In the recent decision of Ristorante a Mano v Minister of National Revenue , the Federal Court of Appeal upheld assessments by the Canada Revenue Agency (“CRA”) for unremitted CPP and EI payments, on the basis that the employer restaurant should have included electronic tips paid to servers in calculating the employer’s liability for CPP and EI payments. The Court held that tips from credit card sales distributed by the restaurant to its servers following their shifts are pensionable wages for the purposes of the Canada Pension Plan and insurable earnings for the purposes of Employment Insurance.
Ristorante a Mano ( the Restaurant) is a restaurant in Halifax that employs servers to provide table service to its customers. Customers sometimes pay tips in cash, which the servers are free to keep. More frequently though, the customers pay their restaurant bills electronically by debit card, credit card, or gift card, and include the tip at the time of payment. The restaurant then distributes a portion of the electronic tip to the servers the next day by direct deposit to the servers’ bank accounts, after deducting credit card processing fees and a percentage of the server’s tips paid to management and support staff ( referred to in the industry as the “tip out”).
The Restaurant did not consider any part of the electronic tips that it paid to it servers as pensionable salary and wages for the purposes of the Canada Pension Plan or insurable earnings for the purposes of the Employment Insurance Act in calculating its liability for CPP and EI, and so it did not include those amounts in its remittances.
CRA disagreed, and assessed the Restaurant for the tax years 2015, 2016, and 2017, for unremitted CPP and EI payments with respect to the electronic tips. Interestingly, the CRA didn’t assess any amounts for the “tip-out” payments to the support staff, although they could have. Also interesting, is the fact that the CRA only assessed the Restaurant for the employer’s contribution amounts, because normally, if an employer fails to deduct the required CPP contributions or EI premiums from the amounts that they pay their employee,then the employer becomes liable for the amount that should have been deducted and remitted.
In upholding the CRA’s assessments, Monaghan J.A. , stated that the question of whether the tips were pensionable wages and insurable earnings for CPP and EI purposes turned on the question of whether the amount “is paid by the employer to the employee in respect of their employment” and that “but for the their employment as servers by the appellant, the servers would not have received any tips paid to them”.
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This decision will have a huge impact on the restaurant industry both for restaurant owners and on those who receive tips. In the normal course of employment, an employer is required to withhold CPP and EI from an employee’s earnings and remit those amounts to the CRA along with the employer’s contribution amount. If an employer fails to deduct and remit CPP and EI from an employee’s earnings, the employer is liable for both the employee and the employer’s portion.
If you are a restaurant owner and you have not been assessed by the CRA yet, you may expect to be audited and re-assessed for past years. Servers are also likely to get caught up in the audit and may face re-assessments and penalties for under-reporting their income if they have not declared all of their tip income.
Going forward, restaurant owners are going to have to start including tip amounts in calculating their CPP and EI remittances and in calculating payroll deductions from employees that they pay tips to.