Reference to the CFA’s Advocacy Update from September 29, 2022

The Federal Court of Appeal (FCA) has ruled that a Halifax restaurant must include a portion of the electronic gratuities intended for wait staff as “pensionable salary and wages” when calculating its liabilities under the Canada Pension Plan.

The recent case involved a popular, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on part of its servers’ tips. Customers sometimes leave a tip in cash, which the servers are free to keep without advising their employer. Most customers, however, choose to pay their restaurant bills using a debit, credit or gift card, and include a tip in their electronic payment. The restaurant, in turn, shares these tips with its servers in a formalized, daily procedure.

The restaurant took the general position that due-backs (payments to the servers based on the tips received through the POS system receipts) received by servers were not considered to be “pensionable salary and wages” for purposes of CPP rules, nor “insurable earnings” for purposes of the EI Act. As a result, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it did not consider any portion of the electronic tips.

The CRA took a different view and assessed the restaurant on the basis that a portion of the servers’ electronic tips for 2015, 2016 and 2017 should have been considered. The taxpayer took the matter to Tax Court in 2020 and lost. It then appealed the decision to the Federal Court of Appeal (FCA), which heard the case earlier this year.

The key question the court had to decide was whether the due-backs were properly considered to be amounts paid by an employer to employees “in respect of” their employment. The restaurant argued the due-backs are not paid in respect of a server’s employment and are not insurable earnings because a server’s due-back bears “little or no relation to the server’s net tip. It is simply the difference between cash payments for meals and electronic tips owing.”

The three-judge appellate panel disagreed, citing a seminal 1983 decision of the Supreme Court of Canada, which stated that the words “in respect of” have “wide scope and import such meanings as ‘in

relation to,’ ‘with reference to’ and ‘in connection with.’ In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.

The FCA, in a written decision released last month, concurred with the lower court’s decision, and concluded the due-backs were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP and “insurable earnings” for purposes of the EI Act.

Click here to read the Court decision.