate accounting records, the remission of the tips to employees would require Withholdings. Employers should not record funds that they hold as agent for their employees as their own funds on their books.

Separate payroll mechanisms: Similarly, if tip payments are integrated into regular payroll systems or processed through employer accounts, the remission of the tips to employees would require Withholdings.

Knowledge of tip amounts: While some knowledge of tip amounts may be unavoidable, employers will want to minimize their involvement with regard to these funds to the extent possible.

Final thoughts

Avoiding Withholdings can result in substantial savings for employees and employers. However, it also comes with risks.

Employers should consult their legal and tax advisors to ensure compliance with provincial employment and tax/EIA/CPP law. We do not offer legal or tax advice here. Each employer is responsible for assessing their own unique circumstances.

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