Your employee may receive tips (directly or indirectly) as part of their employment duties with you. The tips are considered employment income for income tax purposes.

Depending on whether you control the tips or not, you may have to report the tips your employee received on a T4 slip and withhold payroll deductions.

On this page

• Steps
• References

Steps

1. Review the method by which your employee received the tips

   The following are the different methods by which your employee can receive tips:

   • Controlled tips

     Controlled tips are when you (as the employer) control or possess the tips and you then must pay them to your employee.

     You are considered to have paid these amounts to your employee because the tips are controlled by you (as the employer).

     Examples of controlled tips

     The following are some examples of controlled tips:

     • The employer adds a mandatory service charge to a client's bill to cover tips
     • The employer adds a percentage to a client's bill to cover tips
     • Tips that are allocated to employees using a tip-sharing formula determined by the employer
     • Tips that an employer includes in his business income, then expenses and redistributes to employees in the form of pay
     • Tips that the employees turn over to their employer who then distributes them to the employees
     • Cash tips that are deposited into the employer's bank account and become, or are mixed in with, the property of the employer and then paid out to the employees

     Example

     An employee is part of the serving staff in a restaurant. They receive tips from the restaurant's customers. However, some of the support staff believe that they should receive a share of those tips. The restaurant owner agrees to put in place a tip pool to make sure the tips are distributed among all staff members.

   • Direct tips

     Direct tips are when the customer paid the tips directly to your employee.

     You (as the employer) have no control over the tip amount or its distribution.

     Examples of direct tips

     The following are some examples of direct tips:

     • A customer leaves money on the table at the end of the meal and the server keeps the whole amount
     • A guest gives a tip directly to a bellhop, door person, car attendant, porter, etc.
     • The employees and not the employer decide how the tips are pooled or shared among employees
     • A customer includes an amount for a tip when paying the bill by credit or debit card and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations the cash tips could be paid out the day after, for example, if there was not enough available cash on hand

     Example

     An employee is part of the serving staff in a restaurant. The restaurant owner informs the employee that if a customer pays by credit or debit card and includes a voluntary tip, the restaurant will give the full tip amount to the employee in cash at the end of each shift.

   • Declared tips - Quebec only

     Declared tips are amounts of tips that provincial law requires your employee to declare to you (as their employer), along with their controlled tips.

     Employees working in a regulated establishment within the hospitality sector in Quebec must declare their direct tips to you.

     Learn more on tips in the province of Quebec: Employees Who Receive Tips | Revenu Québec.

2. Determine which deductions you must withhold

   You must withhold the following deductions depending on how your employee received the tips:

   • Controlled tips

     • Income tax - Withhold
     • EI premiums - Withhold
     • CPP contributions - Withhold

   • Direct tips

     • Income tax - Do not withhold
     • EI - Do not withhold
     • CPP - Do not withhold, your employee can elect to pay CPP contributions on tip amounts related to employment earnings by filling out Form CPT20, Election to Pay Canada Pension Plan Contributions when filing their personal income tax return

   • Declared tips - Quebec only

     • Income tax - Withhold
     • EI premiums - Withhold
     • CPP - Do not withhold

   If your employee received controlled, declared and direct tips, only withhold deductions on the controlled and declared tips.

   Learn how to calculate payroll deductions: How to calculate.

3. Report the payment on a T4 slip

   You must report the following amounts on a T4 slip depending on how your employee received the tips:

   • Controlled tips

     • Box 14 - Employment Income
     • Box 24 - EI insurable earnings
     • Box 26 - CPP/QPP pensionable earnings

   • Direct tips

     • Do not report any amounts

   • Declared tips - Quebec only

     • Box 14 - Employment Income
     • Box 24 - EI insurable earnings

   If your employee received controlled, declared and direct tips, only report the controlled and declared tips.

   Where the tips are included on a T4 slip, your employee will report the tips on line 10100 of their income tax and benefit return. If you do not have to report the tips on a T4 slip, your employee is still required to report the tips on line 10400.

   Learn how to report on a T4 slip: T4 slip - Information for employers.

References

Legislation