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 $18,056 for the year, the gratuity or retroactive pay is subject to source deductions of income tax at a rate of 7%.
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. Do not subtract the amount of the deduction for employment income or the amount of additional QPP contributions from the employee's remuneration. The table already takes these amounts into account.
Example – First gratuity paid in the year
An employee earns a salary of $540 per week. They also receive a gratuity of $2,500 in March. The deduction code that corresponds to the amount on line 10 of their TP-1015.3-V form is D.
| 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 | $21.82 | |
| Amount withheld from $540 | – | $16.28 |
| Additional source deduction of income tax | = | $5.54 |
| Income tax to withhold for the pay period | ||
| Income tax to withhold on the gratuity of $2,500: $5.54 × 52 | $288.88 | |
| Income tax to withhold on the salary of $540 per week | + | $16.28 |
| Income tax to withhold for the pay period | = | $304.36 |
Example – More than one gratuity paid in the year
An employee earns a salary of $540 per week. They also receive 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 their 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.
| 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) | $24.59 | |
| Amount withheld from $588.08 ($540 + $48.08) | – | $21.82 |
| Additional source deduction of income tax | = | $2.77 |
| Income tax to withhold for the pay period | ||
| Income tax to withhold on the second gratuity ($1,040): $2.77 × 52 | $144.04 | |
| Income tax to withhold on the salary of $540 per week | + | $16.28 |
| Income tax to withhold for the pay period | = | $160.32 |
Do the same calculation for each subsequent gratuity paid to the employee.
Example – Retroactive pay
An employee's remuneration is increased from $375 to $400 per week. The increase is retroactive to 10 weeks, which gives them 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.
| Additional source deduction of income tax | ||
|---|---|---|
| Amount withheld from $400 per week | $3.89 | |
| Amount withheld from $375 per week | – | $0.63 |
| Additional source deduction of income tax | = | $3.26 |
| Income tax to withhold for the pay period | ||
| Income tax to withhold on the retroactive payment of $250: $3.26 × 10 | $32.60 | |
| Income tax to withhold on the wages of $400 per week | + | $3.89 |
| Income tax to withhold for the pay period | = | $36.49 |
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 to calculate the employee's QPP contributions.
If you pay the amount separately from the employee's salary or wages and the pay period exemption has already been taken into account, withhold the lesser of the following amounts:
- the total of:
- the employee's contribution rate multiplied by the portion of the pensionable salaries or wages that does not exceed the maximum pensionable earnings (without taking the exemption into account), and
- the employee's second additional contribution rate multiplied by the portion of the pensionable salary or wages that exceeds the maximum pensionable earnings without exceeding the additional maximum pensionable earnings;
- the employee's total maximum contributions for the year, minus the amounts already withheld from the employee's salary or wages for the year.
Example – Amount paid separately from an employee's salary or wages
An employee earns $515 for the pay period from May 17 to 21, 2024, and also receives a gratuity of $100 separately from their salary or wages. Their remuneration for the year does not exceed the maximum pensionable salary or wages under the QPP for the year ($68,500). To date, a total of $500 in QPP contributions has been withheld from their salary or wages. The amount that can be withheld for the pay period cannot be more than $3,660, which is the employee's maximum annual QPP contribution minus the amounts already withheld for the year ($4,160 − $500).
Based on Schedule B (52 pay periods) of the Source Deduction Tables for QPP Contributions (TP-1015.TR-V), the total QPP contribution withheld for the pay period is $35.05, calculated as follows:
- $28.65 withheld on the salary of $515;
- plus $6.40 ($100 × 6.40%, 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:
- Québec parental insurance plan (QPIP) premiums;
- the contribution to the health services fund;
- the contribution related to labour standards;
- the contribution to the Workforce Skills Development and Recognition Fund (WSDRF) (if applicable).
You must include this amount in your total payroll used to calculate your health services fund contribution rate and your participation in workforce skills development.