Do tips received by restaurant employees count as insurable earnings?
W hen I hear someone say about tax “I’ve seen it all,” I have to resist the urge to say, “No, you haven’t.” After over 40 years working with tax, I still find things that I’ve never seen before. Most of the time it’s nothing really new, it’s just new to me. For example, I have never had to consider whether tips received by servers in a restaurant or other such facility may be insurable earnings. So when I came across the case of Tampopo Garden Ltd. v. The Minister of National Revenue; 2011 TCC 110, it caught my interest.
The appellant is a Japanese restaurant. Servers were required to pay tips of five to six per cent of sales to the appellant and an additional twenty five percent to the bus persons. A former employee, who had worked for the appellant from May 6, 2008 until November 12, 2009, complained that the tips she received had not been included in determining her EI insurable earnings, and therefore, her benefits were lower than what she felt they should be. Her complaint led to a review by the Canada Revenue Agency. The appellant’s record of tips covered January 1 to November 12, 2009.
The CRA used an average to calculate that the former employee received $566 per month in employer controlled tips, totalling $11,461 for the period of time she had been employed. The CRA determined that these were “employer controlled” tips, and are considered insurable employment. The decision was issued under subsection 93(3) of the Employment Insurance Act, based on paragraph 2(1)(a) of the Insurable Earnings and Collection Premiums Regulations which states:
2.(1) For the purposes of the definition “insurable earnings” in subsection 2(1) of the Act and for the purposes of these Regulations, the total amount of earnings that an insured person has from insurable employment is
(a) the total of all amounts, whether wholly or partly pecuniary, received or enjoyed by the insured person that are paid to the person by the person’s employer in respect of that employment…
Tampopo Garden Ltd. appealed the decision to the Tax Court of Canada, arguing that they did not control the tips received by their employees. They argued that the tip sharing formula had
been implemented by the employees themselves and not the appellant. Further, the company had no control over the amounts received by employees in the form of gratuities.
The Minister responded that the appellant did determine the tip sharing formula and the employee was required to turn her tips over to the appellant for distribution. The Minister relied heavily on the court’s decision in Canadian Pacific Ltd. v. Canada, which stated in part “…one must give a broad meaning to the word ‘paid’” and “…a law dealing with social security should be interpreted in a manner consistent with its purpose. We are not concerned with a taxation statute…”
The court also looked at S & F Philip Holdings Ltd. v. Canada. In this case, all tips were placed in a pool for distribution in accordance with certain percentages to all persons involved in food service. The court held that the tips were pecuniary in nature, arose within the context of employment, and therefore were insurable earnings. The appeal was dismissed. The court held that Tampopo Garden Ltd. did control the tips, and they were insurable earnings for EI purposes.
I believe most restaurants have a policy of dividing up gratuities received by servers so that employees not directly involved with customers get a share for their part in the service. It would appear that in situations where the employer takes control of the tips and distributes them to the employees, the tips become insurable earnings. If the employees themselves make the distribution, it seems the tips would not be insurable earnings because the employer has no control over them. But, would that be so if there is a set formula for distribution? It may depend on who set the formula, the employees or the employer.
It came out in the trial that the employee who had lodged the complaint had not reported her tips on her tax returns. Hopefully the CRA has followed up and reassessed her accordingly. It would be interesting to know if the increase she received in EI benefits is greater than the tax, penalties, and interest she will have to pay.
Having found that tips are insurable earnings, the appellant will have to remit premiums on the amounts, not just for this employee, but for all employees. Something tells me the real winner here will be the CRA.