Restaurant payroll in Canada: which tips you withhold on, and which you don't

Summary

If you run an incorporated restaurant, your corporation is the employer, and handing out tips is by itself enough to require a payroll account with the Canada Revenue Agency (the CRA), the federal tax collector. A payroll account is the registration the CRA uses to track what you take off your staff’s pay and send in. What comes off a pay cheque depends on where the tip money sat before it reached the server.

1. Tips the restaurant controls or holds before paying them out are controlled tips, which the CRA treats as wages the company paid. Card tips landing in the company’s bank account count, and so does a service charge you add to the bill. Take income tax, Canada Pension Plan contributions (CPP) and Employment Insurance premiums (EI) off them, then pay the company’s own CPP and EI on top. There’s no employer share of income tax. The money goes on the employee’s T4, the annual slip showing pay and deductions.
2. Tips the customer hands the employee, with the restaurant having no say in the amount or the split, are direct tips. Nothing comes off them and they don’t go on the T4, though the employee still declares the money on their own tax return. We’d treat every tip that passes through the corporation’s bank account as controlled and run it through payroll. At 2026 rates that costs the company about 8.2 cents of CPP and EI on each tip dollar, before your province’s own payroll charges, which this page doesn’t price. What changes the recommendation is a genuine cash-out: at the end of each shift you count the card tips and hand them back in actual cash, under a sharing arrangement the staff themselves wrote. Our cost of an employee calculator prices a server’s full year, from the hourly wage through vacation pay to the workers’ compensation premium.

Opening a payroll account, and what comes off a cheque

A corporation that pays anyone needs a payroll program account, which is your nine-digit business number with the letters RP and a four-digit extension attached, e.g. 123456789RP0001. The business number is the one the CRA gave your corporation when it registered, and the one on your GST/HST mail. Paying salaries triggers the account. So do bonuses, vacation pay, benefits and, listed separately in the CRA’s own list of payments that require it, paying out tips.¹

CPP for 2026 runs at 5.95% from the employee and 5.95% again from the company, charged on the slice of each employee’s annual pay between a $3,500 exemption and a $74,600 ceiling. At most that’s $4,230.45 from one person in the year, and the same again from you. Salary above the ceiling picks up a second band called CPP2, which our guide to paying yourself salary or dividends covers instead.² EI for 2026 costs the employee 1.63% of the pay EI applies to, called insurable earnings, which in a restaurant is normally wages plus any controlled tips. The ceiling is $68,900 a year, and the company pays 1.4 times whatever it withheld.³

Two rules about who CPP and EI cover catch owner-managed restaurants. An owner who controls more than 40% of the voting shares is in what the Employment Insurance Act calls excluded employment, so EI doesn’t apply to their salary at all.⁴ CPP starts with the first pay dated in the month after an employee turns 18, and stops after the last pay dated in the month they turn 70. EI has no age limit at either end.⁵

Controlled tips and direct tips

Outside Quebec the CRA sorts tips into two kinds, and which one you have turns on who controlled the money and who held it, not on your tip policy’s wording.⁶ Controlled tips are the ones the restaurant controls or holds before paying them out. The CRA’s examples include a service charge the restaurant adds to the bill⁷ and tips shared out under a formula the employer set. Cash tips banked into the company’s account and mixed with its own money are controlled too. Withhold income tax, CPP and EI on all of those, and pay the company’s share. They go in box 14 of the T4 (total employment income), box 24 (the part of the pay EI was charged on) and box 26 (the part CPP was charged on).

Direct tips are paid by the customer to the employee, with the employer having no control over the amount or the split. The CRA’s examples are money left on the table, a pool the employees rather than the employer designed, and a card tip returned in full in cash at the end of the shift. You withhold nothing and report nothing. The employee declares the money on line 10400 of their own return. Where one person gets both kinds, only the controlled part counts for CPP and EI. Whoever writes the tip-sharing formula therefore decides the treatment of the whole pool. An owner who steps in once, even to protect the kitchen’s share, makes every tip shared out under that formula a controlled tip for as long as it’s in use.

In our view the cautious treatment is worth its price for most owners, because the two ways of being wrong don’t cost the same. Running a tip dollar through payroll costs the company about 8.2 cents at 2026 rates (5.95% CPP plus 1.4 times the 1.63% EI premium) and the employee about 7.6 cents.⁸ If you treat the tips as direct and the CRA later disagrees, the company owes its own CPP and EI, plus the CPP and EI it never took off the employee. On top of that sits a penalty of 10% of what should have been deducted, and interest at a rate the CRA resets each quarter and compounds daily.⁹ Little of that can be clawed back from the employee’s later pay, and none of it from anyone who has left. Our answer changes for a restaurant running a genuine cash-out, because those tips are direct: you withhold nothing and nothing goes on the T4. What it costs is holding enough cash on the premises every night, and a cashless restaurant can’t do it at all.

Remittance dates, and the letter that follows

How often you send the money in is set by the CRA, not by how often you pay staff. While your payroll account has been open less than 12 months you’re put on quarterly dates automatically, as long as your total remittance in every single month stays under $1,000 and your payroll and GST/HST accounts have a clean record (i.e. no late filings, no late payments and nothing overdue). The first month you reach $1,000 you become a monthly remitter, from the start of the next quarter, paying by the 15th of the month after the month you paid staff. Once the account is a year old the CRA works from your average monthly withholding two calendar years ago, counting everything you send in: income tax, CPP and EI off staff, plus the company’s own CPP and EI. Quarterly then stays open only under $3,000 a month.¹⁰¹¹ We’d pay monthly even where quarterly is on offer, because four large payments are harder to have the cash for than twelve small ones. What that costs you is twelve small chores a year rather than four. Remitting late ordinarily costs 3% of the amount above $500 at one to three days, rising to 10% past seven days.¹²

Every year the CRA rechecks the CPP and EI on every employer’s T4s against what the pay on those slips should have produced. The letter it sends where the two don’t match is a PIER, short for pensionable and insurable earnings review, and it asks for a reply within 30 calendar days of its date. If you neither reply nor pay in full, the CRA issues a bill for its own figure at day 45 and files corrected T4s for you at day 65, so don’t send amended T4s of your own.¹³ The errors it names as common are ordinary ones. Box 28 of the T4, which says no CPP or EI was required, gets ticked when it shouldn’t be. An employee turns 18 or 70 and the deductions don’t change. Or an extra pay run outside the normal schedule hands out the pay-period slice of the $3,500 CPP exemption a second time. T4s are due the last day of February following the calendar year, and more than five of them have to be filed online rather than on paper.¹⁴

The CRA isn’t the only bill your payroll generates. Every province has a workers’ compensation board that charges premiums on the same payroll, at a rate it sets by industry (e.g. one rate for food services, another for construction), and it won’t hear about your hiring from the CRA. Some provinces also tax employers on total payroll above a threshold. Neither is priced here, so check both against your province’s rules before you budget a hire.

How often this changes

The CPP and EI rates and ceilings are reset every January, so a payroll product still carrying last year’s numbers is wrong from the first pay run. The CRA reviews every payroll account each November to set remitting frequencies, working from figures two calendar years old, so a change to yours arrives on a lag. Re-run the tip question whenever you stop handing cash back at the end of a shift, whenever management sets or adjusts the tip-sharing formula, or when a service charge starts appearing on the bill.

Closing thoughts

Payroll is one of the few parts of a restaurant where a decision made once at setup runs untouched for years. Most payroll software offers two ways to enter tips, one that takes CPP, EI and income tax off them and one that doesn’t, usually sitting next to each other in the same list of pay types. Check which one your product uses, then read the rest of your settings once a year as though someone else had set them up.

How we handle it

We open the payroll program account, set the tip treatment against how money moves through your bank and your till, and run the remittances on a calendar. The T4s and the T4 Summary, the one-page total filed with them, go in electronically. When a PIER arrives we answer it and check the year’s payroll records against what was actually remitted, so the same error isn’t sitting in the next year too.