Specking Your Taxes (condensed from OTR Article)

Reducing your costs during a time of slim margins is the first smart thing operators do. Especially today, drivers who spec their trucks for 75 MPH just don’t reflect smart business sense (regardless of speed limiter legislation). When oil was $10-15 per barrel nobody cared, but today it’s nearly certain financial suicide. A lease/owner operator must think business minded now more than ever before. Bells and whistles can sometimes become death and destruction.

Smart operators are still making money. They’re still doing ok because they thought ahead to most all the risks and pitfalls then devised a plan to minimize or even eliminate them.

Thinking ahead for your taxes is also a smart business choice. Too many drivers still have “off the lot” mentality when it comes to taxes. They think that, at the end of the year, taxes are what they are. When they drop off their shoebox full of statements and receipts they think there is no other result than the tax bill presented. This is how they’ve always done it. I hate to break it to them harshly but that’s just not true. It is no truer than specking a truck for 75 MPH and saying fuel consumption “…is what it is”.

The Canadian Tax system is complex. It is sometimes written in vague terms that are subject to considerable interpretation. It is what keeps the accounting industry hustling. The Income Tax Act says a business can deduct “a reasonable amount” of meal expenses. The Tax Law does not mention ANY number. It is the mandate of Canada Revenue Agency to determine what that amount is. Once CRA determines that maximum number for the year (or time period) it is assumed by the citizens and the tax courts to be fare, just and universal. However, this is where confusion and controversy arises.

CRA allows several different systems of reporting business income. Each system has subsequent rules assigned and the bottom line results can vary significantly. The difference is how expenses are reported and presented to CRA.

Let me give you what I consider an extreme example of difference in reporting and presenting. Singleton vs. Canada 2001 2 S.C.R. 1046, 2001 SCC 61. A lawyer took $300,000 capital out of his partnership and bought a house, then (the same day) he took out a mortgage for $300,000 and BORROWED that money to his law practice. He reported the interest on his personal home mortgage as “tax deductible”. CRA audited his return and rejected the interest. The first time I heard of the case I didn’t think the guy had a chance, it appeared to be an obvious paper shuffle. However, the Supreme Court of Canada held up the appeal. The interest was deductible. This is what the Court said:

“…Taxpayers are entitled to structure their transactions in a manner that reduces taxes, the fact that the structures may be complex arrangements does not remove the right to do so… It is irrelevant that… the respondent structured the transaction for tax purposes… Since fairness requires that the same legal principles must apply to all taxpayers, irrespective of their status as natural or artificial persons…”

It is the right of every Canadian to minimize their taxes, how they do so is up to them or their accountant and requires research into specking or reporting their income and expenses accordingly.

The industry is changing fast, those who find the right answers ahead of time will be prepared for the future.