In Ristorante a Mano v. The Queen (2022 FCA 151), the Federal Court of Appeal (FCA) found that a corporate taxpayer operating a restaurant must include the gratuities it paid to its employees when computing its Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums for those employees. Specifically, the FCA dismissed the taxpayer’s appeal and confirmed that the tips, which the taxpayer received from customers’ electronic payments and subsequently paid out to its servers, constituted CPP contributory salary and wages and EI insurable earnings because these amounts were paid to employees in respect of their employment.

This case is a good reminder that it is important to follow the CRA’s position on the treatment of gratuities, including how tips are controlled and allocated.

Legislative background

Employers and employees are both required to make CPP contributions and EI premiums based on the employee’s earnings from the employer, and subject to a maximum annual amount per employee, under each regime.

The employer’s CPP contribution is determined by applying a contribution rate to “contributory salary and wages” paid to the employee, less certain deductions, under section 9(1) of the CPP. Contributory salary and wages are defined as income from pensionable employment (as computed under the Act) under section 12(1) of the CPP.

The employer’s EI premium is a multiple of the employee’s premium, which is based on the employee’s “insurable earnings”, under section 67 and section 68 of the Employment Insurance Act (EIA). Insurable earnings are defined as the total amounts that an employer paid to the insured person (i.e., the employee) in respect of their employment, under section 2(1) of the Insurable Earnings and Collection of Premiums Regulations.

The CRA has stated that tips that employees receive as income in respect of employment may be pensionable earnings under the CPP and insurable earnings under the EIA where the tips are considered to have been paid by the employer (i.e., controlled tips). The CRA considers a controlled tip to be a gratuity amount that an employer possesses and then pays to the employee, such as tips that are allocated to employees using a tip-sharing formula determined by the employer. However, if a customer pays a tip directly to the employee, including where the employer is a conduit for the tip, the amount is not subject to CPP contributions or EI premiums.


The facts have been simplified for the purposes of this article.

A corporation (Opco) operates a restaurant and employs wait staff to provide table service to its customers. Opco transferred the servers “due-backs” (i.e., a portion of the tips that customers paid electronically with debit, credit or gift cards) after their shifts based on an established procedure. Specifically, Opco servers determined the due-backs they were owed at the end of their shift by calculating the total amount of tips they received electronically minus cash payments and other deductions. Opco did not include the due-backs as contributory salary and wages or insurable earnings when computing its liability for CPP or EI purposes.

The CRA assessed Opco for 2015 to 2017 on the basis that Opco should have included the due-backs in computing CPP contributions and EI premiums because Opco paid the amounts to its servers in respect of their employment. Opco appealed the assessments to the Tax Court of Canada (TCC), which dismissed the appeal and upheld the CRA’s assessments.

Opco appealed the TCC decision to the FCA.

Taxpayer argument

Opco argued that the due-backs were not contributory salary and wages or insurable earnings for CPP and EI purposes because the due-backs were not paid to the servers in respect of their employment. Opco explained that the due-backs represented the difference between cash payments received and the amount of electronic tips owed to the servers. Opco also argued it converted those electronic tips into cash for the servers and did not distribute the tips among the servers.

In addition, Opco reasoned that the due-backs depended on whether customers paid their bills with cash or electronically, and not by the servers’ total hours worked or sales.


At issue is whether Opco had to include the due-backs as contributory salary and wages and insurable earnings for CPP and EI purposes, respectively. Specifically, the FCA considered whether Opco paid the due-backs to the servers in respect of their employment.

FCA decision

The FCA agreed with the TCC that Opco had to include the due-backs when computing its CPP contributions and EI premiums for the servers because Opco paid those amounts to the servers in respect of their employment. Specifically, the FCA reasoned that Opco had to include the due-backs as contributory salary and wages for CPP and insurable earnings for EI because Opco’s servers would not have received those amounts if they were not employed by Opco.

In its decision, the FCA relied on a broad interpretation of the word “paid” in both definitions of “contributory salary and wages” and “insurable earnings” and agreed with the TCC that Opco had possession of the electronic tips before it transferred the due-backs to the servers. The FCA also reasoned that an employee’s remuneration could include tips paid to the employer for distribution to its employees, as established by the Supreme Court of Canada in Canadian Pacific Ltd. v. Canada ([1986] 1 S.C.R. 678).

Further, the FCA stated that other factors are irrelevant in this case, including how the tips were paid (e.g., cash or electronic) and Opco’s payment arrangements with its servers (e.g., when Opco paid the due-backs to employees and keeping a portion of the tips for a processing charge). The FCA noted that the EI and CPP regimes do not require the amounts to be related to hours worked or sales to qualify as amounts in respect of employment, dismissing Opco’s arguments. In addition, the FCA commented that this case differs from Lake City Casinos Limited v. The Queen (2007 FCA 100) because in Lake City Casinos, the employer never had possession of the tips, so the tips were not “paid” to the employees.

NOTE: Any discussion or description of the facts of the case or the positions argued by the parties is based solely on publicly available information. For greater certainty, no confidential taxpayer information is disclosed.

For more information, contact your KPMG adviser.

Information is current to September 19, 2022. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500