The Big Three Bailout

OK… I can’t keep my opinion to myself any more. Regarding the bailout of the big three automakers. I have very deep feelings about this which is rooted in a decade or more of quazee-related research.
One cannot comment on the automakers for very long without sooner or later considering the impact one man had on the industry. His name is Dr. Edward Demming (one of my personal business hero’s). Actually his work was much broader than just the auto industry but his impact was still paramount to this topic.
Dr. Demming went from America to Japan after World War Two to help reconstruct the industry base. He was a statistician, a bean counter of bean counters. He was instrumental in assisting Japan changing from manufacturing “junk” to manufacturing “quality”.
There was a scene in Back to the Future where (I believe) the flux capacitor was “blown” on the DeLorean. Dr. Emmet Brown pulled the useless part out of the car and said something like “No wonder its blown its made in Japan”. The statement shocked Marty McFly who (as memory serves) tried to reconcile his understanding of Japan as a quality building country (in 1985) verses Emmet’s 1955 “Japan is junk” mindset. That conflict within Marty was primarily the result of Dr. Demming’s decades of work (with contemporaries such as Joseph Joran of course).
In his later years Dr. Demming was known as a rather bitter man. He was bitter because American industry refused to reevaluate their paradigms of quality. They were big, they were successful and they thought they were impenetrable. Specifically the “big three” thought they were “above questioning”. Bottom line was they were arrogant, especially GM.
In spite of the rejection by his native country, Dr. Demming continued his six sigma work in Japan (with Toyota, Honda, Suzuki and a host of other companies). In his three to four + decades of teaching, Japan was changed into a country manufacturing quality. Slowly, bit by bit, Japan’s quality ate away the big three’s market share. By the time the big three moderately humbled themselves to listen to Dr. Demmings teachings they were decades behind the competition. Even then GM (for example) never really embraced the teachings culturally (still do not in my opinion).
When I went to school we studied GM’s culture as an example of what NOT to build and embrace. Their arrogance and bullying is legendary.
Why should taxpayers “reward” top level management, unions and shortsighted shareholders with a bailout when arrogance got them into the predicament they are in? Without question, they are still trying to bully and blackmail the marketplace (now politicians) with their “economic size” (employees/voters, GDP impact etc). They are not sorry for what they did, they are sorry that they got caught! Big difference!
However, that doesn’t mean they won’t get paid. It just means they own the countries check book because they can exacerbate the panicking public’s political sentiment. Both misery and irresponsibility enjoys company.

Some Operators Left Dangling

Though there are many large trucking companies in Canada, the industry is pretty much dominated by smaller companies. Being a lease/owner operator at a smaller company has both its advantages and disadvantages. One potential hazard that most operators don’t know about is a potential GST liability that is relatively unknown. I wrote about it in my book (chapter eight) and got a great deal of interest and comment about it.
Simply put, for each transaction within our economy that someone is claiming an ITC (Input Tax Credit), there must be a clear purchaser and a clear seller. In addition, the sellers GST must be clearly viewed.
What creates a problem between the trucking industry and GST auditors are the way about 40% of all trucking companies settle with operators. Since the vast majority of all operators use company fuel cards and trucking companies usually just photocopy fuel company statements, circling/highlighting or otherwise indicating what amount was purchased by the operator, there is no clear transaction between the operator and the trucking company. The invoices photocopied are between the fuel company and the purchaser (deemed to be the trucking company). Therefore a GST auditor may disallow all ITC’s if they so choose. The application of this GST “hazard” seems to be random and geographically sensitive, however the vulnerability for an operator is not to be underestimated.
Bottom line is that CRA has the clear authority to mandate trucking companies apply GST in their statements (and often times they have) but it is not universal. There are still some operators dangling in the wind. Unfortunately CRA is left to govern an extremely ethical dilemma.
Kindah leaves one feeling warm and fuzzy doesn’t it?

GST-HST interlining fiasco

The implementation of the HST is not as “smooth” as many might think, especially for interliners. (Interliners are lease/owner operators who run inter provincially under someone else’s running rights, they either own a truck and trailer or just a truck, they are GST zero rated, not collecting GST but able to get their GST/HST refunded)
Take the implementation of HST on an interlining highway tractor leased from a financing company. In New Brunswick the department of motor vehicle DEMANDS that all interliners show proof of HST paid. They even demand it from provinces that do not participate in HST. They demand it even though interliners already pay IRP (a pro-rated form of PST). Hold that fact.
Our federal GST auditors (when auditing interlining operators) some times refuse the ITC application of HST to lease payments (acknowledging only the 5% GST portion not the provincial portion). That means that some auditors force some operators to not only pay IRP at the time of annual registration but PST on lease payments as well. You need a good accountant to fight through this conflict.
The rejection of the HST to an interliner should not occur by an educated federal GST auditor. However, the application of HST is not a universally understood concept by our federal employees (especially in some regions of Canada). Regardless of federal shortcomings this conflict shouldn’t be present anyway. The New Brunswick DMV must be educated to the workings of inter provincial applications of GST/HST in light of IRP. Specifically there MUST be an exception made.
In summary, the DMV in the province of New Brunswick (or any other province that demands HST for interliners) is forcing the administration of HST on financing companies from other provinces. It is needless, redundant and it exposes the lease/owner operator to auditors who weave their own ignorance. Need we remind the DMV again, the province already gets their “PST” through the IRP. Demanding it through HST as well is, in my opinion, an opportunity for Provincial DOUBLE DIPPING. The province may use the application to manipulate the federal numbers so it receives a higher reimbursement than it should. At face value that’s what it looks like. If (for some reason) the province DOSN”T account for the interliners HST in their submission to federal administrators, then why is the DMV demanding extra provincial financing companies to charge HST?
Lets get this straight, either educate the HST DMV’s or the NON HST GST auditors.
Skidoosh!

Canadians and Taxes

Contrary to our Tea Party neighbors to the south, Canadians handle excess taxes in a less dramatic format. We grumble and complain over a cup of $2.49 coffee and then go home to watch skits humiliating our politicians on CBC. The general public, in general, is tolerant of almost anything. Admitedly, there has been a slight change over the last several decades as people are holding government more and more accountable.
Even still, it seems the only sector of society that is motivated enough to do anything proactive are business people. I guess it hurts that much more when you actually have to sign the check yourself.
However, there is a disturbing trend that has increased over the last few decades. Its cheating on taxes or the use of black market – under the table transactions. The people who see this more than anyone (other than maybe auditors who find the perps) are accountants. If CRA (Canada Revenue Agency) would want to check the mood-attitude-temperature of the Canadian taxpayer all they have to do is interview accountants. We hear it and sometimes see it every tax season.
Italy is a democratic country similar to Canada. Yet 25% of Italy is the underground economy (black market). It is so common place the Prime Minister (Silvio Berlusconi) once said “…if taxes are too high it is morally acceptable to evade them…”.
Does our government want to go the route of Italy? If CRA continues to support duplicity, human nature will escort our predicament down the path to Italy.
Justice inspires justice! Come-on Ottawa do the right thing!

Automobile Travel Costs

Not that meal expenses are no longer an issue, but I want to continue the exposure of our duplicitous income tax system and its impact on Canada Truck Operators.
The vast majority of operators in Canada are self employed. It’s not that there was much of a choice when operators became popular in the 1980’s. It was the cheapest and most obvious option at the time. However, the quickest and cheapest option is not always the best choice. I’m not blaming those who decided the trend because it seemed pretty obvious at the time.When a business chooses self employed status they must follow the rules and regulations associated with that method. Unfortunately comparing a self employed business with employer-employee agreements is rather sobering. The restrictions and benefits are just not the same. The primary benefit of self-employment is the ease of entry and the ease of exit not the efficiency of taxes or even recordkeeping.
Vehicle travel costs or business use of personal vehicle in the self employed method has radically different requirements than the “estimated reimbursement for job related costs” method. For example: fuel receipts, maintenance receipts, insurance and depreciation costs are all needed for self employed records, however non of that is needed for the estimated method.
If you use a personal vehicle for business travel there is one primary question that must be asked. Considering all the expenses how much is personal and how much is business? Personal miles are not tax deductible (obviously) so the system has to be able to compare them to the tax deductible business miles.
This brings in the most loathed aspect to personal vehicle business travel. On top of keeping every kind of receipt applicable to the vehicle, the self-employed business owner must keep a vehicle log that keeps track of both personal and business miles. It’s not an unreasonable request. There must be a way to calculate the ratio or percentage of personal to business in each vehicle used. At the end of the year or period the percentage is applied to the total of all receipts and expenses. For example if, over the period, 18% of all miles is business than only 18% of all expenses/receipts are tax deductible.
That’s a lot of paperwork, a lot of details needed to be recorded, sometimes every day. This method is about as labor intensive and time consuming as possible. If a business owner alternates between two or more vehicles then separate receipts and separate logs are required for each vehicle. Bummer!
Even though many accountants coast to coast imply and even say log books aren’t necessary they most certainly are (under audit). The only reason auditors may overlook log books is ignorance, passivity, or generosity. Over many years and even decades disinformation about log books has led many self employed people to lax and irresponsible record keeping. But enough about the method itself, lets go to comparing benefits.
With a proper agreement in place, employees and employers have greatly reduced paperwork and greatly enhanced benefits. Whereas the self employed method works on actual costs (applying them as expenses) the employee agreements provide a deduction to the employer and cash to an employee (no receipts needed). What makes the method so beneficial is the dollar amount an employer can provide an employee for the use of their vehicle. See current rate chart .
Using Ontario as an example, an employee can receive 55.5 tax free cents per KM for each business KM driven (that's 90 cents per mile). Unless you have a Hummer or a Ferrari and doing break stands at every stop sign, using these rates you can make good after tax money. If you can drive your vehicle for less than 55.5 cents per KM in Ontario the difference is pocketed tax free as a "nontaxable benefit.. pretty cool!
These two methods are dramatically different. The net after tax difference can be substantial. The average vehicle is usually able to perform at approximately 2/3 of cost. That means a net after tax benefit of about $.19 cents per KM in Ontario.
Comparing the after tax benefit of the self employed method with the employee agreement method can be a journey with exponential results. Efficiency of your vehicle combined with the cents per KM rate determines the net after tax benefit. However, the average operator may not use their personal vehicle enough to provide HUGE savings, however if they record a considerable volume it may make hundreds and even thousands of dollars over a year.
This tax example is another illustration of how choosing your business tax method is critical to your annual tax bill.

The TL2 Dilemma

About the industries use of the TL2.

Prior to about winter of 2006-2007 CRA was allowing lease/owner operators to use meal expenses as presented on a TL2 (simplified method), even though the form is clearly designed for an employer employee relationship. Historically CRA not only allowed operators to file a TL2 but trained auditors, operators, and accountants how to fill them out. Twenty years of use and training was eliminated one day when CRA announced that TL2’s for lease/owner operators have NEVER been acceptable. It’s one thing to say they can no longer be used its another to say they have never been available. It’s not that they’re wrong, its that they practiced allowing it for 20 years then suddenly changed their mind, confusing the industry.

I have a personal opinion of why they may have done it. Here goes. The Don Wilkenson court case (Aug 2003) proved the guidelines ($33.00 per day at the time) was not “reasonable” and therefore not held up in court. Since then (unfortunately… or fortunately) accountants and operators coast to coast have inserted their own numbers. To stop (or at least slow down) the progression of operators using both the TL2 and higher numbers than the guidelines, CRA eliminated the TL2 entirely (somewhat an example of a few bad guys spoiling it for the majority good guys). I assume it was easier for CRA to eliminate the TL2 than to defend any number in court greater than the guidelines but less than or equal to the Treasury board of Canada numbers.

The timing of this crisis however, hits operators hard. Just as they suddenly appeared to have meal expense reprieve from the lunch bag letdown campaign (increase from 50% to 80% March 19, 2007 Federal budget) they are struck with the lack of access to the TL2. The effect is dramatic. Operators only keep about $20-$25 per day of receipts (on average) and are still subject to the same reductions as the guidelines ($51, the amount offered without need of receipts). The national effect is actually about a 50% REDUCTION in meal allowance writeoffs. The shift of take home income advantage from self-employed operator (owning your own) to employee just rocketed towards the employee. A net effect many may not have calculated on. Bummer!... at least those who are still self-employed.

Historically its just one more example of how the implied best system available, is NOT the best! It is laced with holes of vulnerability. In my opinion equality will NEVER be implemented using the self employed system/method.

PS. My first week of blogging has received a huge volume of hits (I’m displaying hits where I thought I’d be in 1-2 years not 5-7 DAYS). However, I have no comments. I have to admit I’m new at this form of communication. I’d like to get to know my audience. I welcome your comments and questions.

Qualification: another tax angle

Let’s look at these differences from another angle. Too often the differences are just boiled down to dollars and sense. In the application of taxes, or more specifically expenses, some times the differences come in simple qualification rather than numbers.
Meals for truck drivers (employees) are channeled through a form called a TL2. Without going into details of the simplified method, lets just say most drivers still use it and try to conform to several restrictions associated with the gross $51.00 per day allowance.
Restrictions for qualification come in both time and distance. The driver must be gone from his/her municipality for 24 hours or more and the driver must be 160 KM from his/her municipality.
In the comparison to the other meal system (estimated reimbursement for job related costs) the rules are completely different. Restrictions and qualifications are determined by an Employer Employee Agreement. These are and can be as varied as employees, unions and job titles themselves. However, let me give you one as an example. If the employee leaves their home before eight in the morning they qualify for breakfast. If they leave after eight am they are only allowed to collect re-imbursement on lunch (and onward if applicable).
So, as we see, certain citizens qualify on a meal to meal basis (no distance restriction at all) while other citizens are hamstrung by time and distance.
If a CRA auditor looked at the log of a driver who left at 7:45am on a Monday who returned at 6:00am Tuesday morning they would disqualify the trucker for the TL2 $51.00 meal allowance. No reductions, no allowance at all. It was as if they never ate a single meal in almost 24 hours.
This constraint (and many others) is totally government imposed. In other words the administration can change this restriction on any future budget. Nothing is secure, nothing is predictable. Changing these rules is a matter of: government greed, lobbying, public exposure and political will.
The only other tax option is for drivers to keep every meal receipt (an option CRA would love, seeing that most drivers in general would loathe the imposition). If a driver is gone all day, stuck in their truck, they still may not claim one penny of TL2 job related meal costs according to the qualifications stipulated. In this situation the qualification difference is not just 926% or 1200+% but INFINITE. One citizen qualifies absolutely and the other absolutely not.
This administrative strangulation to the trucking industry is, in my opinion, one of the primary reasons the industry struggles to attract and keep qualified employees. It is not only what they have done, or what they are doing but it is the fact that the entire tax system is vulnerable to tampering. Who would want to become perpetually vulnerable in their career?
The solution is and will always be total and absolute equality. Specifically lease/owner operators can achieve this almost instantly by having an employer employee contract with their employer (a corporation that they own themselves). Using their log books as official documentation for on and off travel status, operators can qualify for the benefits exactly the same as the most generous of employer contracts accepted by CRA. Skidoosh

Truckers Income Tax Comparisons

In Pursuit Of Equality

To launch “Canada Truck Operators” (my industry analysis blog) I choose to start with a detailed analysis of the tax implications on Canadian trucker’s meals. It’s a hot steamy topic that has been rightfully on the minds of most Canadian truckers for over a decade. Though my research goes back 25 years I chose to only start my chart at 1992 because the prior values are pretty much the same trajectory.
What boils my potatoes more than any other data is the impact of the 1994 budget and it’s gross misrepresentation to the public and the industry. If anyone remembers, the Prime Minister at the time stated “…there are some industries that are not paying their fair share of taxes…”. The party at the time then proceeded to CUT the deductibility of meals to truckers. Even though, according to the data presented, the truck drivers were already OVER paying their fair share of taxes.
When government stands behind a microphone and says something, does anyone hold them accountable? In 1994 the government FLAT OUT LIED! It’s no wonder that Canadians complain about their government so much. People rarely trust someone who twists the facts.
What is also misleading is the effect the “lunch bag letdown” campaign actually had on justice and equality. I projected the net effect to 2011 to show that the most conservative case still shows a difference of 649% ($74.67). Let’s remember, once it bottoms at 649% (in 2011) the percentage will once again start creeping upwards.
I’m not interested in political spin games or smoke and mirrors, only cold hard facts, justice and equality. I believe the more the public and the industry truly knows the facts, the more accountable our government will be.
Fully implemented to the lease/owner operator sector of the trucking industry, equality will provide anywhere from $100-200 million dollars per year. That’s $6-8000 in tax reduction per operator… PER YEAR! Not an insignificant amount.
One of my personal desires is to expose the truth to as many drivers as possible and set the industry on the road to justice, equality, sound business practices and the removal of needless government meddling. This may take many years but I believe it can be done, and in a way Canadians can be proud of.

In this case the Canadian Charter of Rights and Freedoms 15.1 is similar to the Ontario speed limit. It looks pretty when posted but seldom enforced.