Tips and Gratuities in Alberta: 8 Fact Every Employer & Employee Should Understand

Tips—sometimes called gratuities—are a core part of the service industry, but their rules, tax treatment, and business implications are often misunderstood, especially when it comes to tips in Alberta.

Whether you’re an employer or an employee in Alberta, knowing exactly how tips work can help you stay compliant, maintain good customer relationships, and protect your bottom line.

What Are Tips?

A tip is money voluntarily given by a customer to an employee or business, over and above the cost of goods or services.

Two Main Types:

Type	Definition	Example
Direct Tips	Given directly to the employee without employer control.	Cash left on the table for a server.
Controlled Tips	Collected or distributed by the employer, often via service charges or pooling.	Automatic gratuity on a banquet bill shared among staff.

Canada Revenue Agency (CRA):
Tips and gratuities are amounts that a customer gives to an employee voluntarily or that are added to a bill by the employer and passed on to the employee.

Pros & Cons of Accepting Tips

Pros

Cons

– Direct appreciation from customers: Tips let customers personally reward employees for excellent service. – Income boost: Tips can significantly increase take-home pay for employees. – Motivation for service quality: Incentive for higher quality service.

– Unpredictable income: Tips fluctuate daily and seasonally, making financial planning difficult. – Administrative complexity: Pooled tips must be carefully tracked, distributed, and reported to meet tax and labour requirements. – Potential disputes: Different views on fairness in distribution can create friction. – Awkward in some industries: Where tipping isn’t customary, asking for tips may make customers uncomfortable or seem unprofessional.

This structure makes it clear: tips are good for employees in service-heavy industries, but not always good for employers or suitable in every sector.

When Might a Business Charge Tips?

• Hospitality & Food Service – Common practice; sometimes automatically added for large parties.
• Personal Services – Hair salons, spas, and similar services often receive voluntary tips.
• Event Services – Weddings, catering, or banquet services may use automatic service charges.

Note:
In Alberta, there’s no law requiring tips, but if an employer chooses to implement them, they must follow clear policies to avoid confusion or disputes.

Tax Implications

Employers:

If the tips are Controlled Tips (employer collects/distributes):

• Considered pensionable and insurable earnings
• Employers must:
  • Deduct Income Tax, Canada Pension Plan (CPP), and Employment Insurance (EI) at source
  • Report on the employee’s T4 slip
• Employers are not permitted to deduct amounts from employee tips to cover business costs (e.g. fees, breakages, uniform costs) unless there is a clear, documented agreement (signed by both employer and employee or contained in the employment contract or policy), and the tip system (pooling/sharing/distribution) complies with CRA rules for controlled tips.

CRA Reminder:
Controlled tips are subject to payroll deductions because the employer has control over the amount and distribution.

Employees:

• All tips are taxable income (direct or controlled.)
• Direct tips (cash in hand):
  • Must be reported on personal tax return
  • Not subject to CPP/EI deductions at source
  • Employees can opt in to CPP using Form CPT20 for future pension benefits
• Not reporting tips risks penalties, back taxes, and interest.

CRA Reminder:
You must report all tips you earn as income on your tax return, whether they are controlled tips or direct tips.

Direct Tips vs. Controlled Tips

Type of Tips	Example	Payroll Deductions	Reported on T4?
Direct Tips	Customer gives cash directly to server	No CPP/EI at source; taxable	No
Controlled Tips	Service charge added to bill, employer pays out	CPP/EI/Income Tax deducted	Yes

How Tips in Alberta Work

• No provincial law currently regulates tip ownership under the Employment Standards Code
• Employers may:
  • Let employees keep their tips
  • Implement pooling or distribution systems
• Bill 210 – Protecting Workers’ Tips Amendment Act (2024, pending) would:
  • Legally define tips as belonging to employees
  • Prevent employers from withholding/deducting them (except pooling)
  • Require transparency in tip distribution

CPP and EI for Tips

Type of Tips	CPP	EI
Controlled Tips	Yes – deductions required	Yes – deductions required
Direct Tips	No – unless employee opts in (Form CPT20)	No

CRA Reminder:
Direct tips are not pensionable or insurable because the employer has no control over amount or distribution.

Final Tipsaway

✅ Employers:

• Create clear, written tips policies
• Follow payroll rules for controlled tips
• Be transparent about pooling and distribution

✅ Employees:

• Report all tips as income
• Consider contributing to CPP for retirement benefits
• Keep records of cash tips for tax filing

Key point:
Proper handling of tips protects both businesses and staff—ensuring fair treatment, compliance, and customer trust.

Enjoyed this post? Don’t stop here, you might like: Top 10 CRA Business Questions Answered: A Simple Guide For Alberta Business Owners — explore more insights on our blog to discover strategies, tools, and tips designed to support your business growth and success.