Gratuities and Retroactive Pay

Source deductions of income tax

Gratuities and retroactive pay are subject to source deductions of income tax.

If an employee's estimated annual remuneration, including a gratuity or retroactive pay is not more than $14,550 for the year, the gratuity or retroactive pay is subject to source deductions of income tax at a rate of 8%.

If an employee's estimated annual remuneration is more than $14,450, you can use the formulas in the guide entitled Formulas to Calculate Source Deductions and Contributions (TP-1015.F-V) to determine the amount of income tax to withhold from the gratuity or retroactive pay. You can calculate the income tax to withhold based on regular payments and use one of the methods applicable to gratuities and retroactive pay, or calculate the income tax to withhold based on a cumulative average and use one of the proposed methods.

You can also use the Source Deduction Table for Québec Income Tax (document TP-1015.TI-V) to calculate the source deduction of income tax as shown in the examples below.

Example – First gratuity paid in the year

John, an employee whose weekly remuneration subject to source deductions of income tax is $540, receives a gratuity of $2,500. The deduction code on his Source Deductions Return (TP-1015.3-V) form is D.

  1. Divide the amount of the gratuity by the number of pay periods in the year: $2,500 ÷ 52 = $48.08.
  2. Add $48.08 to $540, for a total of $588.08 per week.
  3. To calculate the additional weekly source deduction of income tax resulting from the gratuity of $48.08, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional deduction. The amount withheld from $588.08 minus the amount withheld from $540: $20.86 − $14.46 = $6.40.
  4. To determine the amount of income tax to withhold from the gratuity of $2,500, multiply the additional source deduction of $6.40 by 52 (that is, the number of pay periods in the year): $6.40 × 52 = $332.80.
  5. The income tax to be withheld for the pay period is therefore $347.26, that is, $14.46 + $332.80.

Example – Other gratuities paid in the year

Laura, an employee whose remuneration subject to source deductions of income tax is $540 per week, receives a $2,500 gratuity in March and a $1,040 gratuity in July. The deduction code on her TP-1015.3-V form is E. The income tax to be withheld from the first gratuity is calculated as in the previous example (first gratuity paid in the year). The income tax to be withheld from the second gratuity is calculated as follows:

  1. Divide the amount of the second gratuity by the number of pay periods in the year: $1,040 ÷ 52 = $20. Add the result to the weekly remuneration subject to source deductions: $540 + $20 = $560.
  2. Divide the amount of the gratuities previously paid by the number of pay periods in the year: $2,500 ÷ 52 = $48.08.
  3. Add the amounts obtained in steps (a) and (b): $560 + $48.08 = $608.08.
  4. To calculate the additional weekly source deduction of income tax resulting from the second gratuity, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional weekly deduction. The amount withheld from $608.08 minus the amount withheld from $588.08: $19.83 − $16.63 = $3.20
  5. To determine the amount of income tax to withhold from the gratuity of $1,040, multiply the additional source deduction of $3.20 by 52 (that is, the number of pay periods in the year): $3.20 × 52 = $166.40.

Use the same method for each subsequent gratuity paid to Laura.

Example 3 – Retroactive pay

Eric is an employee whose remuneration subject to source deductions of income tax is increased from $300 to $325 per week, retroactive to 10 weeks. He is therefore entitled to $250 ($25 × 10) in retroactive pay. The deduction code on his TP-1015.3-V form is A.

  1. To calculate the additional weekly source deduction of income tax resulting from the pay increase, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional deduction. The amount withheld from $325 per week minus the amount withheld from $300 per week: $4.51 − $0.75 = $3.76.
  2. Multiply the additional source deduction of $3.76 by the number of weeks covered by the retroactive pay increase: $3.76 × 10 = $37.60.
  3. The amount of income tax to be withheld from Eric's remuneration for the pay period is therefore $42.11, that is, $4.51 + $37.60.

Québec Pension Plan (QPP) contributions

If you pay an employee a gratuity or retroactive pay during a pay period, and the amount is paid along with the employee's salary or wages for the period, add the amount to the salary or wages and calculate the employee's QPP contribution using the usual method.

However, if you pay the amount separately from the employee's salary or wages, the contribution you must withhold is the lesser of the following amounts:

  • 5.40% of the gross amount (without taking the exemption into account, since it is already taken into account in the salary or wages);
  • the employee's maximum contribution for the year, minus the amounts already withheld.

Example – Amount paid separately from an employee's salary or wages

Anna receives a salary or wages of $515 for the pay period from May 17 to 21, 2017, and also receives, separately from her salary or wages, a gratuity of $100. To date, a total of $500 in QPP contributions has been withheld from her salary or wages. The balance to be withheld for the rest of the year is $2,297.20 that is, the employee's maximum annual QPP contribution ($2,797.20), minus the amounts already withheld for the year ($500). Therefore, the amount withheld for the pay period must not exceed $2,297.20.

Based on Table A of the Source Deduction Tables for QPP Contributions (TP-1015.TR-V), a QPP contribution of $24.18 must be withheld from the salary or wages of $515, and one of $5.40 (5.40% x $100, no exemption) from the gratuity of $100. The total QPP contribution withheld for the pay period is therefore $29.58.

If Anna's gratuity was paid along with her salary or wages, her employer would instead locate the pay bracket that includes pensionable salary or wages of $615 ($515 + $100) in the "Remuneration" column of the section of Table A that covers 52 pay periods per year, and withhold the corresponding QPP contribution ($29.58).

Québec parental insurance plan (QPIP) premiums and other employer contributions

If, during a pay period, you pay an employee a gratuity or retroactive pay, the amount is subject to employee and employer Québec parental insurance plan (QPIP) premiums, the employer contributions to the health services fund and the contribution related to labour standards.

You must include this amount in your total payroll used to calculate your health services fund contribution rate, your participation in workforce skills development and, if applicable, your contribution to the Workforce Skills Development and Recognition Fund (WSDRF).

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