The issue in the case was whether the taxpayer Peller, when distributing the pooled tips to the various employees, should have withheld Canada Pension Plan (CPP) and Employment Insurance (EI) premiums (as it would be required to do, if it paid regular salary or remuneration). The taxpayer did not withhold, arguing that the tips were not really part of the employees’ earnings paid by the tax-payer; rather they were paid by the taxpayer’s customers and effectively passed on by the taxpayer as an agent or nominee (and customers do not have to withhold of course).
The CRA disagreed and argued that the taxpayer had indeed paid the tips to the employees, as required under a broad interpretation of the CPP and EI legislation. As a result, the taxpayer was assessed in respect of the CPP and EI it did not withhold. On the taxpayer’s appeal to the Tax Court of Canada, the CRA assessment was upheld.