HST and gratuities

[bcguy42 38594]

Say you have a nice meal, you pay by credit card, you decide to give a $20 tip. Let's make it simple and say there is only one server (to avoid the pooling of tips complication.) So how much of the tip does the server get?

 

Try $17.20. And, since the tip came by credit card, the income is recorded and must be reported by the server who will pay income tax on it come tax time.

 

Say what?

 

CRA considers a mandatory gratuity (the 18% when you have a large group) OR when the gratuity is included in credit card payment (that is the recipient pays adds a gratuity to a credit card payment) to be extra consideration for the supply of the food/beverages rather than a contribution towards the salary (non-taxable) of the employee.

 

If the gratuities are in the invoices or in the credit card payments 13/113 of the amount in Ontario (12/112 in BC, 15/115 in NS, 113/113 in Nfld/Lab. and NB) will not go to the waitress/service provider and will be remitted to the Receiver General of Canada.

 

Just out of curiousity, why is there not a crap storm over the fact that CRA is taxing the same money twice? Especially because the individuals affected are making low hourly wages and rely on the gratuities as employment income (to make ends meet)?

 

While we wait for the crap storm that will probably never come, a suggestion. Even if you use plastic to pay for the meal or whatever, tip in cash.

[qwertyaccount 15793]

Credit card tips are ok.

 

Generally, any tip you decide to leave (direct tip) isn't subject to GST/HST, and the server doesn't pay EI/CPP on the tip either, as long as the funds are given to the server in cash by you or the establishment.

 

i.e. you put the tip on your credit card bill and the restaurant gives it to the server in cash, which is common practice.

 

If the tip is mandatory/preset, etc., (controlled tip) it is subject to GST/HST/EI/CPP no matter how you pay.

 

It's not the CRA that is screwing over some servers, it's the restaurant, either by design or by ignorance.

 

Here's some boring detail from the CRA's website:

 

Tips and gratuities

Tips or service charges are not usually added to a bill. In general, consumers tip a percentage of the amount of a bill to service providers such as to waiters, waitresses, barbers, hairdressers, and taxi drivers. The percentage and whether the tip is calculated on the amount of the bill before or after taxes depends on the practice of the particular consumer.

A tip or gratuity that is freely given by a customer, for example, cash not recorded on a bill, is not subject to the GST/HST. However, if you add a mandatory or a suggested amount to the customer's bill as a service charge, you have to charge GST/HST on that amount.

Does Income From Tips and Gratuities Form Part of an Employee's Pensionable and/or Insurable earnings?

 

Gratuities or tips received by employees are income earned in respect of employment for purposes of the Income Tax Act. However, it must be determined whether tips received in the course of employment are considered pensionable earnings under the CPP and/or are insurable earnings under the EIA. This answer depends on whether the tips are considered to have been paid by the employer (controlled tips), whether they are considered to have been paid by the client (direct tips) or whether they are declared tips in the province of Quebec.

 

Controlled Tips

 

Controlled tips are gratuities that are controlled by the employer. Since they are controlled by the employer, the employer is considered to have paid these amounts to the employee. The following are some examples of controlled tips:

• The employer adds a mandatory service charge to a client's bill to cover tips;
  
• The employer adds a percentage to a client's bill to cover tips;
  
• Tips allocated to employees using a tip sharing formula determined by the employer;
  
• Tips that an employer includes in his business income, later expenses and redistributes to employees in the form of pay;
  
• Tips that the employees are required to turn over to their employer and are later distributed to the employees;
  
• Cash tips that are deposited in the employer's bank account and become the property of (or even commingled with the property of) the employer and subsequently paid out to the employees.
  

We use the term 'controlled tips' within this article to denote the principles of employer control/employer possession over the tips and the employer's obligation to pay the tip to the employee as expressed by the courts.

 

Controlled tips form part of the employee's total remuneration and are subject to CPP contributions and EI premiums being deducted at source, provided that this person is employed in pensionable and/or insurable employment.

Direct Tips

 

Direct tips are gratuities that are paid directly by the client to the employee and that are not subject to any of the forms of control by the employer as mentioned above under the heading controlled tips. The following are some examples of direct tips:

• A client leaves money on the table at the end of the meal and the server keeps the whole amount;
  
• A client gives a tip directly to a bellhop, door person, car attendant, porter; etc.
  
• Tips pooled and/or shared among employees in a manner determined by the employees (as opposed to the employer);
  
• When paying the bill by credit card, a client includes an amount for a tip on the credit card and the employer returns the tip amount in cash to the employee;
  
• When paying the bill by debit card, a client includes an amount for a tip and the employer returns the tip amount in cash to the employee;
  

We use the term 'direct tips' to denote the principle of when the employer has no control over the tip amount and no control over the tip distribution. Direct tips are considered to have been paid by the client and not the employer. In these situations, the employer is merely a conduit for the tip from the client to the worker.

 

Direct tips are not subject to CPP contributions and/or EI premiums. However, an employee can elect to make CPP contributions on tip amounts earned in the course of pensionable employment where the tip income is found not to be subject to CPP contributions at source. The individual will complete a form CPT20 to elect to pay the CPP contributions.

 

It is possible for an employee to receive both controlled and direct tips. In such a situation, only the controlled tips will form part of the employee's pensionable and/or insurable earnings.

[Gentleman11 10508]

During my extended career which has involved a lot of international and domestic travel over the years, I have found that tip recipients always prefer cash. For that reason I will pay the bill with a credit card and the tip in cash.

 

One might say well how do I expense it when entertaining on an expense account. The answer is there are many ways of compensating yourself on an expense account. Some companies will accept cash tips as a line item (bell hops, maitre d's, caddies), most accept parking meters, and then if you have a real tight ass Controller / CFO there is always taxi fares. The key is just be fair to both yourself and your employer. The waiters and waitresses (primarily Canadian) I've talked to really appreciate cash tips for not only the obvious cash, but also the fact that it muddies the CCRA waters when calculating the overall amount of tipping in the economy.

 

If your tip is being paid out of your own pocket then there is no issue. The next subthread on this might be calculating the tip, before tax or after tax? (not trying to hijack the thread here), more rhetorical remark than anything else.

 

Good thread by the way!

 

Tips, tips, tips .....that reminds me, off to the Fripples thread!

 

G11

[bcguy42 38594]

Maybe this will clarify the HST on Tip added to Credit Card. The example I just read goes as follows:

 

For example, when I go to the hair salon, I pay by VISA. Before I indicate my PIN number when I use my chip card, I am asked whether I wish to add a tip or gratuity and I usually add 15%-20% of the tax-excluded price for the services rendered. The CRA when auditing such service providers/venues, adds the gratuity amounts to the consideration for the services and calculates the GST/HST owing.

So the assessed HST is paid by the owner.

[qwertyaccount 15793]

Great example!

 

I'm no expert, and I am often wrong, but my undetstanding of the excise tax act is that if the tip is correctly accounted for in the vendor's records, then GST/HST isn't aplicable.

 

I'd love to find out more - do you happen to know the CRA's "IT" or bulliten number of the article that your example is from?

 

Taxes make my head hurt - I have to go look at some fripples & boobies now!

[bcguy42 38594]

I saw the information here:

 

http://www.thehstblog.com/2010/07/articles/hst-general/gratuities-as-added-consideration-for-the-supply/

 

I'm looking through Rev Can's stuff trying to find the original information but, like you, tax stuff makes my head hurt.

 

I think I need to see someone to relieve the stiffness. :)

[Guest C*****tte]

I believe in Quebec its slightly different but of course we have a different tax system. Wait staff have a % of their sales declared and taken from their pay cheque to reflect that income. Of course if clients don't tip or tip less then the wait staff is paying tax for income they did not earn. Or they must fill out forms after each shift and do the math themselves. I do not know if this applies to other jobs where they earn tips.

[qwertyaccount 15793]

I believe in Quebec its slightly different but of course we have a different tax system. Wait staff have a % of their sales declared and taken from their pay cheque to reflect that income. Of course if clients don't tip or tip less then the wait staff is paying tax for income they did not earn. Or they must fill out forms after each shift and do the math themselves. I do not know if this applies to other jobs where they earn tips.

 

You are right!

 

I forgot about my diverse audience and deleted the Quebec info. for brevity.

 

Here it is:

 

Declared Tips

Declared tips are the amount of tips that provincial law requires an employee to declare to his or her employer along with their controlled tips. In the province of Quebec, the Taxation Act provides specific guidance for employers in the hospitality sector whose employees carry out their duties in a regulated establishment. Employees working in a regulated establishment in the province of Quebec must declare their direct tips to their employer. For the purposes of the EIA, employees in the province of Quebec working in a regulated establishment will have the amount of their declared tips included in their insurable earnings along with their controlled tips. Currently, Quebec is the only province that has tax legislation requiring employees to declare their tips to their employer.

 

Additional Comments:

I saw the information here:

 

http://www.thehstblog.com/2010/07/articles/hst-general/gratuities-as-added-consideration-for-the-supply/

 

I'm looking through Rev Can's stuff trying to find the original information but, like you, tax stuff makes my head hurt.

 

I think I need to see someone to relieve the stiffness. :)

 

Thank you for the link!

 

She is right when she discusses mandatory gratuities, which effectively form part of the price of the service, and as such, have GST/HST applied to the full amount.

 

It's hard to make a judgment based on the cases she's seen - there are two sides to every story.

 

It could be cases of lazy proprietors or those with inadequate bookkeeping, making it impossible to separate the comingled funds to determine what is the cost of the service and what is the tip, and the business owners are punished for this by having to pay the tax.

 

It's very easy for a business owner to keep the tip separated from the service -- simply pay the server in cash for the tip portion at the end of the shift, as the CRA suggests. The credit card terminals even tally this for them automatically.

 

The devil's always in the details!