Sept. 9, 2022 "Restaurant finds itself in hot water with CRA over servers' electronic tips": Today I found this article by Jamie Golombek on the Financial Post:
If you’re an employee who gets a regular paycheque, you’ll be very familiar with the concept of source withholdings, which reduces your take-home pay.
Put simply, your employer is legally required to withhold and remit federal and provincial income tax to the Canada Revenue Agency, as well as Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums.
Failure to withhold any of these can land an employer in hot water with the CRA, as one Nova Scotia restaurant recently found out. But before delving into details of the case, let’s review the basic rules governing CPP and EI deductions.
Under the CPP, the employer’s contribution is determined by applying a contribution rate to the “contributory salary and wages of the employee … paid by the employer,” less certain deductions. For 2022, employee CPP/QPP contributions are 5.7 per cent of earnings between $3,500 and $64,900, so the maximum amount of contributions for this year is $3,500. Employers are required to match employee contributions.
For 2022, an employee’s EI premiums are 1.58 per cent of “insurable earnings” up to $60,300, so the maximum EI premium you may pay is $953. Insurable earnings are defined as “the total of all amounts, received or enjoyed by the insured person (i.e., employee) that are paid to the (employee) by the … employer in respect of that (insurable) employment.”
Under the EI Act, employers must contribute 1.4 times the employee premiums, or 2.21 per cent of insurable earnings, with a 2022 maximum premium of $1,334 per employee.
The recent case involved a popular, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on part of its servers’ tips. Customers sometimes leave a tip in cash, which the servers are free to keep without advising their employer.
Most customers, however, choose to pay their restaurant bills using a debit, credit or gift card, and include a tip in their electronic payment. The restaurant, in turn, shares these tips with its servers in a formalized, daily procedure.
At the end of each shift, each server prints a “summary of sales” from the restaurant’s point-of-sale system.
That summary shows each server’s
food sales,
beverage sales,
cash received from patrons who paid in cash,
electronic payments received
and electronic tips.
This info is used to prepare a “cash out sheet.”
On that sheet, the server records their electronic tips, the cash received, a kitchen staff “tip-out” (equal to one per cent of food sales), and an amount equal to two per cent of the electronic tips (the processing charge).
The restaurant retains the tip-out to pass along to its kitchen staff and the processing charge to cover its credit-card fees. The net amount is the server’s “net electronic tip.”
If none of the server’s customers happened to pay their restaurant bills in cash that day, the restaurant simply transfers an amount equal to the server’s net electronic tip to the server, typically the next business day, via direct bank deposit. This is known as the “due-back.”
In some circumstances, a server’s due-back is less than the server’s net electronic tip. This happens when a restaurant customer pays in cash, which the server retains and is taken into account in calculating the due-back. In these cases, the server’s net electronic tip is partially received in cash (from customers’ payment of their restaurant bills), and partly from the due-back received from the restaurant itself.
At the end of each shift, each server also prepares two envelopes in which they place
cash to “tip out” the onsite restaurant manager and assistant manager — two per cent
— and the support staff (bussers, hosts/hostesses and bartenders) at one per cent per support staff person (to a maximum of three per cent).
Each server delivers their summary of sales, their cash out sheet, and the two envelopes to the onsite manager at the end of their shift who later distributes the cash tip-outs to the restaurant managers and support staff.
The sales summary and cash out sheet were set aside and picked up the next morning by someone from accounting to facilitate payment of the servers’ due-backs.
The restaurant took the general position that due-backs received by servers were not considered to be “pensionable salary and wages” for purposes of CPP rules, nor “insurable earnings” for purposes of the EI Act. As a result, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it did not consider any portion of the electronic tips.
Needless to say, the CRA took a different view and assessed the restaurant on the basis that a portion of the servers’ electronic tips for 2015, 2016 and 2017 should have been considered.
The taxpayer took the matter to Tax Court in 2020 and lost. It then appealed the decision to the Federal Court of Appeal (FCA), which heard the case earlier this year.
The key question the court had to decide was whether the due-backs were properly considered to be amounts paid by an employer to employees “in respect of” their employment.
The restaurant argued the due-backs are not paid in respect of a server’s employment and are not insurable earnings because a server’s due-back bears “little or no relation to the server’s net tip. It is simply the difference between cash payments for meals and electronic tips owing.”
The three-judge appellate panel disagreed, citing a seminal 1983 decision of the Supreme Court of Canada, which stated that the words “in respect of” have “wide scope and import such meanings as ‘in relation to,’ ‘with reference to’ and ‘in connection with.’ In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.
The FCA, in a written decision released last month, concurred with the lower court’s decision, and concluded the due-backs were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP and “insurable earnings” for purposes of the EI Act.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
CRA wins tax case dealing with restaurant servers' electronic tips | Financial Post
Some restaurants in Vancouver have requested to receive cash only payments. CRA and EI is defrauded as well as their employees. Who is the watchdog then? The bigger question is, "who are they harbouring"?
A "Gift" for prompt service, which means that it is a payment on account of service.
...
Which means that it falls within the legal definition of "earnings on account of employment".
...
Which are 100% taxable, 100% of the time.
Sept. 23, 2022 "Canada's tipping culture is flawed and there's no clear fix in sight: experts": Today I found this article by Bob Becken on CBC:
From oil changes to take-out food, the "tip nudge" has quickly become a "well-established societal norm" in Canada, according to food economist Mike von Massow.
Card payment machines have made it simple for businesses to prompt a gratuity option, even in industries where tipping previously wasn't part of the cost or conversation. And data from Canadian trade associations show the average percentage tip for restaurant dining has gone up since the pandemic began.
Von Massow, who's also a professor at the University of Guelph, says the expectation for Canadians to increase the amount of their gratuities is getting out of control, and has become a hot-button issue across the country.
"I went to my local craft brewery the other day, just to the bottle shop, to pick up a couple of cans of my favourites," von Massow said. "When I was paying there, literally someone grabbed beer out of the fridge and gave it to me and I was prompted to tip in that circumstance."
He calls it a "double whammy" for consumers, with more businesses asking for tips while simultaneously raising their prices.
"You know, I've started to wonder if I give a particularly good lecture, should I put a jar at the front of the lecture hall at the end, and as they file out? Maybe they could drop a few bills in there for me, too. I mean, where does it stop?"
International alternative
Kate Malcolm moved to Port Perry, Ont., in 2017 from the U.K., where tipping isn't common.
Five years later she says she still has a hard time coming to grips with Canada's tip culture.
"There is no way that in England you would give $10, $20, $30 to a hairdresser," she said. "It's so expensive to get your hair done as it is, and then you have to tip them as well? It's such a foreign concept."
Malcolm, who runs a podcast aimed at newcomers, included her reaction to Canada's unwritten rules for gratuities in a TikTok video outlining her "culture shock."
She says when her parents first came to visit they were also unclear what the expectations were for tipping in Canada, leading to an awkward exchange at a restaurant.
"They kind of just threw coins on the table, like maybe $2 and change, and were like, 'that's all we do, right?' I was cringing for that. I'm like, that is probably more insulting than not doing it [tipping]."
Malcolm lived and worked as a server in Australia, as well, where tipping is also not the norm.
She said the wage was much higher than in Canada, and without the expectation to make tips, she felt less pressure to be "super friendly" all the time.
Some customers outraged by tip prompt
The Dough Bakeshop in Toronto added a gratuity option to its card machines after input from employees and customers.
Co-owner Oonagh Butterfield says they've always had a cash tip jar at the counter but saw a significant increase in tips when customers were given a debit or credit card option to do so.
"I've had signs up since we implemented it, being as clear as I can be, saying it's not expected," she said.
Despite posting signage like "to bypass the tip option please press green" Butterfield says some customers still question the electronic gratuity option.
"Sometimes there's a little bit of, I'll say, outrage around the fact that they're even being asked the question, 'would you like to tip?' Especially if they're just buying bread, which, again, is why I try to communicate to people this is not a necessity."
Despite currently having the tip option for customers, Butterfield says she supports moving away from Canada's current tipping culture, "so that everyone can be guaranteed a living wage."
No tipping equals prices raised to give staff living wage
In July 2020, Toronto's Richmond Station restaurant did away with tipping, instead choosing to raise its prices to pay staff more.
Co-owner Carl Heinrich calls Canada's tipping culture "a very inequitable way of paying staff."
The lockdown forced his business to start offering take-out — historically a service that didn't generate a lot of tips, he says.
"Any time you edit somebody's wage or pay, their livelihood, there's a lot of communication necessary," Heinrich said. "Because there was no blueprint for this new system, there was a lot of work. And frankly, two years later, it's still work."
There isn't one flat rate of living wage for staff at Richmond Station. Pay varies depending on a person's performance, experience and their position, he added.
"Dishwashers are making a living wage. Servers are making a living wage. But certainly our best servers are paid more than our least experienced servers. In the previous system that wasn't possible."
Aside from "very top end" restaurants, where customers might not be as sensitive about how much they're spending, says University of Saskatchewan business professor Marc Mentzer, many businesses that replace tipping with service charges don't succeed.
Customers like the illusion of having power over the server and the server likes the illusion of controlling the amount of their own income, he adds.
"In an ideal world, there would be no tipping. It's a human rights catastrophe. But it's just so deeply entrenched. I think we're stuck with it."
Hefty pre-programmed tip percentage options on chip card machines can "scare people into tipping a higher percentage than they might have ever considered before," Mentzer added.
"Everybody complains about tipping, but given a choice between a restaurant with tipping and a restaurant with a service charge, I'm not sure how customers would make that choice. I think customers might actually prefer the tipping approach if given the choice."
Canada's tipping culture is flawed and there's no clear fix in sight: experts | CBC Radio
Did we all forget how we'd developed a terrible reputation for being the world's worst tippers? I thought that this was making up for it?
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