The Per Diem Tax System

Unlike the most popular tax reporting system for lease/owner operators (self-employed) the per-diem system requires much more active involvement by both you (the operator) and your accountant. Though there are some things that require more attention, if done properly the over all per-diem system actually reduces the paper requirements.

The entire system is based on an employer-employee agreement. Therefore, obviously, the operator must reclassify themselves as an employee. They must cease to be self-employed. Changing the entire nature of their reporting status requires several significant steps. Usually it should not be done alone. It’s not that it CAN’T be done alone but most operators will get stuck on various snags in the incorporation and registration process.

Once operating, being on a salary and receiving a per-diem (if done properly) takes a little getting used to. It usually takes between two to six months to get comfortable. For operators just starting the system there are about twenty questions most end up asking (some repeatedly). Everyone has questions, there’s no shame in walking out your learning curve. The system is not designed for the “fly by nighters”, it’s for the serious business minded operators.

However complex the system appears at first, it brings phenomenal tax results. It is the most efficient tax system available to Canadian operators today. It saves anywhere from $6-8,000+ per year in taxes. It does so ethically and (most importantly) legally. It’s been around for decades. If anyone remembers back when “Motorways” was around, they paid their drivers a “meal allowance” per day (per-diem). It’s the same thing.

There are some disadvantages of using the system such as: sometimes restricting financing, nominal CPP reduction at time of retirement, possibly and increase in accounting fees, and the most critical disadvantage of them all disability benefits. In the event that an operator hurts themselves and starts collecting WCB, their benefits can be reduced dramatically. Because of this we suggest every user of the system retain private disability insurance.

Another disadvantage is the taxes payable. When there are taxes due (if they are presented correctly) they will be submitted to Canada Revenue Agency as source deductions. Source deductions are classified as “monies in trust” and must be available when due. You can’t make payments on them (not without getting in trouble). When you are self-employed many operators can negotiate monthly payments of their taxes however, the per-diem system does not allow that luxury.

These disadvantages may seem harsh but properly managed they pale in comparison to the annual tax savings. I guess we all get what we pay for.