A Tip About Tips

A client came to me recently with an interesting question.

Tippl Inc. (I have permission to use their name), a cashless tipping platform, had started their company with the aim of making it easier for people to tip service providers who don’t typically have a convenient way to accept digital payments—think zipline guides or ski instructors. Tax wasn’t top of mind when they launched. But when several hair salons started asking them the same tax question, Tippl came to me.

A bit of context first.

These days, most tips are paid by credit card. When tips received by credit card are ultimately paid out to employees, typically the employer has to withhold under the Canada Pension Plan (“CPP”) and Employment Insurance Act (“EIA”). That’s a cost borne by both employers and employees. In contrast, when tips are paid in cash and handed out at the end of a shift, those withholdings typically don’t apply.

The salon’s question was simple: can withholdings on tips paid through the Tippl platform be avoided altogether?

Turns out, it might be possible.

Controlled or direct

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, like most cash tips) are not.

The law offers more nuance. 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 or the courts could still determine that the employer is the payer.

Avoiding withholdings

If an employer wants to avoid paying CPP or EI withholdings, there are a number of steps they could discuss implementing with their tax and legal advisors:

Employee-led committees: Employees could form a committee to oversee tip distribution policies. These committees would have sole authority over how tips are allocated and when the tips are paid out, ensuring that the employer does not dictate or control the process.

Tip bank account: Employers would establish a separate bank account exclusively for tip payments, with signing authority given only to employee committee members. Ideally, this account would be at a different financial institution than the one used for the employer’s business, minimizing the risk of commingling.

Agency agreements: Employers could enter into agreements with employees confirming that any tip funds held in the dedicated account are held in trust or as agent for the employee, not as employer property. This reinforces the legal and practical separation of the tip funds.

Proceed with caution

If done properly, avoiding withholdings can mean significant savings for both employers and employees. But missteps—like mingling tip funds with payroll, using a single integrated payroll system, or the employer exercising too much control over tip distribution—can easily lead to the CRA determining that the employer is in fact the payer.

Employers should consult their legal and tax advisors to ensure compliance with provincial employment and tax/EIA/CPP law. This blog post is not intended to offer legal or tax advice.

If you have any further questions about this topic, you can feel free to reach out to us. The author can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.