Quebec’s Treatment of Income from Tips and Gratuities

by Craig Anthony

1 min read

Tipping is a widely accepted practice in Canada, and it is customary to tip employees in the hospitality and service industries. Tips constitute a substantial portion of the income of bartenders, waitstaff, and hair stylists. Whether tips are treated as insurable earnings depends on how they are classified, including whether the employee is required to declare gratuities under any provincial legislation. Quebec is the only province with this requirement.The Canada Revenue Agency divides tips into three distinct categories:Controlled tips are under the control of and paid at the discretion of the employer. This includes service charges added to a bill that the client pays directly to the employer. For example, banquet facility owners typically add a gratuity to the total bill for large parties, such as wedding receptions. This amount is paid to the employer, who distributes it to the employees. CRA rules subject these amounts to Canada Pension Plan and Employment Insurance Act premiums that the employer pays and treat them as insurable earnings of the employee.Direct tips are paid by the client directly to the employee and are not under the control or discretion of the employer, including amounts included on bills paid by credit card for which the employer acts as a conduit for directing the gratuity to the employee. Direct tips are not subject to CPP or EIA rules, but the employee may elect to report them and must pay the applicable CPP and/or EIA premiums.Declared tips are direct tips that Quebec requires employees in regulated establishments to report to the employer for treatment as insurable income that is subject to CPP and EIA premiums. Quebec is the only province with this requirement. Declared tips increase employer and employee CPP/EIA premiums. Although employees pay a greater portion of their earnings in taxes, they benefit from a larger pension when they retire, and any amounts collected during periods of unemployment more accurately reflect actual earnings. The province initially benefits from the additional tax revenue collected but increases its future pension liability.

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