Beurocracy 101 and Compliance 101

Many years ago I went to a tractor pull. I’m not a huge fan but wanted to see what the noise was all about, and noisy it was! The dirt was flying and the fumes were fuming. For me, however, the real interesting part was the mechanism that the tractors pulled. For every yard the tractor pulled, the weight was shifted closer to the tractor (multiplying the effective resistance/friction). Finally the multiplication factor made it virtually impossible for the tractor to drag the weight. Even with the most powerful of tractors the gears and shifting burden will eventually make it impossible to continue.

Canada Revenue Agency is designed the same way. The primary goal of the agency is not to administer the income tax act justly and fairly but to manage the population of the country in such a way as to collect taxes from virtually everyone with the relative same degree of intensity. The more aggressive the citizen is in reducing taxes (apart from the norm) the more incremental burdening obstacles CRA shifts to the tax payer. It’s the “policies”, forms, requests and explanations that slowly weight down the citizen or actually it’s the accountant that gets weighted down.

Accounting firms constantly evaluate their clients compliance, punctuality and financial stability (including whether they pay their accounting fees or not). The clients compliance and punctuality are critical to the level of risk a firm is able or willing to absorb. For instance we rate each of our clients about twice a year for compliance to subsistence. If they fall short they are either encouraged to higher compliance or (eventually) we find them another accountant.
Using subsistence allowance is not for the slackers. The immense savings it provides comes with a cost, compliance. A word to accountants, if its used by your clients make sure they do it right, the last thing this opportunity needs is a rejection because of “non-compliance”. On the road the word would be the “entire opportunity” failed and the industry would battle disinformation for years.

Working within the CRA system requires clear definitions to avoid a continual tsunami of weight/restrictions.

Update on industry education projects

Today marks the final day of work on a project I have been exhausting myself on for over six months. We finally finished the studio production of “Making Your Miles Count: taxes, taxes, taxes” CD version. Included in this audio version is an additional chapter that updates users of subsistence allowance (and potential users) in several compliance and risk issues. Some people have been waiting for the CD for nearly eight months. Their patience is admirable, my time estimates grossly inadequate.

Slated on the horizon are two more audio projects that I hope to have available by spring. These projects are much less intense and much more informal. Their educational and entertainment value is my most pressing objective.

I don’t have the CD version available on our web sight yet but it should be up in a couple weeks. Those who wish to pre-order a set can do so by e-mail.

There will be several topics and projects I’ll be sharing in the next coupe weeks. One has to do with a report submitted to the taxpayer’s ombudsman. Those who regularly read this blog can look forward to it.

Leave it to Doctor Demming!

If you’ve been in the accounting industry for longer than 20 years you get to know the beurocratic system, both its strengths and weaknesses. CRA does NOT operate using the same business “rules” that the public is exposed to. In fact the rules that CRA plays by are: written by themselves, are written for their benefit, and is subject to change without consultation with the public (whom they are designed to “serve”). It can very well be a frustrating industry, not unlike trucking who must work with the DOT.

In the last twelve months our office has recorded a HUGE increase in CRA errors. Our numbers show triple digit increases. In our specific experience we have nailed it down to data entry. CRA has made significantly more data entry errors than we have EVER experienced before. We have attributed some of the errors to their “new system” which was launched early last year (ie. GST-ITC checks stopped due to late or incomplete data). I personally am not against the new system as it relates to late filers. In fact some aspects of the system I am very comfortable with. However, some things are getting out of hand.

Here is just one example. One of our clients sent in a check for $1400 in source deductions. The check cleared the bank with the appropriate deposit information on the reverse (Revenue Canada DID receive and deposit it). Under the “re” the appropriate RP number was clear. The appropriate amount was placed on the source deduction form (submitted). However, the amount was not applied to the source deduction account. In fact it didn’t appear ANYWHERE! In fact they are still looking for it. In talking with the client I have to communicate it will take 2-6 months to have CRA adjust it correctly. Meanwhile T4’s and T4 summaries are all submitted as “balanced” and yet CRA numbers disagree. Not until the file is given to someone who has authority to investigate and correct will it be rectified (hence the 2-6 months). Meanwhile the “request for payments” pile up, interst, penalties etc.

When CRA data keys errors the system operates as a punishment to innocent tax payers. The process of correcting CRA errors is brutal! As I stated, under most situations it takes four to six months to correct CRA blunders (or anyone’s blunders for that matter). That kind of correction would NEVER pass in the real world. The only reason it is tolerated is because of a lack of competition (maybe we can get Bosnia administer our taxes). Performance evaluation is balanced by a “systemic” approach to implementation, which means that the “system” comes first. Then, when and if there is time service!

Dr. Edward Demming is my hero (as anyone who reads my blogs knows). He states that people are restricted from excelling at their work because of the system! Bang on Dr.!

CRA's "WAYS"

I just finished my book on CD, which included a revised chapter on the national application and strategic plan for subsistence allowance. One aspect of the chapter discussed the historic (and not so historic) ways CRA “deals” with issues of possible conflict. I provided an example of a not so publicized situation where CRA had the “Moral High Road” in dealing with a tax issue. Instead of ethically dealing with the problem, CRA chose to lie, manipulate and harass citizens in blatantly illegal procedures. In the specific case I outlined, all that needed to be done was change a particular law (as it was written in the Income Tax Act). However, instead of closing a legal opportunity they chose to stalk and intimidate individuals into an economic stupor. It was (and is) a deeply sorrowful day for our Country.

However, it revealed the “mind” of CRA. Its power is derived from its ability to harass one specific individual (with virtually unlimited resources) until economic oblivion is achieved. It can also focus on a small or medium size group of citizens (ranging sometimes in the tens of thousands or hundreds of thousands).

Too often Canada Revenue Agency has been promoted as an entirely law abiding body of beurocrats. This, unfortunately, is not the case. When given an opportunity and a reason to abuse, they can be brutal. It reminds me once again of Silvio Berlusconi, the President of Italy who stated “when taxes are too high it is morally acceptable to evade them”. It is my solemn determination to avoid this type of national attitude. Too many accountants across Canada hear clients try and justify “tax evasion” every year. Granted, they do so because they feel they are being unjustly taxed. It’s not the taxation that motivates resentment and abuse but the “unjustness”. That is one of the primary reason I am an advocate of subsistence allowance. If properly and nationally implemented, subsistence may change our Countries anti-government sentiment (starting with truckers of course).

If CRA (with the Finance Ministers approval) focuses on shutting this just and non-discriminative opportunity down, I fear a much more vocal carnage may occur. Eventually, the only other option for equality may come in a flat tax (something I don’t view as entirely necessary at this time). A flat tax would eliminate the jobs of 50-70%+ of all auditors and CRA workers as well as accountants and tax lawyers (an efficient but not very popular move for sure). I trust the current Canadian leaders might see the ultimate outcome of the conflict, embrace justice and equality while refusing to comply with another tax scandal.

So far they have, in fact they have been more than just co-operative. But politics is politics….

Advice to the weary

Historically, being an operator produces 5-10% more net income than just being a driver. Taking in consideration the non taxable benefit of subsistence allowance however, would move the national averages up anywhere to 10-17%. These numbers are significant and could well produce a shift from company driver to company operator. In this turbulent time this tendency may harm uninformed drivers.

I would hazard a guess, however, the 10-17% will not be a national average this year (or even last) as too many operators are sacrificing their own salaries to sustain their business. “Fortunately” (and also sadly) the glaring tax benefits are offset by the sight of operators dropping like flies. However, those who are surviving, and even thriving will continue to maximize non-taxable benefits.

In these turbulent times, understanding supply and demand is critical to sound business practices. Operators changing companies over a cup of coffee must become a thing of the past. In tough times, providing a high level of service creates your own demand and company loyalty. It is critical to operator’s success in an economic downturn. Those who too quickly jump from ship to ship will eventually fall into the water and drown, its inevitable, especially in a recession.

As early as September of 2007 I started telling my clients to “buckle down” and don’t make waves, create value within your company. My advice now is, “if you are at all making a living, no matter how uncomfortable, stick it out!”. The lower grade companies, dealing with lower grade customers and lower grade operators will soon fall by the wayside. You don’t want to be licensed on one of those during a recession.

Take it easy, count your blessings, save your pennies, take advantage of every savings when you can.

My dilemma with the Employer Employee Agreement

It is my firm belief that the fulcrum to subsistence allowance is the employer employee agreement. Without an adequate EEA CRA may try and find legal grounds to overturn its inherent equality.

Therefore I am in a deep personal conflict. I wish to see thousands of operators use subsistence allowance within three to five years. However, one of the success factors needed is the compliant application of the EEA. Without adequate control over the application I may be placing the national acceptance in jeopardy. Providing a perfectly acceptable EEA to someone who doesn’t apply it properly may be placing the entire industry at risk. So what do I do? … its not a rhetorical question… it’s an actual question….

I’ll tell you what I’ve done SO FAR. I have provided a general EEA to our firm’s clients. I then monitor (yes even demand) proper application of it. If a client shows that they are not interested in compliance I remove them from its application (and usually our firm). Why should non-compliant people receive the same non-taxable benefits as compliant people? I don’t know… maybe I’m a control freak!

For the good of the entire industry and future application of the allowance, I am of the opinion (at least right now) I must retain control of the EEA. I am willing to go to the Supreme Court defending the systems integrity but not without assurance the application is reasonably applied.
I am reminded of the tax court judge that presided over the Don Wilkerson court case. The critical quote was “… these kinds of aberrations cannot occur…”. It was clear that the tax court will not stand for injustice, inequality and aberrations. However, we don’t want to present an ethical argument without any regards to compliance. In my opinion the application of the EEA must be applied nationally, the more consistent the better. I think that firms that have been using subsistence would agree with me.

Come on! Let's hear it for equality!

In my research on the application of subsistence to lease/owner operators I have found several firms that use it. However, none have done any public advertising because they seem to be intimidated by Canada Revenue Agency. In their defense CRA is not an easy book to read and not an exact science to practice. They appear to “let things go” and “draw the line” indiscriminately. Sometimes exposing a court case that proves them wrong only seems to delay their tactics rather than stop them.

Too many Canadians believe that CRA audit assessments or re-assessments are based entirely on the Income tax laws as supported by tax court rulings. Unfortunately they are not! They are too often formulated as a geographic application or interpretation. Sometimes one or a group of auditors take on a particular issue with an “end justifies the means” mentality. With the “ends” being tax revenue and the “means” being ignoring of court rulings. For example: I have a case right now on my desk where a T4’d executive (who was re-assessed for a particular tax year) filed a notice of objection against the assessment. Several months after filing it, suddenly the executive’s employer received a garnishment order. I personally presided over a phone call to the auditor assigned to the file. The garnishment immediately was repealed (no apology or explanation). It was repealed because I mentioned the “Notice of Objection”. The auditor acknowledged the filing on their data base and then immediately faxed the retraction. This is NOT an isolated case, in certain instances they are routine. The point is, CRA knew of the notice but ignored the legal requirement to suspend all collections until they were advised (by the citizen) that they (the citizen) knew of their rights under the law. Once it was clear the citizen knew the law, CRA obeyed it. It appears that the phrase “ignorance of the law is of no avail” only applies to citizens not to the government.

This is just one reason why most accountants (if they use subsistence) try and operate “beneath the radar”. They don’t want to be on the phone all day arguing with agents quoting court cases and being harrased with illegal and ignorant actions. I sympathize with them! It’s not a cake walk, especially if an accountant has to work for a living as well. CRA seems to have all the time and money! BUMMER!

This is an open invitation for accountants to ask for assistance in the application and defense of subsistence allowance. If this opportunity is ever to catch on, accountants have to feel comfortable with their application and know how to (or have someone) defend it. In my opinion the strongest means of defending subsistence is compliance and publicity. It’s kind of hard to garnish popularity when one profession is shy to publicize. Come on guys and gals, let’s hear it!

Not Exactly Chump Change

Once an employer–employee agreement has been finalized (I recommend having the agreement placed in the minute book of the corporation) the new employee (driver) takes the keys and starts driving.

After a month he/she receives their first salary check. They also calculate the days gone multiplying it with the current treasury board figures (both Canada and US, adding exchange of course). The total is calculated and submitted to the corporation for payment. Let’s work through an example:

12 days in Canada
81.55 x 12 = $978.60

11 days in the US
81.55 x 125% = $1,121.31

Total nontaxable benefit to driver $2,099.91
GST ITC for company $46.60 ($978.60 x .047619 equals $46.60)

Total expense for the corporation $2099.91 – $46.60 equals $2,053.31

Remember this estimated re-imbursement for job related costs are not subject to and reduction (such as the 50% rule or the soon to be 80% rule). They do not fall under the meals and entertainment category as does expense accounts for salesmen (who entertain). It is a write off identical in principle and format to the treasury board of Canada’s travel directive Appendix B module 1,2, and 3.

So lets re-cap! A driver who drives 23 days gets 2099.91 tax free (tax savings of $735.xx, not including CPP) and the corporation receives a check of $46.60 in ITC’s). If a driver (who also owns the company) does this eleven months of the corporate year the combination of corporate and personal tax savings will be $8,597.60 (not including CPP savings). Not exactly chump change.

So, why aren’t accountants jumping all over this? Because its not how they’ve always done it. If they start changing how they do it, CRA may ask questions. Questions they are shy to answer. It’s not that the questions don’t have answers (and good ones) its just most accountants don’t want to talk to CRA unless they absolutely HAVE TO!