CRA wins tax case coping with restaurant servers’ digital suggestions

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For those who’re an worker who will get an everyday paycheque, you’ll be very accustomed to 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 not too long ago discovered. However earlier than delving into particulars of the case, let’s assessment the essential guidelines governing CPP and EI deductions.

Underneath the CPP, the employer’s contribution is decided by making use of a contribution fee 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 yr 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 could pay is $953. Insurable earnings are outlined as “the entire 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.”

Underneath 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 current case concerned a well-liked, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on a part of its servers’ suggestions. Clients typically depart 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 reward card, and embrace a tip of their digital cost. The restaurant, in flip, shares the following tips 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 exhibits every server’s meals gross sales, beverage gross sales, money obtained from patrons who paid in money, digital funds obtained and digital suggestions. This information is used to organize a “money out sheet.”

On that sheet, the server information their digital suggestions, the money obtained, a kitchen workers “tip-out” (equal to at least one per cent of meals gross sales), and an quantity equal to 2 per cent of the digital suggestions (the processing cost). The restaurant retains the tip-out to cross alongside to its kitchen workers and the processing cost to cowl its credit-card charges. The web quantity is the server’s “internet 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 internet digital tip to the server, sometimes the subsequent enterprise day, by way of direct financial institution deposit. This is called the “due-back.”

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In some circumstances, a server’s due-back is lower than the server’s internet 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 internet 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 wherein they place money to “tip out” the onsite restaurant supervisor and assistant supervisor — two per cent — and the help workers (bussers, hosts/hostesses and bartenders) at one per cent per help workers 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 workers. The gross sales abstract and money out sheet had been put aside and picked up the subsequent morning by somebody from accounting to facilitate cost of the servers’ due-backs.

The restaurant took the final 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. Consequently, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it didn’t contemplate any portion of the digital suggestions.

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For sure, the CRA took a distinct view and assessed the restaurant on the idea {that a} portion of the servers’ digital suggestions 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 Enchantment (FCA), which heard the case earlier this yr.

The important thing query the court docket needed to resolve was whether or not the due-backs had been correctly thought of to be quantities paid by an employer to workers “in respect of” their employment. The restaurant argued the due-backs will not be paid in respect of a server’s employment and will not be insurable earnings as a result of a server’s due-back bears “little or no relation to the server’s internet tip. It’s merely the distinction between money funds for meals and digital suggestions 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,’ ‘close to’ and ‘in reference to.’ In different phrases, “however for” their employment as servers by the restaurant, the servers wouldn’t obtain any suggestions paid to them within the type of due-backs.

The FCA, in a written resolution launched final month, concurred with the decrease court docket’s resolution, and concluded the due-backs had 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 Non-public Wealth in Toronto. Jamie.Golombek@cibc.com

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