--- title: "How Payroll Works for Tipped Employees in Canada (CPP, EI, T4)" url: https://www.everstonecpa.com/blog/restaurant-tip-reporting-payroll-canada description: "Restaurant tip reporting for payroll: controlled tips attract CPP and EI, direct tips do not; a tip pool can shift them. See what goes on the T4." type: guide updated: 2026-10-08 summary: "Canadian employers must deduct CPP and EI from controlled tips, which the employer possesses and pays out, but not from direct tips paid by the customer to the employee. Both are taxable income to the employee. Where a worker receives both, only the controlled portion is pensionable and insurable." faq_count: 7 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Restaurant tip reporting Hospitality payroll # Restaurant tip reporting and payroll: controlled versus direct tips By EverStone CPA · Reviewed August 2026 · 10 min read Tips are the part of restaurant payroll that quietly creates the most exposure. Two servers on the same shift can take home similar money and yet, depending entirely on how the house handles the till, one amount is subject to CPP and EI at source and the other is not. Owners often set the policy for operational reasons — fairness, tip-outs to the kitchen, card versus cash — without realizing they have simultaneously set the payroll treatment. This guide explains the distinction the CRA actually draws and what it means for your remittances and slips. Related: [Tips and payroll for salons and spas](https://www.everstonecpa.com/accountant-for-hair-salons-spas-bc). Related: [Payroll figures 2026: CPP and EI max $4,230.45 and $1,123.07](https://www.everstonecpa.com/tax-update/payroll-figures-2026). **Quick answer:** Canadian employers must deduct CPP and EI from *controlled* tips, which the employer possesses and pays out, but not from *direct* tips paid by the customer to the employee. Both are taxable income to the employee. Where a worker receives both, only the controlled portion is pensionable and insurable. Controlled and direct tips the wrong way round is a payroll problem the CRA finds at the T4 stage. [Ask about your tip-out](https://www.everstonecpa.com/quick-question). Both are taxable. Only one is pensionable and insurable. **On this page**[The distinction that decides everything](#s-the-distinction-that-decides-everything)[What that means for CPP and EI](#s-what-that-means-for-cpp-and-ei)[Income tax is a separate question](#s-income-tax-is-a-separate-question)[Quebec adds a third category](#s-quebec-adds-a-third-category)[Tip pools, tip-outs and house policy](#s-tip-pools-tip-outs-and-house-policy)[Payroll accounts, remittances and slips](#s-payroll-accounts-remittances-and-slips)[Getting a CPP/EI ruling if it is genuinely unclear](#s-getting-a-cpp-ei-ruling-if-it-is-genuine)[Where restaurants get caught](#s-where-restaurants-get-caught)[Getting it right](#s-getting-it-right)[Frequently asked questions](#s-frequently-asked-questions)[Running payroll for a restaurant?](#s-running-payroll-for-a-restaurant) ## The distinction that decides everything The CRA divides tips into two categories nationally, plus a third that applies only in Quebec. **Controlled tips** are tips that an employer controls or possesses and then must pay to the employee. Because they pass through the employer’s hands, the employer is considered to have paid those amounts to the employee. They are part of the employee’s total remuneration. **Direct tips** are paid directly by the customer to the employee. The employer has no control over the tip amount or its distribution and is merely a conduit for the tip from the customer to the employee. The test is *not* cash versus card, or percentage versus round-up. It is control and possession. A card tip banked by the restaurant and paid through payroll or the till float has been controlled by the employer; a tip handed to a server, or passed through without the house running the distribution, has not. ## What that means for CPP and EI Controlled tips are part of total remuneration and deemed paid by the employer, so **CPP contributions and EI premiums must be deducted at source** where the employment is pensionable or insurable, and the employer’s share follows. Related: [2027 EI premium rate](https://www.everstonecpa.com/tax-update/ei-premium-rate-2027). Direct tips are **not** subject to CPP contributions or EI premiums. An employee can elect, on their own return using **Form CPT20**, to contribute to CPP on tips from pensionable employment not subject to CPP at source. Payroll is not involved. When an employee gets both, as is normal in a busy room, only controlled tips are pensionable or insurable earnings. Payroll therefore needs two tip figures per employee; a single “tips” field forces a guess, usually the expensive one. **Running a restaurant payroll with tips?** We set tips up correctly on payroll, controlled or direct, and run it with remittances and T4s, from $325 a month. See [our restaurant accounting](https://www.everstonecpa.com/restaurant-hospitality-accounting), or [get a payroll quote](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form). [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form) ## Income tax is a separate question These two ideas are often conflated. For the Income Tax Act, *all* tips and gratuities are employment income, controlled and direct alike. The controlled-versus-direct distinction decides whether amounts are pensionable earnings under the CPP, insurable earnings under the Employment Insurance Act, or both. It does not decide taxability. So direct tips are fully taxable even with no CPP or EI deducted, and the server must report them. Being asked to “leave tips off” is being asked to help under-report income; do not. ## Quebec adds a third category In Quebec, **declared tips** are tips provincial law requires employees to declare to their employer with controlled tips; staff in regulated establishments must declare direct tips. For Employment Insurance, declared tips are insurable along with controlled tips. Operating in several provinces means a real configuration difference. ## Tip pools, tip-outs and house policy Most restaurants pool tips or tip out to kitchen and support staff. Once the house sets the formula, holds the money and distributes it, you are much closer to controlled tips, because control and possession are exactly what the CRA looks at. Pooling is legitimate and widespread; just know which category your arrangement falls into, document it and configure payroll to match. Provincial employment standards on tips and pooling sit alongside the federal payroll rules, frame things differently, and must be met separately. ## Payroll accounts, remittances and slips It all lands in the payroll program account. Controlled tips raise pensionable and insurable earnings, so employee deductions, the employer’s share and the remittance rise, sometimes changing its frequency. Adding tips that sat outside payroll can change your remitter category; see [payroll remittances and the RP account](https://www.everstonecpa.com/blog/payroll-remittances-canada-rp-account). At year end, the amounts flow onto the employee’s T4. Getting the split right during the year is what makes the slip correct in February; it is very difficult to reconstruct twelve months of tip categorization from memory. The [slip filing deadlines guide](https://www.everstonecpa.com/blog/t4-t4a-t5-slip-filing-deadlines-canada) sets out the timing. Keep the supporting records — tip sheets, pool distributions, till reports — for **six years** from the end of the last tax year they relate to. ## Getting a CPP/EI ruling if it is genuinely unclear Some arrangements fall between the categories, such as a pooled fund with partial employer administration, or a payment platform holding tips before staff get them. You need not guess: the CRA issues CPP/EI rulings on whether specific earnings are pensionable, insurable or both, a far better basis than an untested internal assumption. A ruling also forces you to describe precisely who sets the split, holds the money and decides when it is paid, which often settles the question first. If the answer is unfavourable, learning it in advance beats an assessment for years of unremitted contributions and premiums on both sides. ## Where restaurants get caught The usual pattern: card tips are banked, paid on the pay cheque, and called direct tips because “the customer left them.” That is controlled-tip behaviour, and a payroll review assesses unremitted CPP and EI, both halves, plus penalties and interest, for every affected employee and open year. In hospitality it is a predictable issue, not an exotic one. The second pattern is inconsistency: cash tips treated one way, card tips another, with no written policy explaining why. Consistency and documentation are what make a position defensible. Tips are not the only place restaurant payroll drifts. With shift-based staff, statutory holiday pay is calculated as an average day’s pay over the 30 calendar days before the holiday, and working the day earns a premium on top of it. See [statutory holiday pay for employers](https://www.everstonecpa.com/blog/statutory-holiday-pay-canada-employers) for the qualifying test and the formula. ## Getting it right The early fix is cheap: document how tips are collected and shared, categorize each stream, set separate controlled and direct payroll fields and keep the records. With properly run [payroll](https://www.everstonecpa.com/payroll-services-canada), remittances, T4s and any CPP/EI review tell one story. That is how to manage tip reporting for restaurant payroll: a written policy, a category for each tip stream, separate payroll fields and kept records. Sources - [Canada Revenue Agency — CPP/EI Explained: Tips and Gratuities](https://www.canada.ca/en/revenue-agency/services/tax/canada-pension-plan-cpp-employment-insurance-ei-rulings/cpp-ei-explained/tips-gratuities.html) - [Canada Revenue Agency — Tips received by employees](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/calculating-deductions/determining-tax-treatment/tips.html) - [Canada Revenue Agency — How long to keep your records](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/keeping-records/where-keep-your-records-long-request-permission-destroy-them-early.html) This article is general information for Canadian restaurant and hospitality employers and is current as of July 2026. Employment standards around tips and tip pooling are provincial and sit alongside the federal rules described here — confirm both for your province. It is not tax advice; please [speak with a CPA](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form) before acting on anything here. About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form) ### Keep reading [Payroll services →](https://www.everstonecpa.com/payroll-services-canada) [Payroll remittances and the RP account →](https://www.everstonecpa.com/blog/payroll-remittances-canada-rp-account) [T4 and slip filing deadlines →](https://www.everstonecpa.com/blog/t4-t4a-t5-slip-filing-deadlines-canada) Common questions ## Frequently asked questions about restaurant tip reporting **What is the difference between controlled tips and direct tips?** Controlled tips are held or controlled by the employer and then paid to the employee. Direct tips go straight from customer to employee, with the employer at most a conduit. What matters is who controls the money before the server gets it, not how the customer paid. **Do I have to deduct CPP and EI from tips?** From controlled tips, yes. They are part of total remuneration and the employer is considered to have paid them, so CPP and EI are deducted at source where the employee is in pensionable or insurable employment. Direct tips are not subject to CPP or EI. **Are direct tips still taxable income?** Yes. All tips and gratuities are employment income for income tax, controlled or direct. The distinction decides whether amounts are pensionable or insurable, not whether they are taxable. Employees report direct tips on their own return. **What if an employee receives both controlled and direct tips?** Common, and the rule is clean: only controlled tips count as pensionable or insurable earnings. Direct tips stay outside CPP and EI, which is why payroll needs separate fields for the two. **Can an employee contribute to CPP on direct tips voluntarily?** Yes. An employee can choose to contribute to CPP on tips earned in pensionable employment that were not subject to CPP at source, by filing Form CPT20. It is an employee election, not a payroll item. **Do the rules differ in Quebec?** Quebec adds a third category: declared tips, which provincial law requires employees to declare to their employer with controlled tips, including direct tips in regulated establishments. For Employment Insurance they are insurable along with controlled tips. **How does payroll work for tipped employees?** It depends on control. Controlled tips, held and paid out by the employer, go through payroll with CPP and EI deducted and onto the T4. Direct tips are still taxable to the employee, but no CPP or EI is deducted. With both, only the controlled part is pensionable and insurable. ## Running payroll for a restaurant? Tell us your staff count and how tips are pooled. A CPA replies by email within one business day with the right treatment and a fixed monthly fee. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask free through [the quick-question form](https://www.everstonecpa.com/quick-question); a CPA replies by email within one business day. For a proper look, a 45-minute **Advice Call** with a CPA is $225 plus GST, booked by email with a secure payment link and credited to your first invoice if you become a client within 60 days. Want us to take it on? [Send an enquiry](https://www.everstonecpa.com/book-online?service=payroll#enquiry-form). 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Plus he saved me a bundle!” Corrin Skalbeck · Google Local Guide **Run your own numbers with the free calculators:** [compare salary against dividends](https://www.everstonecpa.com/salary-vs-dividends-calculator) · [check when your T2 is due](https://www.everstonecpa.com/t2-deadline-calculator) · [check whether instalments apply to you](https://www.everstonecpa.com/tax-instalment-calculator) [← Rental property: current expense or capital expense?](https://www.everstonecpa.com/blog/rental-property-current-vs-capital-expense) [The record of employment — when, how and by when →](https://www.everstonecpa.com/blog/roe-record-of-employment-canada) More on this subject: [the payroll hub](https://www.everstonecpa.com/payroll-hub). --- Source: https://www.everstonecpa.com/blog/restaurant-tip-reporting-payroll-canada Prices: https://www.everstonecpa.com/pricing · Contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online