Tips, Tip Pools and Payroll: What an Ottawa Restaurant Actually Owes

A restaurant in the ByWard Market, on Elgin, or along Preston runs two payroll systems whether the owner realises it or not. There is the one that pays wages, and there is the one that moves tips around. The second is where the compliance risk sits, because a single operational choice, how tips reach the staff, decides whether CPP contributions and EI premiums are owed on them.

Get that wrong in either direction and you either under-remit, which the CRA finds on a payroll examination, or you over-remit, which quietly costs the restaurant its own share on money that was never remuneration.

The distinction that decides everything

The CRA splits tips into two categories in its CPP/EI guidance on tips and gratuities. Both are taxable income to the employee. Only one is pensionable and insurable.

The test is control and possession, not generosity. Per the CRA’s page for employers on tips received by employees, controlled tips include a mandatory service charge added to a bill, a percentage the house adds to cover tips, tips allocated using a tip-sharing formula the employer determines, tips run through the business as income and redistributed as pay, and cash tips deposited into the employer’s bank account and later paid out.

Direct tips include cash left on a table, a tip handed straight to a bellhop or a valet, pooling that the employees rather than the employer decide, and, importantly, a tip added to a credit or debit card payment where the employer returns the full amount in cash to the employee at the end of the shift.

Where an Ottawa restaurant usually trips

Three fact patterns account for most of the errors I see.

The card tip paid out on the next pay run. Card tips returned in cash at shift end are direct tips. The same tips held and paid through payroll are running through the employer’s account, which points at controlled. The operational decision was made for convenience and it changed the payroll answer.

The tip-out formula written by management. A house rule requiring servers to contribute a percentage of sales to a pool for bussers and kitchen is a tip-sharing formula determined by the employer. A pool the staff designed and police themselves is not. The paperwork behind the pool matters, because that is what an auditor reads.

Mandatory service charges on banquets and large parties. An automatic gratuity added by the employer is a controlled tip in the CRA’s own examples. A private event line billed as a service charge and then distributed to staff is squarely in the controlled column.

An employee can receive both kinds in the same shift. Where that happens, only the controlled portion enters pensionable and insurable earnings.

How does the tip get from the customer to the employee?
│
├── Customer hands or leaves it to the employee, and the
│   employee keeps or shares it on their own terms
│        → Direct tip. No CPP or EI at source. Not on the T4.
│
├── Card tip returned in full, in cash, at the end of shift
│        → Direct tip.
│
├── Employer adds a mandatory service charge or a percentage
│   to the bill
│        → Controlled tip. Deduct CPP and EI. Report on the T4.
│
├── Employer sets the tip-sharing formula and redistributes
│        → Controlled tip.
│
└── Tips banked by the business and paid out later
         → Controlled tip.

The employee side, and Form CPT20

Direct tips are still income. The employee reports them at line 10400 because they are not on any slip.

There is a consequence worth explaining to career servers: direct tips build no CPP entitlement. An employee can choose to contribute on them by filing Form CPT20 with their return. For someone whose declared income is mostly tips, that is the difference between a CPP retirement benefit based on their real earnings and one based on base wages alone. It is a personal decision and the employer is not part of it, but a manager who explains it is doing something useful.

Note that Quebec runs a declared tips regime that has no Ontario equivalent. Nothing in Quebec’s rules applies to a restaurant on this side of the river, and this is one of the places where an operator with a Gatineau location genuinely has two different systems to run.

The ESA layer, which is separate and also binding

Payroll compliance is not the whole obligation. Ontario’s rules on tips and other gratuities sit on top of the CRA rules and answer different questions.

Tips are not wages. They are excluded when calculating minimum wage, overtime, vacation pay, public holiday pay, termination pay and severance pay. An employer cannot credit tips against the minimum wage obligation.

You cannot deduct from tips for losses. Spillage, breakage, walkouts and damage cannot come out of an employee’s tips. Only three deductions are allowed: statutory ones such as income tax, CPP and EI, court-ordered amounts, and redistribution through a tip pool.

Card processing fees are a narrow exception. The employer may exclude a portion of a credit card processing fee from the tip, calculated as the greater of the tip multiplied by the card company’s processing percentage and the tip multiplied by 1.5%. That exception applies to credit cards only. Debit processing fees and any other fee cannot be deducted.

Payment method and the sharing policy. Since 21 June 2024, tips must be paid by cash, cheque or direct deposit to an account the employee selects, and an employer with a policy allowing the employer, a director or a shareholder to share in a tip pool must post that policy in the workplace.

An employee cannot waive any of this, even in writing.

Records, and the two file drawers

The two regimes want different documents, and you need both.

For the CRA, the payroll record has to show which tips were controlled, how they were calculated, and how they flowed to the T4. The slip mechanics are in RC4120 and in the T4 and T5 filing guide.

For the ESA, Ontario’s record keeping rules apply, and a posted tip-sharing policy has to be retained after it stops being in effect.

While you are in the payroll file, two other Ontario obligations attach to a growing restaurant and are easy to miss: WSIB coverage, covered in workers’ compensation in Ontario, and the Employer Health Tax once payroll clears the exemption, covered in the Ontario Employer Health Tax. Both are outside anything the CRA will ever mention to you.

All three obligations move with payroll every month, which is an argument for keeping them inside a monthly close rather than rediscovering them each February.

If you run a restaurant or a bar in the region and you are not certain whether your tip-outs are controlled or direct, send me your tip pool rules, how card tips are paid out, and a recent T4 summary. I will tell you which category you are actually in, whether the source deductions match it, and what needs to change before the next payroll examination. Get in touch.