The Federal Court of Appeal 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.
This was despite the fact the restaurant had no obligation to include gratuities paid in cash directly to wait staff, who were free to keep the tips without advising their employer.
Brian Casey, counsel in BoyneClarke LLP’s business and criminal litigation teams, who represented Ristorante a Mano Ltd., says treating electronic payments differently from cash is “odd” in today’s society. “The foundational jurisprudence on which the court relied comes from an era when most people paid for things in cash.”
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But David Rotfleisch, founder of tax boutique Rotfleisch & Samulovitch Professional Corp., who wasn’t involved in the case, says the wording of the governing legislation may have left the court with no choice but to reach the conclusion it did. “The legislation is drafted overly broadly, so the decision may be technically correct, however absurd the result. And the government has no intention of amending the law because it would decrease tax revenues.”
Most often, the restaurant’s customers paid their bill using a debit, credit or gift card and added the tip as part of their electronic payment. The payments went directly into the restaurant’s accounts, which arranged for the electronic tips — minus a processing charge and a kitchen staff tip-out — to be paid to the servers, initially by cheque and, more recently, by direct deposit.
Where servers received cash in payment, they didn’t turn it over to the restaurant. Instead, they reported the cash received, which was offset against the amount due for the electronic tips. Accordingly, the amount servers received for their electronic tips didn’t actually correspond to the actual amount of the electronic tips received.
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Casey argued the amounts the restaurant paid to the servers weren’t, in the words of the legislation, amounts “paid by the employer” to the employees “in respect of their employment.” He reasoned because these amounts bore “little or no relation to the server’s net tip” and were “simply the difference between cash payments for meals and electronic tips owing,” they weren’t amounts “paid in respect of the employee’s employment” but rather amounts “paid in respect of the difference between cash received and tips.”
In support of his submissions, Casey noted the amounts in question weren’t determined by hours of work, sales or the actual electronic tips received, but were “dependent on whether the server’s customers pay their restaurant bills with cash or by electronic means.”
However, the court disagreed. “The arrangements between [the restaurant] and its servers that permitted servers to retain cash received in payment of restaurant bills, thereby reducing their due-backs, does not affect the conclusion that a server’s due-back was in respect of the server’s employment. But for their employment with the [restaurant], the servers would not have received the due-backs from the [restaurant].”
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The court also noted nothing in the legislation suggested an amount earned in respect of employment had to be “calculated in a particular way or with reference to hours worked or sale or any other measurable factor.”
Casey also argued the amounts in issue weren’t paid by the employer. He said this wasn’t a case where the employer received all the tips — including cash — and decided what portion to distribute to employees. Rather, this was simply a case of the employer converting the electronic tips to cash for the employees. Again, the court disagreed, noting, “method of payment should not be confused with who has paid.”
In the result, the amounts paid were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP.