We're Doing It All Wrong
by Jim Park
It's tragic how easily we all get lost in technicalities. The Income Tax Act permits transport employees to deduct meal and lodging expenses from their income as a means of defraying some of the cost of traveling. The TL2 form allows drivers this small deduction because, as a rule, trucking companies don't pay their driver's traveling expenses.
For all the posturing and lobbying that's gone into trying to get the TL2 meal deduction reinstated to 80% from the current 50% over the past several years, a much more imaginative solution to starvation already exists. It's been under our noses all along, but nobody's noticed it. It's called a 'per-diem'.
Employees in Canada who travel as a requirement of employment are permitted to receive a per-diem (which literally means 'by the day') allowance from their employers to cover the cost of meals and other incidentals associated with travel. The employer pays the per-diem to the employee, who is not required to declare it as income. The employer, who isn't required to substantiate the per-diem allowance by retaining receipts, claims the expense, or 50% of it under the present rules, on its corporate tax return.
Notwithstanding Don Wilkinson's successful challenge of Revenue Canada's interpretation of what's 'reasonable' (see Trucker Wins Meal Tax Appeal), Canadian drivers and owner-operators should probably abandon the idea of using the TL2 form as a means of recovering the cost of eating on the road. highwaySTAR has been actively seeking appropriate advice on this issue for several weeks now, and so far, nobody has been able to explain why this idea won't work.
Now, fasten your seatbelts.
Let's say you're an incorporated owner-operator. In that relationship, you are both an employee and an officer - probably the president - of your company. As a driver, the company pays you a weekly salary of, say, $1000. Then one day the concept of the per-diem lands in your lap. In your capacity as company president, you decide to trim your salary back to $750.00 per week. Then you decide to grant yourself a per-diem allowance of $48.00 for each day you're away. If you're gone for five days, your allowance works out to $240.00 per week.
On pay day, you cut yourself a cheque for $750.00 before deductions, and another cheque for $240.00 to cover your meal expenses. You may be short 10 bucks at first glance, but you're actually miles ahead from a tax perspective.
If you were paid $48.00 for each of 250 days away from home, you'd receive $12,000 in per-diem allowances annually, tax free. You wouldn't see one-third of that if you continued to us the 'Simplified' method as outlined in the TL2 guide.
Here's the real beauty of the per-diem: it allows the driver to lower his personal taxable income substantially by shifting the burden of the meal expense to the corporation while the corporation gains another write-off. By reducing the taxable income paid to the driver, the company also sees a reduction in the employer's contribution to Revenue Canada, CPP, EI, and Workers' Comp.
Company drivers can take advantage of this as well, with their employer's blessing. And companies can feel good about doing it because they're offering the driver a huge income supplement in the form of a tax-free meal allowance.
In a similar manner to what I've just described, the employee agrees to take a cut in pay of perhaps 10 cents a mile. The employer offers a per-diem of $48.00 for each day away. Every week, the employer hands the driver two cheques: the official pay cheque and the expense cheque. It all works out in the wash, and it's done more or less this way in thousands of companies across the country, - Revenue Canada's own auditors, for example - albeit not trucking outfits.
The only group this model won't work for is the sole-proprietor owner-operator. There's no formal employer/employee relationship here, and Revenue Canada would likely see that business as a Personal Service Corporation, which wouldn't be allowed the per-diem benefit. But those owner-ops could incorporate! The benefit realized from incorporating would more than off-set that cost.
The obvious question, of course, is: why hasn't this been tried before? First, the bulk of the owner-operator population are sole-proprietors who aren't eligible for a per-diem allowance, so it's never been thought of as a solution for that group. Second, the TL2 is the only cost-recovery mechanism available for employee drivers. There's never been much thought given to the driver and the company working this one out in any other fashion. We've just never looked outside the box for solutions.
Well, the box has just been opened. It's time to examine the possibilities and practicalities of the per-diem. We don't know how this will all work out. We'll continue to examine the issue and we'll keep you posted. In the meantime, call or e-mail us with your questions - and consult with your own tax advisor for more information.