20 February 2008 External T.I. 2007-0232621E5 F - Pourboires versés électroniquement
Principal Issues: [TaxInterpretations translation] 1. Which corporation controls the tips paid to employees?
2. Should electronically paid tips be subject to deductions at source?
Position: 1. Question of fact.
2. All tips that are under the control of the employer, paid by the employer or another person on the employer’s behalf, are subject to deductions at source.
Reasons: 1. Question of fact.
2. 153(1)(a) of the Income Tax Act and the agency's long-standing policy.
2007-023262 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. February 20, 2008
Dear Madam,
Subject: Responsibility for making deductions at source on tips paid electronically to employees
This is in response to your letter of April 23, 2007 asking us to determine whether A Co or B Co controls the tips paid to employees and whether B Co must withhold tax on all tips. According to the facts submitted, A Co operates a XXXXXXXXXX restaurant and ensures that tips are paid to each employee into their bank account by electronic transfer. B Co, which operates XXXXXXXXXX, hires the employees and ensures that each waiter is taxed for the amount of tips received. You added that the two corporations are related to each other. A parent corporation holds, through a subsidiary, XXXXXXXXXX% of the shares of A Co, in addition to owning XXXXXXXXXX% of the shares of B Co directly.
Our Comments
The situation described in your letter is an actual situation involving taxpayers. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
The question of which corporation controls the tips is a question of fact. While it appears that B Co is acting on behalf of or as an agent, nominee or representative of A Co, we are unable to provide a definitive determination in that regard. Paragraph 153(1)(a) of the Income Tax Act (the "Act") requires every person who pays salary, wages or other remuneration, including tips, to withhold the amount determined in the prescribed manner on account of the recipient's tax for the year. Part I of the Income Tax Regulations (the "ITR") sets out the rules governing the withholding of tax at source by an employer from amounts paid to an employee. In addition, the definition of "employer" in subsection 100(1) of the ITR includes any person paying "remuneration". The latter term is also defined in paragraph 100(a.1) of the ITR and includes an employee’s gratuities required under provincial legislation to be declared to the employee’s employer.
In the light of the facts submitted, the responsibility for paying the tips of each employee into their bank account by electronic transfer suggests that the tips were under the control of one of the two corporations. Thus, the employer or the person paying the tips on its behalf has an obligation to make the appropriate deductions at source.
Any amount received as a tip by an individual in a taxation year is included in the individual's income from an office or employment by virtue of subsection 5(1). All tips received in the course of employment, and reported on a T4 slip, must be included on line 101 of the employee's income tax return, while those received in the course of employment but not reported on a T4 slip, must be included on line 104 of the employee's income tax return.
These comments are not advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.