By Scott Taylor
When you were learning how to drive a truck, I doubt anyone sat you down and explained how to manage your business and personal income, or what you should know about filing and paying your taxes.
You’re not alone, and that’s a problem. As a whole, the trucking industry has a mile-long rap sheet of non-compliance when it comes to taxes, which is why owner-operators are targets for Canada Revenue Agency auditors.
These auditors don’t want to hear how complicated the forms are, or how hard it is to keep receipts organized. They want bank statements, credit card statements, and cancelled cheques—personal and business—to see if your income as reported on your tax return can support your spending habits. They’ll cross-reference your Social Insurance Number to any of your federal tax accounts—GST/HST, payroll, income, and excise—and make sure they’re up to date in their filings and have no overdue balances.
Fortunately, you can lower the risk of an audit and potentially reduce your tax obligation at the same time. It’s a matter of structuring your business properly, getting organized, setting up regular financial reviews, and asking for help.
SOLE PROPRIETOR OR ‘ME INC.’?
Many owner-operators are sole proprietors, a category of entrepreneur where the individual and the business are the same entity for tax and legal purposes. Others opt for incorporation. These business structures differ in several important ways:
1. Liability. As a sole proprietor, you assume all liability for your company. Personal assets—your house, your car—may be seized to pay the debts of your business. An incorporated business, on the other hand, is a distinct legal entity. The corporation will sign the contracts with a carrier, load broker, or customers. It will show income from trucking and other services, as well as expenses. And, presumably, it will hire you as its president, chairman, and the No. 1 employee.
As a shareholder, you’re not personally responsible for the corporation’s debts unless you’ve given a personal guarantee. But understand that because it’s hard for a new corporation with no assets to secure a loan, a lender may require a guarantee before it will offer credit. As a result, you still may be personally liable if the corporation can’t repay its debts.
2. Taxes. Incorporation can reduce your tax obligation. If you’re like most owner-operators, your corporation should qualify for the small business deduction, an annual tax credit that carries a far lower tax rate than your personal income tax rate.
Also, corporations pay dividends to their shareholders from the company’s earnings. Unlike wages, dividends can be paid without the shareholder being actively involved in the corporation. If your spouse and/or your kids are shareholders, you may be able to redistribute income from family members in higher tax brackets to family members who are taxed at a lower rate.
Additionally, you can decide when you personally receive income from the corporation. Instead of getting your income when it’s received, you can plan to accept your income at a time when you’ll pay less in tax.
Finally, as the president of your company, you can establish policies that may benefit you as an employee: a per diem expense for meals and showers, for example.
3. Complexity. Corporations are created by registering with either your provincial government if you operate intraprovincially or with the federal government if work takes you beyond your home province. The governing body will issue a certificate that says when the corporation officially takes on a life of its own. Think of it as your company’s birth certificate.
The corporation will get a business number (BN) to file GST/HST returns, make payroll deductions to, and to use as an account number for filing its tax return (you’ll file two tax returns each year: one for your personal income, one for the corporation).
Incorporation adds a layer of complexity to your business, but it may be worth it given the potential tax savings and limited personal liability.
GET ORGANIZED
Businesses are required by law to keep a proper set of books and records that can support claims made on tax returns and other government documents.
If an expense was incurred for business purposes or for producing business income, it’s probably tax deductible. Here are four things not to overlook:
How do you stay organized when you’re managing your business from your truck? Buy an expandable file from a business supply store (save the receipt!) and ask your accountant to help you label the slots with appropriate categories—one for meal receipts, for example, another for fuel. Keep the folder handy and file your receipts as you collect them. We give something similar to each of our clients and have them put the whole works into a big envelope and mail it to us every three months. (We pay the postage.)
THINK ‘QUARTERLY’
Organizing receipts and statements is the first step toward really managing your business. Your accountant can help by providing financial statements each quarter, giving you a three-month snapshot of your finances. Quarterly accounting allows for quarterly GST/HST reporting—especially beneficial if you’re always in a refund position. Finally, quarterly statements help when you need to present up-to-date financial records in order to obtain the best financing for new equipment, for example.
As you move toward quarterly financial reviews, consider paying your income tax in quarterly installments.
If you skip the installment option and instead send your taxes in at the end of the year in one payment, CRA will assess an interest penalty calculated against what they say you should have paid. The interest charge on the outstanding amount is compounded daily. Furthermore, the interest assessed by CRA is not an allowable expense. You can’t deduct it as you would interest on a business loan.
Also, what if you wait until year’s end to pony up your tax liability and then you can’t afford to pay it? If that’s the case, CRA will put you onto a payment plan over the next seven months or so. Trouble is, it’s hard to set aside money to pay this year’s taxes when you’re paying off what you owe for last year.
CRA has a formula to help you determine whether you should be sending installments, and if so, how much to send and when. If you’re operating a proprietorship, installments are made quarterly on March 15, June 15, Sept. 15, and Dec. 15. If your total taxes payable are greater than $2000 this year and were greater than $2000 in either one of the two preceding tax years, then installments are required. Corporations must make monthly installments based on the previous year’s tax bill.
HELP!
With quarterly reviews, your accountant should have time to find ways to reduce your tax obligation that will more than offset any extra fees—especially if he understands the trucking business.
For example, 2008 was a tough year and many owner-operators showed low incomes. Has your accountant called to discuss reducing your depreciation claim on your equipment? Reducing your available capital cost allowance (CCA) in a low-income year and paying a small, reasonable tax bill is better than claiming it all and paying a ridiculously small tax bill. You can level off your income for future years when (hopefully) you make good money and you can claim the CCA you saved against a high income.
An accountant can do more than just file your taxes. He should be able to guide you through the financial aspects of your business, whether you’re just starting out, several years in but feeling overwhelmed, or simply in need of financial fine-tuning.
It’s a big step, laying out your financial life for someone else to see. But it’s not much different from when you were learning to drive. You got good advice, and the “operator” side of your life turned out pretty well. With a little help, the “owner” side will thrive, too.
Scott Taylor is vice president of TFS Group