Gratuities and Retroactive Pay

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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 $15,532 for the year, the gratuity or retroactive pay is subject to source deductions of income tax at a rate of 8%.

Otherwise, 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 also use the Source Deduction Table for Québec Income Tax (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 earns a salary of $540 per week. He also receives a gratuity of $2,500 in March. The deduction code that corresponds to the amount on line 10 of his TP-1015.3-V form is D.

Calculating source deductions of income tax for the pay period
Remuneration per week
Weekly salary (52 pay periods) $540.00
Amount of the gratuity: $2,500 ÷ 52 + $48.08
Remuneration per week = $588.08
Additional source deduction of income tax
Amount withheld from $588.08 $32.97
Amount withheld from $540 $26.97
Additional source deduction of income tax = $6.00
Income tax to withhold for the pay period
Income tax to withhold on the gratuity of $2,500: $6.00 x 52 = $312.00 $312.00
Income tax to withhold on the salary of $540 per week + $26.97
Income tax to withhold for the pay period = $338.97

Example – More than one gratuity paid in the year

Laura earns a salary of $540 per week. She also receives a $2,500 gratuity in March and a $1,040 gratuity in July. The deduction code that corresponds to the amount on line 10 of her TP-1015.3-V form is D. 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 shown below:

Calculating source deductions of income tax for the pay period
Remuneration per week
Weekly salary (52 pay periods) $540.00
Amount of the second gratuity: $1,400 ÷ 52 + $20.00
= $560.00
Amount of previous gratuities: $2,500 ÷ 52 + $48.08
Remuneration per week = $608.08
Additional source deduction of income tax
Amount withheld from $608.08 ($560 + $48.08) $35.97
Amount withheld from $588.08 ($540 + $48.08) $32.97
Additional source deduction of income tax = $3.00
Income tax to withhold for the pay period
Income tax to withhold on the second gratuity ($1,040): $3.00 x 52 $156.00
Income tax to withhold on the salary of $540 per week + $26.97
Income tax to withhold for the pay period = $182.97

Do the same calculation for each subsequent gratuity paid to Laura.

Example – Retroactive pay

Eric's remuneration is increased from $325 to $350 per week. The increase is retroactive to 10 weeks, which gives him a retroactive payment of $250 ($25 × 10). The deduction code that corresponds to the amount on line 10 of his TP-1015.3-V form is A.

Calculating source deductions of income tax for the pay period
Additional source deduction of income tax
Amount withheld from $350 per week $4.90
Amount withheld from $325 per week $1.38
Additional source deduction of income tax = $3.52
Income tax to withhold for the pay period
Income tax to withhold on the retroactive payment of $250: $3.52 x 10 $35.20
Income tax to withhold on the wages of $350 per week + $4.90
Income tax to withhold for the pay period = $40.10

Québec Pension Plan (QPP) contributions

If you pay an employee a gratuity or retroactive pay during a pay period, and you pay the amount 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.

If you pay the amount separately from the employee's salary or wages, withhold the lesser of the following amounts:

  • the gross amount (without taking the exemption into account, since it is already taken into account in the salary or wages) multiplied by the employee's contribution rate;
  • 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 earns $515 for the pay period from May 17 to 21, 2020, 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 amount that can be withheld for the pay period cannot be more than $2,646.40, which is the employee's maximum annual QPP contribution minus the amounts already withheld for the year ($3,146.40 - $500).

Based on Table A of the Source Deduction Tables for QPP Contributions (TP-1015.TR-V), the total QPP contribution withheld for the pay period is $30.55, calculated as follows:

  • $24.85 withheld on the salary of $515;
  • plus $5.70 ($100 × 5.70%, without exemption) withheld on the gratuity of $100. 

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

If you pay an employee a gratuity or retroactive pay during a pay period, the amount is subject to:

Basic conditions
You must withhold and pay these contributions and premiums if one of the basic conditions for making source deductions and paying employer contributions is met (also check whether any of the special cases apply).

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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