Restaurant gratuities (tips) are taxable for income tax and EI, and may be subject to GST/HST
Recent Court cases have confirmed, not only that tips to waiters are taxable, but also that if they are paid through the employer, they are subject to source withholdings, EI and CPP withholding. If they are mandatory gratuities, the employer must charge GST/HST on them.
In Ristorante A Mano Ltd., 2022 FCA 151, a restaurant collected tips that were paid by credit card, and distributed them to the waiters (after taking off a processing fee to recover credit-card charges, and a further amount for the kitchen staff). The CRA took the view that these payments were part of the waiters’ income, not only for income tax purposes, but also for calculating the Employment Insurance premiums the restaurant had to pay, and the Canada Pension Plan contributions it was required to make for its employees. The CRA assessed the restaurant accordingly, and the restaurant appealed.
Both the Tax Court of Canada and, on appeal, the Federal Court of Appeal ruled in the CRA’s favour.
In another recent case, 1410109 Ontario Ltd., 2022 TCC 141, a company operated a banquet hall in Ontario. In its contracts and invoices for weddings and other events, the company charged an automatic 15% “gratuities” on its fees, and paid this money out to the manager, chef and serving staff. The CRA assessed the company for not charging HST on the gratuities, and the company appealed.
The Tax Court of Canada again ruled in the CRA’s favour. The 15% was not a gift from the patrons to the servers, as the company claimed. Rather, it was required by the contract, and thus formed part of the “consideration” to which 13% HST applied. Thus, the company was liable for not collecting and remitting HST on all the “gratuities”.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Geib & Company to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
