If you’re an employer of an establishment that facilitates tipping, it’s important to stay up to date with best practices.
Today, we’re going to explore types of tips, some foundational rules associated with tipping practices, and how to ensure you’re staying fair and compliant as a business when it comes to the distribution of tips.
Employees Who Receive Tips
There are a number of different employees who may receive tips including, but not limited to:
- Restaurant staff
- Hair stylists
- Cosmetic/beauty technicians
- Entertainment staff
- Tattoo artists
Tipping Rules in Canada
Let’s get some housekeeping out of the way, shall we? When it comes to tipping, there are rules employers must abide by in order to remain compliant.
Ontario legislation prohibits an employer from accessing any portion of an employee’s tips – this means they can’t withhold an employee’s tips, nor can they deduct any amount from an employee’s tips. To do so is illegal and can lead to weighty fines.
Of course, there are exceptions or special considerations with any rule:
- Employers do have the ability to oversee and distribute tips so long as the employer doesn’t receive a share of the tip.
- An employer can be a part of the tip pool so long as they regularly perform the same work or tasks the tip is received for.
- If tips are given via credit card, the inevitable credit card fee is fine to deduct from an employee’s tips.
According to Québec legislation, tips belong to employees and must be paid in full. Tips can be shared when voluntary, and like Ontario, an employer cannot impose and deduct tips.
Similarly, legislation prohibits employers from making any sort of tip deductions.
In Manitoba, legislation is silent in the arena of tipping rules, but the government has reportedly claimed that tips are considered the property of the house.
Tips belong to the employee who received them, as per New Brunswick legislation.
Newfoundland & Labrador
Tips belong to the employee, but when tips are paid via credit or debit, statutory deductions can be made from tips by the employer.
Prince Edward Island
Tips and gratuities are the property of the employee – employees are not required to share tops with their employer. Pooling tips can be adopted for the benefit of the employees, but a written agreement must be struck at the time of hiring.
North West Territories
Wages reportedly do not include tips, but as a whole, the North West Territories are otherwise silent.
Nunavut, Yukon, Saskatchewan, Nova Scotia and Alberta are all silent on the subject of tipping in regards to legislation.
Tipping rules vary depending on your location. If you’re located in a different province, be sure to check out provincial legislation and case law specific to your province or territory.
If you’re located outside of Canada, we encourage you to check the rules specific to your location.
Types of Tips
For tax purposes, tips are divided into two categories: controlled tips and direct tips.
A tip is classified as a controlled tip when an employer has the ability to control how a tip will be paid – by what means, and how much.
So if a service charge is applied to a tip – it’s a controlled tip. If tips are distributed through a tip sharing arrangement, tips are considered controlled.
If a tip is included in an employer’s business income, it would be classified as a controlled tip.
Controlled tips must be accounted for during taxes – the amount an employee receives in the form of tips must be documented on their T4 slip. Employers are also responsible for making source deductions, including income taxes and EI and CPP premiums.
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A tip is classified as a direct tip if the employer has no control or influence over the amount of tips an employee receives.
A direct tip would be considered income rather than a wage, so no source deductions have to be made. However, an employee must ensure that they are reporting their tip earnings on their tax returns. Note that a direct tip is NOT subject to a tip sharing arrangement, unlike controlled tips.
If you’re located in Québec, the rules differ: employees are required to declare their tips to employers. Be sure to check out the appropriate tipping regime if you’re located in Québec.
Pay Your Staff Securely And Accurately
As an employer, it’s important to establish a sound process for handling tips and tip pooling. You need to think about how tips are distributed, when they’re distributed and how tip jars will be divided amongst employees in a fair manner. How are you tracking your tips? Do your employees understand how tipping practices work?
Furthermore, how will you report your employee’s tip earnings for tax purposes?
It’s a lot to think about. Especially as an additional layer on top of regular wages.
Why not utilize a system that makes the process a whole lot easier?
Our very own ePay makes it easy for you to seamlessly pay your employees with secure, online transactions. Check out ePay here.
Payroll shouldn’t be a headache – let us help you streamline your financial business processes so you can get back to all the other things you want to do.