CRA wins tax case dealing with restaurant servers’ electronic tips

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Should you’re an worker who will get an everyday paycheque, you’ll be very conversant in the idea of supply withholdings, which reduces your take-home pay.

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Put merely, your employer is legally required to withhold and remit federal and provincial revenue tax to the Canada Income Company, in addition to Canada Pension Plan (CPP) contributions and employment insurance coverage (EI) premiums.

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Failure to withhold any of those can land an employer in scorching water with the CRA, as one Nova Scotia restaurant just lately discovered. However earlier than delving into particulars of the case, let’s evaluate the essential guidelines governing CPP and EI deductions.

Beneath the CPP, the employer’s contribution is decided by making use of a contribution price to the “contributory wage and wages of the worker … paid by the employer,” much less sure deductions. For 2022, worker CPP/QPP contributions are 5.7 per cent of earnings between $3,500 and $64,900, so the utmost quantity of contributions for this 12 months is $3,500. Employers are required to match worker contributions.

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For 2022, an worker’s EI premiums are 1.58 per cent of “insurable earnings” as much as $60,300, so the utmost EI premium you might pay is $953. Insurable earnings are outlined as “the overall of all quantities, obtained or loved by the insured particular person (i.e., worker) which might be paid to the (worker) by the … employer in respect of that (insurable) employment.”

Beneath the EI Act, employers should contribute 1.4 occasions the worker premiums, or 2.21 per cent of insurable earnings, with a 2022 most premium of $1,334 per worker.

The latest case concerned a preferred, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on a part of its servers’ ideas. Prospects generally go away a tip in money, which the servers are free to maintain with out advising their employer. Most prospects, nonetheless, select to pay their restaurant payments utilizing a debit, credit score or present card, and embrace a tip of their digital cost. The restaurant, in flip, shares the following pointers with its servers in a formalized, every day process.

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On the finish of every shift, every server prints a “abstract of gross sales” from the restaurant’s point-of-sale system. That abstract reveals every server’s meals gross sales, beverage gross sales, money obtained from patrons who paid in money, digital funds obtained and digital ideas. This information is used to organize a “money out sheet.”

On that sheet, the server data their digital ideas, the money obtained, a kitchen employees “tip-out” (equal to 1 per cent of meals gross sales), and an quantity equal to 2 per cent of the digital ideas (the processing cost). The restaurant retains the tip-out to move alongside to its kitchen employees and the processing cost to cowl its credit-card charges. The online quantity is the server’s “web digital tip.”

If not one of the server’s prospects occurred to pay their restaurant payments in money that day, the restaurant merely transfers an quantity equal to the server’s web digital tip to the server, usually the following enterprise day, through direct financial institution deposit. This is named the “due-back.”

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In some circumstances, a server’s due-back is lower than the server’s web digital tip. This occurs when a restaurant buyer pays in money, which the server retains and is taken into consideration in calculating the due-back. In these circumstances, the server’s web digital tip is partially obtained in money (from prospects’ cost of their restaurant payments), and partly from the due-back obtained from the restaurant itself.

On the finish of every shift, every server additionally prepares two envelopes by which they place money to “tip out” the onsite restaurant supervisor and assistant supervisor — two per cent — and the help employees (bussers, hosts/hostesses and bartenders) at one per cent per help employees particular person (to a most of three per cent).

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Every server delivers their abstract of gross sales, their money out sheet, and the 2 envelopes to the onsite supervisor on the finish of their shift who later distributes the money tip-outs to the restaurant managers and help employees. The gross sales abstract and money out sheet have been put aside and picked up the following morning by somebody from accounting to facilitate cost of the servers’ due-backs.

The restaurant took the overall place that due-backs obtained by servers weren’t thought of to be “pensionable wage and wages” for functions of CPP guidelines, nor “insurable earnings” for functions of the EI Act. Because of this, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it didn’t think about any portion of the digital ideas.

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Evidently, the CRA took a special view and assessed the restaurant on the idea {that a} portion of the servers’ digital ideas for 2015, 2016 and 2017 ought to have been thought of. The taxpayer took the matter to Tax Court docket in 2020 and misplaced. It then appealed the choice to the Federal Court docket of Attraction (FCA), which heard the case earlier this 12 months.

The important thing query the courtroom needed to determine was whether or not the due-backs have been correctly thought of to be quantities paid by an employer to staff “in respect of” their employment. The restaurant argued the due-backs aren’t paid in respect of a server’s employment and aren’t insurable earnings as a result of a server’s due-back bears “little or no relation to the server’s web tip. It’s merely the distinction between money funds for meals and digital ideas owing.”

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The three-judge appellate panel disagreed, citing a seminal 1983 resolution of the Supreme Court docket of Canada, which said that the phrases “in respect of” have “broad scope and import such meanings as ‘in relation to,’ ‘with regards to’ and ‘in reference to.’ In different phrases, “however for” their employment as servers by the restaurant, the servers wouldn’t obtain any ideas paid to them within the type of due-backs.

The FCA, in a written resolution launched final month, concurred with the decrease courtroom’s resolution, and concluded the due-backs have been “contributory wage and wages of the worker paid by the employer” for functions of the CPP and “insurable earnings” for functions of the EI Act.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected]

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