GST/HST ON GRATUITIES
In Canada, there is a range of service industries where tipping has become not only customary, but fully expected. Examples are meals served in restaurants, taxicab rides across town, and haircuts at the local salon. In all these scenarios, the underlying service is subject to tax, and most people probably never think about the tax status of the gratuity left for the service provider.
But, are these types of gratuities subject to GST/HST?
In general, the Goods and Services Tax / Harmonized Sales Tax (GST/HST) applies to any supply of goods or services made in Canada unless a specific tax exemption applies. The applicable tax is calculated as a percentage of the consideration paid (currently 5%, 13%, or 15%).
Anytime an amount of money is exchanged between two parties, the question must be asked: is this payment for a good or service, or is it perhaps something else?
The CRA’s Administrative Policy
Tipping waitstaff in Canada is probably the most common example of gratuities being provided by a patron to a service provider. When it occurs, most patrons probably never consider whether or not GST/HST applies. In most instances, the tax likely does not apply. The Canada Revenue Agency (CRA) has long held the position that a gratuity, when freely given by a customer, is not consideration and, therefore, not subject to GST/HST. Interestingly, the CRA has also long held the view that a tip or gratuity, when mandatory on the part of a purchaser, is not freely given and therefore is simply an increase in the consideration paid and is ultimately subject to GST/HST.
The Tax Court Weighs in on the Issue
Although the CRA has long held this view regarding the application of GST/HST to tips and gratuities, it has only recently been tested in the Tax Court of Canada. In a recent Canada case (1410109 Ontario Ltd), the issue of how GST/HST may apply to gratuities was considered.
The facts in this case were relatively straightforward. The taxpayer owned and operated a banquet hall, which was used in the business of hosting events. Patrons who wanted to book the hall would meet with the hall manager, sign a contract, and pay a deposit for the use of the hall. The contract set out the date the hall was to be made available, along with any food and beverage packages to be provided by the hall. There was a range of packages available, including everything from buffet-style meals to plate service and bar service.
As the banquet hall was located in Ontario, the contract noted that all prices were subject to HST at 13%. The contract also noted that all prices were subject to a 15% gratuity.
At the end of the event, the customer who booked the hall was provided with an itemized invoice, outlining the various charges for the hall, food, and bar charges. All of the amounts were sub-totaled. HST at 13% was applied to the subtotal. Gratuity at 15% was also applied to the subtotal.
Under audit, the CRA took the position that the gratuity paid was mandatory, formed part of the contract, and was therefore part of the consideration paid to the banquet hall. As consideration paid, CRA took the position that HST was required to be collected on the mandatory gratuity.
On the other hand, the owner of the banquet hall was of the view that the consideration for the services rendered was fully accounted for in the fees set out in the contract, and that the gratuity was simply a customary gift from patrons to servers. The owner of the banquet hall took the position that they did not have any claim to the gratuities and as such, it was not consideration received by the banquet hall.
The court commented that:
There is little legal Canadian authority on the issue of tips/gratuities. However, the Minister has historically argued that there is a distinction based upon volition. The Minister stated as early as April 1994: “Gratuities which customers voluntarily give to employees are not taxable. However, if you include a gratuity as a service charge in an invoice to a customer, whether mandatory or a suggested amount, it is taxable at 7%”. The Minister has expressed very similar statements in many subsequent letters and publications.
However, this stance is unsupported by clear, Canadian authority. The Minister’s support for its position is never justified beyond a general reference to the Excise Tax Act; no specific provisions of the ETA nor any case law are provided, analyzed, or explained. Due to this lack of justification or rationale, the Minister’s position begs the court’s further analysis.
In eventually concluding that the gratuities provided were in fact subject to HST, the court further stated:
Ultimately, a practical distinction is necessary in this appeal and based upon these facts at least. The gratuity in this appeal is effectively non-negotiable, pre-calculated, and arithmetically correlative to the taxable services. The gratuity is paid contemporaneously and indistinguishably from all other taxable services and supplies specified in the contract and included in the invoice.
The gratuity is coincidently embedded and associated with the other taxable services. Sections 133,138 and 153(1) of the ETA all anticipate and support this conclusion. The independent, autonomous, and disjunctive payment of a cash tip directly to a server is distinct. Further, it is not a fact set before this court in this appeal.
Considerations Resulting from the Courts Decision
Practically speaking, all businesses who receive tips or gratuities directly, or on behalf of their employees, should review their tax collection practices in light of the decision.
Where gratuities are freely given and at the sole discretion of a satisfied customer, it is clear there is no requirement to collect and remit GST/HST.
Should a vendor specifically require a customer to pay a gratuity as evidenced in a contract in writing, the CRA would certainly expect the vendor charge, collect, and remit GST/HST on the tip amount.
Although the issue was not explicitly addressed in the court’s decision, the CRA has stated that its position with respect to mandatory tips also extends to scenarios where restaurants require a mandatory tip, for example, based on party size, even where no formal written contract exists. Perhaps this issue will be addressed specifically by the courts at a future time.
The Tax Court has confirmed the validity of the CRA’s policy with respect to at least some mandatory gratuities. It would be prudent for businesses to review their billing practices and point of sales systems to ensure they can comply with the requirement to collect GST/HST on mandatory gratuities and tips.
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