The most hotly disputed topic in tax reduction today is meal and “travel expenses”. What can you write off and how much work is it to expense things? Keeping meal expenses was made popular after CRA’s Oct 2006 issuing of IC73-21R9. It emphasized the need for both the employer and employee to sign the TL2 (simplified method). Since most operators are self employed their “employer” is nowhere to be found. Prior to the bulletin, operators have historically always been able to use the simplified method. Now they are required to keep receipts.
Tax preparers are split on how to handle this dilemma. Some require operators to keep receipts. Others ask for receipts as a “backup” but still use the simplified method to calculate meal expenses in personal T1 filing. Still others don’t even bother to ask for receipts yet submit TL2 numbers. If you are unsure which system your preparer uses just ask yourself if they requested your log books at the end of the year, or the number of days you were gone. If the answer is yes, and you are self-employed… they used the simplified method. If they used it they usually have operators sign a waver. Wavers are used to remove the firm’s potential liability of CRA rejecting the meal expense (not enough receipts or none at all). If you signed a waver, and they used the simplified system you are carrying liability whether you like it or even know it.
So what are operators to do? Accumulate potential tax liabilities or a bag full of receipts? Criss-crossing the country will get you a host of different perspectives, each usually passionately defended.
The best alternative for operators is… neither! They should change the reporting system used to file their business expenses. Instead of classifying themselves as self employed, become an employee of their own company. Have an employer employee agreement that stipulates a “per-diem” reimbursement for job related costs (meals). The system is easier than keeping receipts and fully utilized allows an annual tax savings of $6-8,000+ (plus cpp savings).
The system has very specific disadvantages but in my opinion is dwarfed by the tax savings. There are setup costs (which can be minimized) and a definite learning curve (2-6 months) but the most striking disadvantages are: future financing issues and possible tax liabilities (if not done correctly). The disadvantages are not insurmountable but should be planned and prepared for, especially the liabilities. Make sure whoever is overseeing your per diem reporting is also liable to defend you… not “voluntarily” till just before court but all the way if necessary.
The system is not for the “fly by nighters”, it’s for serious business operators who are willing to follow the tax rules to minimize their expenses.