Our guide to creating a compliant tip system
First, let's start off by saying this is not legal or tax advice, but from over 10 years in the business, we have a few best practices. When it comes to implementing a compliant tip system, hospitality operators are often left in the dark. The liability risk for operators lies in the often confusing distinction between what the Canada Revenue Agency (CRA) deems as “controlled tips” vs “direct tips.” “Controlled tips”, according to the CRA, refers to “tips that an employer controls or possesses and then must pay to the employee.” This control means that gratuities are subject to source deductions such as EI and CPP, for which the operator (employer) may be liable.
To avoid liability, it’s recommended that hospitality operators implement a “Direct tip” system, which CRA defines as “Tips that are paid directly by the customer to the employee. The employer has no control/possession over the tip amount or its distribution. The employer is merely a conduit for the tip from the customer to the employee.” Additionally, CRA does consider electronic gratuities briefly held by the employer and paid out within a prescribed timeframe cited as “at the end of each shift” as meeting their criteria for a direct tip.
If your head is slightly spinning, we understand. Fortunately, we’ve been in the business of instant gratuity payouts long enough to help you navigate the large interpretation gap between controlled and direct tips. When it comes to keeping your tip system efficient, practical and compliant there are 5 best practices to follow.
Disclaimer: this guide should not be considered legal or tax advice. For more resources, please contact us at email@example.com
5 best practices to ensure tip compliance
- Use a pre-funded settlement wallet
- Enable a pre-funded settlement wallet that is held in trust and eliminates employer possession
- The employer is not physically touching money that is paid out for tip disbursement, only appointed Tip Employee exercises Payouts
- Funds flow into the trust account via an automated pre-authorized debit in advance of revenue generation.
- To prohibit the employer from controlling, a settlement trust account is held with the issuing bank
- Establish a tip committee and a collective bargaining agreement (CBA)
- Employees of the restaurant appoint 2-3 trusted, senior manager/employees to define and lead the tip committee and tip sharing program
- Tip committee is in charge of the rules and Collective Bargaining Agreement (CBA) for breakdown of tip outs and governance rules (e.g. how often they will meet)
- XTM Inc.'s Today platform enables the appointment of employees as 'tip out managers' within the portal to facilitate the payouts for the entire team
- A Collective Bargaining Agreement is established, signed and reviewed annually
- Tip Committees encourage staff engagement and build trust, which ultimately helps to improve culture and retention.
To get access to the rest of the tips, access the best practices here.
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Relevant Today Magazine articles:
Whitepaper: Establishing a Tip Committee
Ensure gratuity payout compliance