Tax savings come in various forms and methods. They also come in various amounts. In the last couple years more and more operators are getting incorporated. They ask their accountants to save them taxes through the available meal expenses. Too many accountants are still only saving less than half of what is available.
The less you know about filing your taxes the more dependent you are on your accountant. Out of necessity, more and more operators are educating themselves on the basics. There are three basic tax reporting methods used in the industry: self-employed, incorporated using the TL2 and incorporated using “estimated reimbursement for job related costs”.
The majority of operators are still self-employed. They gather their paperwork in January and February, take the box to their preparer and file their taxes on or before June15th. This system is the easiest for the tax preparer but the most expensive for the operator. Deductions have more hoops to jump through, for instance: meal expenses must be accompanied by receipts and personal vehicles require both receipts and log books. It’s sort of like buying a truck that gets 3 ½ miles to the gallon and wears out tires in 40,000kms. It’s hard to say no to the purchase price, until you calculate the bottom line costs.
The next method of tax reporting is incorporation using the TL2. The first obstacle is the cost of incorporating, but once that is paid for the annual administration costs are only minimal. However, there is no need to keep meal receipts any more. In fact all year long the meals are neither calculated nor recorded. Not until after the corporate year end is completed and T4’s are issued are the log books even requested. Then the TL2 calculates the non refundable tax credit for the employee/driver (subject to guideline restrictions of course). In 2009 the $51.00 allowed by the guidelines translate into $11.63 per day. I’m not sure how many drivers can actually survive off $11.63 per day but I’m sure they don’t suffer from obesity. Having a corporation and using the TL2 is a little like purchasing a brand new finely tuned and specked truck that can only be shifted into first and second gear. The ultimate benefit of the trucks ability is blocked or restricted from use.
The final method is incorporation using “estimated reimbursement for job related costs”. This system redefines taxable income into “non-taxable benefits” through monthly meal per-diem and personal vehicle reimbursement checks. It’s governed by an employer-employee agreement complete with an audit trail for CRA authentication. The meal allowance (as of October 1, 2009) is $83.55 per day if the agreement is linked to the treasury board of Canada. This system is 7.184 times more efficient than the prior illustration. It’s like releasing the restriction of the upper gears on your brand new 7-8+ mile per gallon truck.
The tax savings ranges from $6-8000+ per year. Not only is that finely tuned, it may be the deciding factor in survival!