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IMPERIAL OIL

Working the Tax Angles

by Jim Park

In the Book of Life, Rule Number One reads this way: if it sounds too good to be true, then it probably is. And that's what many of you might have thought after reading highwaySTAR's account of Don Wilkinson's Winnipeg tax-court victory. Your suspicions are forgivable. It was a significant ruling for truckers, but could it be real?

Well, rest assured, Wilkinson did win his case, and he's already received his refund. We know of another driver who claimed $48 on his TL2 this year. He, too, has already received his refund.

In We're Doing It All Wrong, we expanded on this - and lobbed a grenade into the fray - by suggesting a pretty easy way to fatten your bank account: the very ordinary per-diem meal allowance. It's a scheme that few carriers or owner-operators have ever considered for some odd reason, but it's utterly routine for hundreds of thousands of other workers. And an absolutely legal way to make a substantial difference in your monthly your cash flow and after-tax earnings.

We were amazed, but not really surprised, by the number of calls and letters we received about those two stories. Many offered congratulations to Wilkinson on his victory; many more expressed concern that their own tax preparers were reluctant to follow Wilkinson's lead. It would seem that any tax preparer who isn't doing everything possible to serve his client's interests may be looking out for the wrong party.

We also got the following message from a major tax-preparation firm about the case via Pam Wilkinson, Don's wife, who received it in response to a previous enquiry: "The Canada Customs and Revenue Agency (CCRA) does not consider this case to be precedent setting. Consequently, taxpayers who wish to claim more than $11 per meal should be prepared to be reassessed. However, as is evident from the Wilkinson case, they could very well be successful in their appeals. It should be stressed that transport employees can always claim more than $11 per meal by keeping their receipts and claiming under the detailed method."

In addition, the firm also offered the following observations about my commentary, on the per-diem meal allowance idea for owner-operators: "Once incorporated, the corporation can indeed pay a salary and non-taxable meal allowance to its driver, but remember that 50% of the meal allowance will not be deductible to the corporation; therefore the corporation will pay tax on the non-deductible portion. (Income Tax Act 67.1(1)). Each circumstance should be examined individually to ensure that the increase in compliance costs does not negate the net tax savings, if any." We couldn't agree more.

So, if you're contemplating a change in how you deal with meal expenses, it would be useful to know what you're about to jump into. The following chart compares the difference in after-tax income between the TL2 method, used to recover a portion of your meal expenses, and the per-diem meal allowance method.

Our chart illustrates a typical Canadian company driver (or incorporated owner-operator paid as a company driver) with an annual income of $48,000. The tax deductions have been rounded for clarity, and will vary only slightly from province to province. Your exact numbers may be slightly different.

Tax Savings from Deductible Meal Allowance

Assumes gross annual income of $48,000 with 200 days away, and 50% of $33.00 TL2 meal deduction, or $48.00 per diem for 200 days ($9600.00)

     
EMPLOYEE TL2 Plan $48 Per Diem
Gross pay $48,000 $38,400
Personal deductions 8000 8000
Taxable earnings 40,000 30,400
Taxable earnings over $30,000 10,000 400
Federal income tax 7000 4888
Provincial income tax 2780 1836
EI premiums 917 684
CPP premiums 1490 1307
Gross payable $12,187 $8,715
Meal-deduction tax savings -1033 0
Net tax payable $11,154 $8715
Add per-diem income 0 $9600
After-Tax Income $36,846 $39,285
Net benefit of per diem to employee: increase in after-tax income of $2439
     
EMPLOYER COST TL2 Plan $48 Per Diem
Gross pay $48,000 $38,400
EI premiums 1260 957
CPP premiums 1720 1307
WCB premiums @ $5.90 per 100 2040 1550
Gross outlay before per diem $53,020 $42,214
Add per-diem cost 0 $9600
Employer tax on 50% of per diem at 19% 0 912
Gross Labor Cost $53,020 $52,726
Net benefit of per diem to employer: decrease in gross labor cost of $294

As you can see, an employee using the per diem method keeps an extra $2439 over the employee using the TL2 method. Employers paying their drivers a per diem after adjusting the mileage rate to reflect the per diem offering, lowers the gross cost of employing the driver by $294 per year.

For owner-operators who've made the decision to incorporate, under tax law you're treated as an employee of your corporation. That allows you to strike a deal with the corporation for a meal allowance. In your case, the amount you decide to draw out of the company as a wage is up to you. How you deal with your meal expenses is also up to you. We recommend that you visit a specialist to crunch a few numbers before deciding to incorporate and before deciding what your salary should be.

The meal allowance is tax-free cash money ($9600 in our example) paid directly to you to cover the cost of eating while on the road. The meal deduction provisions offered by the TL2 are only a means of lowering the overall amount of tax you're required to pay by reducing your taxable earnings by the amount you've claimed on the TL2.

You've already paid that tax up front on your gross earnings in the form of payroll deductions, and the refund you get back in May is the total of all the tax you overpaid throughout the year. The refund is not directly attributable to the meal deduction; you don't get that $3300 back directly in your refund cheque. Bear in mind, however, that if you elect to claim a per diem, you'll not be able to claim any more meals on the TL2. You may still claim any appropriate lodging expenses incurred as a result of your travels.

Tweaking the Numbers

We've had inquiries from drivers who want to take the per-diem issue to their employers, but don't know quite where to start adjusting their mileage rate. As we suggested, drivers could benefit from reducing their normal mileage rate in exchange for a tax-free daily meal allowance. The question is: by how much?

In rationalizing the spread between mileage and the allowance, it should work out on a daily basis to the equivalent to $48 off what you might have earned on mileage. The problem is, the daily mileage is never the same, and some days, you never even leave the truckstop.

You'll likely have to take some of the new arrangement on good faith, which goes for the carriers too. Something as intangible as a comparison from daily rates to mileage and productivity is nearly impossible to pin down to the penny.

Here's how you can work it out for yourself. Start with your annual earning expectations. Then determine, using last year's logs, how many days you spent away from home (we've used 200 in all our examples) and multiply that figure by the per-diem allowance you want to bargain with (200 days away x $48 per day = $9600). Now, knock that amount off of your expected earnings to arrive at your 'revised' mileage rate ($42,000 - 9600 = $32,400 รท 120,000).

Where you run into problems is trying to quantify the non-earning days when you're laid over, or running fewer miles than usual. You could take an average based on previous months (miles divided by days away) for a reasonably accurate reflection, or you could rely on good old fashioned blind faith and assume that on average, you're away 20 days out of the month, and base the projected expenses that way.

On the other hand, you and your boss could always agree to a 'reasonable' reduction in pay, somewhere around eight cents per mile - we guess - and take the per diem for all the time away. One might expect the boss to win occasionally on that one, and sometimes you'd win. Either way, the saving for the carrier and the extra dough in your pocket are worth a little effort to come to a compromise.

Here are some guidelines to take into the office.

Mileage Rate Adjustment Formula
Per-diem rate: $48 @ 200 days away = $9600
MileageRate
per mile
EarningsDaily
revenue
Adjusted
rate
120,000 40¢ $48,000 $240 32¢
120,000 35¢ $42,000 $210 27¢
120,000 30¢ $36,000 $180 22¢

Finally, as we've said before, remember that we're not professional accountants here. All of this bears further checking on your part, but the principles are good and the direction definitely worth pursuing. Remember as well that the Wilkinson case on which all this is based may not form a precedent in Ottawa's eyes. We think it should be, but the tax man may see things differently.

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