Direct Tips Benefits for Employees

It depends on which province you're operating in. In the province of Ontario, it is illegal to put tips on Credit Cards as of June 21 2024. This new change came into effect with Ontario’s Bill 149 Working for Workers Four Act which now adds 2 new requirements for tips being processed in Ontario:

1. Employers must transparently share the tip division model with employees to ensure fair distribution. Tips should be fairly shared among employees, and owners and managers should only be included if they are performing similar duties as other tip-earning employees.
2. When tips are being transferred electronically, employees must select which bank account they want the tips deposited into. This has been in reaction to all the complaints received from hospitality industry people who did not want their tips on credit cards. 

The following are permitted methods of payment for tips in Ontario - section 14.1 of Bill 149. There are no options for  Visa / Mastercard Credit Cards or Debit Cards. 

14.1  (1)  An employer shall pay an employee’s tips or other gratuities,

  (a)  by cash;

  (b)  by cheque payable only to the employee;

  (c)  by direct deposit in accordance with subsection (3); or

  (d)  by any other prescribed method of payment.

Simply put, the tipping laws are set up at a Federal and Provincial level. Federally, the Canadian Revenue Agency (CRA) requires proof that the tips were:

1. Voluntarily given from the customer to the employees
2. Employees have been in charge of the division of tips
3. Employees have selected how the tips should be distributed
4. Employees have control of their tips at the end of each shift (e.g. at the end of breakfast shift, lunch shift, and dinner shift)
5. Paperwork that proves employees were aware of this model and that employer has not finalized decisions on tip division and distribution.

Atlas Direct Tips helps you meet all requirements, and we do not put tips on credit cards!

If the Tips are considered Controlled, this means that the tips are seen as a form of pay and as a result both employer and employee must contribute to Canadian Pension Plan (CPP) and Employment Insurance (EI). In 2024, this is about 7.6% for the Employer and 7.6% for the Employee.

For example, $100 of tips will require $7.60 of contribution from the Employer and $7.60 from the Employee.

Direct Tips are exempt from CPP and EI. This means employers do not have to pay any CPP and EI on tip amounts, and employees are also exempt from paying CPP and EI on tips they generate. 

For example, $100 of tips will require $0 of contribution from the Employer and Employee.

In case of an audit where an employer or employee is in a situation where the CRA deems their tips to be Controlled Tips, both the employee and the employer will have to pay CPP and EI (together about 7.6%) on all tips generated in the period under question.

For example, if you've earned $10,000 in tips, you will have to pay 7.6% ($760) plus potential late penalties. 

If the employer is not able to retrieve these funds from the Employee, they are responsible for both Employee and Employer portion = 15.22%.

If you're found to have a Controlled Tip model and have not been deducting CPP and EI premiums, then you're responsible for CPP and EI for up to 3 years. 

Calculate tax liability of a Controlled Tip model

If you're found to have a Controlled Tip model you'll have to pay CPP and EI on tip amounts you've earned. 

Calculate the Employee Liability if Tips are Controlled

Putting tips on payroll means that you have Controlled Tips. This means that you're paying CPP and EI on tips, and also are deducting CPP and EI from employee tips. 

For every $1M in sales, you're paying over $13K per year in CPP and EI contributions. 

With a Direct Tip model you'll be exempt from this. 

Calculate savings for moving Tips from Payroll to Direct Tips.