Canada: Pension plan contributions and employment insurance apply to restaurant tips (court decision)

A court decision concerning gratuities paid to employees when computing Canada pension plan contributions and employment insurance premiums.

Pension plan contributions and employment insurance apply to restaurant tips

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.

The case is: Ristorante a Mano v. The Queen (2022 FCA 151)


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

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 Canada Revenue Agency (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.

Read a September 2022 report prepared by the KPMG member firm in Canada


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