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Restaurant Owner Must Withhold and Remit in Connection with Tips and Gratuities Paid to Servers

In an interesting decision, Justice Campbell of the Tax Court of Canada examined the employer withholding obligations in connection with tips and gratuities received by workers employed by the appellant taxpayer at its 2 restaurants, Peller Estate Winery Restaurant and Trius Winery restaurant, both located in the Niagara region. The restaurants are fine dining establishments and employed knowledgeable and experienced employees to meet the goal of providing a high end fine dining experience.

Predictably, all tips and gratuities received were received by the restaurant owner and then pooled and divided among staff in accordance with an agreed upon formula. It made sense that all of the employees of the restaurants should receive tips in proportion to the role they played in providing the special dining experience to the patrons of the restaurant. This process was part of the co-ordinated team approach and was successful, from a service and reputation perspective.

However, it had interesting unexpected consequences for tax purposes.In particular, the tip, gratuity and pooling systems that favoured all employees were rather complicated from an accounting point of view. Because the system was quite specific, it was necessary to keep proper records of the calculations to determine that each person got the amount to which everyone had agreed they would be entitled.

One of the critical issues in determining the taxation issue was to determine who “paid” the tips and gratuities.

In an ordinary situation, where cash tips were left on a table, it was clear that the patrons were paying the tip. 

Previous Supreme Court of Canada authority established that only those tips that are “received personally” by the employee would remain outside the scope of the term “insurable earnings”. I would note that this does not mean that such amounts received by the employee do not have to be reported for tax purposes. Clearly, all such amounts must be reported by the employee. However, the key issue is whether such amounts constitute “insurable earnings”. Any amounts “paid” by the employer fall into that category and are subject to withholding obligations.

In this case, the Court found that all amounts, whether given by credit card or cash, were handed over to the employer who accounted for them, exerted considerable control over who received what and engaged in the redistribution of those amounts. 

Ultimately, the Court determined that these were amounts that were paid by the employer and constituted insurable earnings for the purposes of withholdings.

In the result, the employer was assessed for the unremitted statutory withholdings.

Please contact Keith Trussler, Linda Smits or Ainsley Furlonger with your questions regarding these obligations and problem solving strategies.