One of the benefits of writing a tax book to truck drivers is the response I get from people coast to coast. Over the last 24+ months I have had wonderful discussions with accountants and drivers from virtually all across Canada. I’ve learnt a lot, such as: each region seems to have they’re own isolated little skirmishes with Canada Revenue Agency.
I also know that accountants are busy adjusting to new regulations (thanks to Enron etc) as well as preparing for IFRS (International Financial Reporting Standards) which are due January 1, 2011. It is a very unsettling time for many accounting firms (who thrive on consistency).
Unfortunately, having accountants as busy as they are, leaves too many drivers alone when dealing with the qualification and application of meal allowance (per-deum, subsistence allowance). I wrote my strongest article last month warning of the industries potential future conflict with CRA. Too many operators still don’t understand properly.
A little while ago I had an individual tell me of a friend who was squawking on the CB about the benefits of incorporating. His friend usually paid between $20-25,000 in taxes every year, but last year he incorporated and only paid $4000. The implication was that incorporation saved him $16-21,000. Let me say upfront, there is something very wrong with his numbers!
The Treasury Board of Canada lists Canadian Meal Allowance as $83.25 affective April 1, 2009(http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/tbm_113/c-eng.asp). Using an exchange rate of 125% (which is way above the annual average of 106.601429% for 2008) only puts his US daily travel allowance at $105. If incorporating saved him $16-21,000 it would represent a tax deduction of $131.51-172.60 per day providing he drove 365 days in the year. If he drove the average 22 days per month it represents a tax deduction of $181.82-238.64 per day. Therefore, it is impossible for his numbers to match his understanding. His accountant didn’t ensure his client understood his situation.
In my experience the bottom line tax savings of incorporating (with per-deum, subsistence allowance application) ranges only from $6-8,000 per year. His $16-21,000 drop reflects something else. My guess has to do with WHEN he changed his business status. I assume he incorporated somewhere between May-July 2008. That means that his “self-employed earnings” represents only half of 2008’s income. The rest of 2008’s income is reported in his corporation (assuming no T4’s). If this guess is correct I hope he hasn’t spent the $8-15,000 of taxes yet to be paid.
Subsistence/Per deum does bring dramatic tax savings if reported correctly ($6000-8000 annually). In fact if every lease/owner operator in Canada used the system, it would collectively save $150-280 million dollars per year in taxes (assuming all the 25-35,000 operators are still in existence). However, existence is not what determines qualification… compliance does!
In my humble “pie-in-the-sky” estimate, only about 40% of all operators will EVER truly qualify. Here are just a few reasons:
- Too many accountants refuse to research the system and train operators accordingly
- Without adequate training, qualifying (for an operator) means “surviving a meal allowance audit”. When accountants require operators to sign liability wavers the operator is left holding all the risk and defense, a daunting task to go alone undocumented and untrained.
- Industry dis-information has scared potential users from even considering a change from self-employed status
- Too many operators refuse to arrange their financial transactions to satisfy the required employer-employee agreement audit trail. Simply put, many refuse to be trained. They are either arrogant or lazy!
The 60% that will NOT qualify for the tax savings may suffer needlessly, yet suffer they will. The “Billy big riggers” flying by the seat of their pants from one layover to the next, need to stop being lease/owner operators or start being business minded. Currently I estimate business minded operators represent only 40% of the total. Hopefully, in the future, the fly by night operators will dwindle to 40 or even 20%.