Driver Inc. is one of the most debated topics in the Canadian trucking industry today.
This model of driver engagement has grown over the last decade because it supposedly allows for significant tax savings for both the so-called contract driver, as well as for the hiring company.
But is it really as simple as that? Is it legal? Drivers who are either in this sort of relationship with a carrier, or are considering entering into one, should inform themselves of the full scope of the risks they face.
And, if the goal is to run your own small business to increase your take-home pay, I would suggest there is a better way.
Firstly, contract drivers generally get paid less per mile or per hour than they would otherwise get paid as an employee.
They are willing to accept a lower rate to avoid source deductions being taken off their pay.
If they have a good – scratch that, creative – accountant, the thinking is there will be little to no taxes to be paid at the end of the year once all eligible business expenses have been deducted.
Not only is there significantly more of an administrative and record-keeping burden associated with this approach (not to mention the related legal and accounting costs), in reality, these drivers are taking home less than if they were an employee.
Also, contractors do not enjoy the many rights and protections owed to employees under Canada’s labor laws.
For example, contractors may be let go at any time and for any reason, without severance. A company is also not required to pay the company portion of Canada Pension Plan (CPP) and Employment Insurance (EI) premiums for contractors. Contract drivers must cover these expenses on their own.
Contractors are also foregoing at least two weeks of vacation and nine statutory holidays that are required to be paid to employees. That is an entire month that contractors do not get paid for.
In other industries, contractors may be paid better than employees in order to make up for these fairly significant shortfalls in earnings and benefits. This is unfortunately not often true in trucking.
According to the Canada Revenue Agency (CRA), one of the key factors in distinguishing between an employee and a contractor is whether the equipment or tools used in undertaking the work are owned by the individual – in this case, a truck.
Some drivers believe they can get around this by incorporating themselves. Sorry, not so!
The reality is that an individual who simply provides driving services, runs the significant risk of being deemed a personal services business (PSB) which attracts basically the same high tax rate and limited ability to deduct expenses as if the driver were an employee.
CRA defines a PSB as: “A business that a corporation carries on to provide services to another entity that an officer or employee of that entity would usually perform.” Sounds like
Driver Inc. to me and I expect CRA will ultimately rule that way. This could be catastrophic for a driver, as CRA can go back and re-assess several years, charging interest and penalties on the re-assessed amounts.
Income taxes would be re-assessed at a higher rate and expense deductions not available to an employee would be denied. CRA will ensure that the contractor is put in the exact same position they would have been if they were an employee.
So, what is the point? In my view, contract drivers are taking a great risk. They are likely just deferring their tax bill while not making any more money in the meantime.
But, what is more perplexing, is that if a driver truly wants to become a legitimate small, independent business in order to maximize his or her take-home pay, there is a perfectly legal and accepted way of doing that: buy a truck and operate as an owner-operator.
There are many lending institutions that can help drivers make the transition. Indeed, many trucking companies offer reasonable lease-to-buy programs with no deposit requirements. They may also offer attractive pricing on fuel, maintenance and insurance.
Not only does this model allow the corporation to access the small business tax rate and legitimately deduct eligible business expenses, but they can also make significantly
Using the company I work for, Titanium, as an example, our owner-operators can gross upwards of $250,000. Even after truck payments, fuel, and repairs and maintenance, owner-operators can still take home a six-figure income.
A contract driver, in comparison, generally makes around $55,000 to $65,000.
Owner-operators, in the meantime, are also building equity in their truck. After a truck is paid off, owner-operator take-home pay increases by another $20,000 to $30,000 a year.
Alternatively, that equity can be used as a trade-in towards a new truck with reduced monthly truck payments.
Reputable companies take care of owner-operators and make the transition easy for them.
Freight is generally balanced or auctioned, so that every owner-operator has equal access to good freight.
All things considered, there is much more money to be made as an owner-operator and for much less risk.
Contract drivers should be wary and consider the owner-operator model, as the only one really profiting from a Driver Inc. arrangement is the company they work for.
The companies that are hiring contract drivers should worry as well. In their case, it’s not CRA that should be a concern, as CRA has more to gain by going after the contract drivers.
These companies should be worried about the class-action lawsuit coming their way for all the years of vacation and statutory holiday pay that was avoided. That is after all, how the model unraveled in the U.S.
Kasia Malz is the CFO of Titanium Transportation Group, a leading provider of transportation and logistics services throughout North America. She can be reached at email@example.com.