Who this is for
Restaurant, cafe, bar, catering and hospitality owners in BC, and their bookkeepers. Also staff who want to understand why their T4 shows what it shows.
The five points
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Controlled tips are the employer’s responsibility. A mandatory service charge. Tips added to credit or debit payments that the business receives and pays out. A tip pool where the employer sets the sharing formula. These are employment income run through payroll: CPP, EI and income tax withheld, employer CPP and EI paid, amounts reported on the T4.
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Direct tips stay with the employee. Cash left on the table. A tip the customer gives straight to the server. A pool the staff run themselves without the employer deciding the shares. No payroll deductions. The employee reports the income on their own return.
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Direct tips are still taxable. Employees must track and report them. An employee who wants CPP coverage on direct tips can elect to contribute using CRA form CPT20.
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The arrangement decides, not the label. Calling something a tip pool does not make it direct if the manager decides who gets what. Write down how tips are collected and distributed, and keep that consistent.
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Keep records either way. For controlled tips: the amounts collected and paid out per employee per pay period. For direct tips: a reasonable system so staff can report accurately. Card tip reports from the terminal are the usual source.
One thing many people do not realize
Adding a mandatory service charge to the bill turns tips into controlled tips. So does pooling card tips and distributing them by a formula the restaurant sets. From that point the restaurant must withhold CPP, EI and income tax on them and pay the employer’s share of CPP and EI. Many owners switch to card-tip pooling for convenience without realizing they have taken on payroll obligations.
What to prepare
- How tips are collected: cash, card, service charge, app
- Who decides the sharing and how
- Terminal and app tip reports for a recent month
- Your current payroll setup
When professional help may make sense
If card tips have been paid out to staff for years without going through payroll, the business may have unremitted CPP and EI. That is better fixed before a payroll review than during one.
How Rex Tax may be able to help
We run payroll for restaurants, set up the tip treatment that matches how you operate, and prepare the T4s. Our guide on delivery app deposits covers the other side of restaurant bookkeeping.
Official sources
This guide is general information, not advice about your situation. It reflects the rules for the 2026 tax year. It has not yet been reviewed by a practitioner. The information was checked against the official sources listed above on the date shown. Rules change. Check the official sources above or ask us. How we prepare these guides.