Pooled tips at restaurant were subject to CPP and EI withholding
In the recent Andrew Peller Ltd. case, the taxpayer was a company that operated some restaurants at its wineries. In the restaurants, the taxpayer employed numerous servers, wait staff, bus persons, and so on. Instead of allowing servers or wait staff to retain for themselves the tips they received from customers, the taxpayer had a system under which the tips were pooled into one large “account”, and later divided up and paid to the various employees in the restaurants.
The issue in the case was whether the taxpayer Peller, when distributing the pooled tips to the various employees, should have withheld Canada Pension Plan (CPP) and Employment Insurance (EI) premiums (as it would be required to do, if it paid regular salary or remuneration). The taxpayer did not withhold, arguing that the tips were not really part of the employees’ earnings paid by the tax-payer; rather they were paid by the taxpayer’s customers and effectively passed on by the taxpayer as an agent or nominee (and customers do not have to withhold of course).
The CRA disagreed and argued that the taxpayer had indeed paid the tips to the employees, as required under a broad interpretation of the CPP and EI legislation. As a result, the taxpayer was assessed in respect of the CPP and EI it did not withhold. On the taxpayer’s appeal to the Tax Court of Canada, the CRA assessment was upheld.