TORONTO, Ont. - Tax time is creeping up, and just how you define yourself and/or your business has everything to do with what you end up having to pay.Needless to say, it's best to figure it out befor...
TORONTO, Ont. – Tax time is creeping up, and just how you define yourself and/or your business has everything to do with what you end up having to pay.
Needless to say, it’s best to figure it out before you end up in tax court.
A couple of cases just released by the federal tax court show the courts are still applying a classic legal test to determine whether a trucker is an employee or a “independent contractor.”
Employee drivers get benefits like severance pay, pensions and unemployment benefits, plus their employer is obliged to withhold income tax and CPP on their earnings.
But those who engage “independent contractor” drivers can sever the business relationship at any time, plus the drivers themselves get to deduct their operating expenses from their income.
When tax court judges need to figure out whether a driver is an employee or an independent contractor, they don’t look at the way the parties have written up their deal – they look at the actual relationship between the payer and payee.
Judges usually look back to a 1986 Federal Court of Appeal case, where Wiebe Door Services Ltd., an industrial door company, claimed its installer/repairmen were independent contractors, and therefore not liable for CPP and unemployment insurance withholdings.
The revenue minister argued the installers were employees.
The court at that time created a four-part test to determine whether an “employment” relationship exists:
The degree or absence of control, exercised by the alleged employer;
Ownership of tools;
Chance of profit and/or risk of loss;
The degree of “integration” of the alleged employee’s work into the alleged employer’s business.
This was the classic test (it’s called the “Wiebe Door” test) that got applied last August 19 (2003) when Mississauga, Ont.-based Lyte Enterprises Inc. claimed a dozen of its truckers were independent contractors.
The minister of national revenue begged to differ and said they were employees.
Lyte went to the tax court for a ruling.
The drivers hauled freight for Lyte’s clients across the U.S. and Canada.
They drove trucks owned by the company.
The drivers needed to have both experience and an AZ licence, plus they had to keep logbooks.
They reported to Lyte when a load was delivered, or to obtain new assignments. The company provided drivers with pagers and they were required to deliver their loads within time frames determined by Lyte.
Lyte’s name and authority numbers appeared on the trucks. The drivers were paid on a per-mile basis, but trucking costs, including repairs, maintenance, fuel, insurance, road and bridge tolls were all paid by Lyte.
Lyte also offered drivers medical, dental and life insurance plans.
Toronto Tax Court Deputy Judge William E. MacLatchy applied the four-part test and agreed with the minister – the drivers were employees.
While Lyte didn’t actually “control” its drivers (in the sense of supervising them), their job was to deliver Lyte’s customers’ goods and the company would provide all the custom forms and declarations, manifests and bills of lading – whatever was required by the driver to deliver the load.
The dispatcher’s time limits had to be obeyed and drivers had to call in once deliveries were done. If they came back empty they wouldn’t get paid.
Lyte also owned the “tools” – in this case the trucks – and covered all their expenses. This clearly “pointed to an employer-employee relationship,” MacLatchy said.
The drivers did have a “chance of a profit” – but the only way a driver could increase his income was to drive more miles, and that, said MacLatchy, was “not profit in the true entrepreneurial sense.”
There was also little “risk of loss” to the driver.
Drivers could take a longer route to the destination but they wouldn’t be paid the extra mileage so had little incentive to do so.
And even though drivers were responsible for their own meals and other personal comforts, “these items cannot be considered as an entrepreneurial loss,” said MacLatchy.
As for the degree of “integration,” it wasn’t enough that all the drivers had signed an acknowledgment that they were independent contractors.
A driver couldn’t approach Lyte and say he had a trucking business and that he’d take Lyte’s business deliveries on as his own business, MacLatchy said.
All these factors pointed to an employer/employee relationship.
But the tax court came to a different conclusion last Sept. 2 (2003) when it applied the same four-part test to the relationship between driver Joseph Tesiorowski and 1463863 Ontario Ltd., operating as DSD Inc.
Driver Joseph Tesiorowski wanted to be considered an employee – and though the case doesn’t say so, he probably wanted to collect unemployment benefits. Tesiorowski and DSD had parted company before the case went to court.
DSD started business in London, Ont. after the closure of Lewis’ Bakery.
Tesiorowski had worked for Lewis for 21 years as a unionized driver – and DSD offered to keep him on him an “independent distributor.”
Tesiorowski told the court he worked five days a week from 6 a.m. to 3 p.m. and was paid $500 a week plus commission.
He was “assigned” a territory that was identical to the route he’d driven for Lewis Bakery since 1991. He didn’t own the truck, but it was leased for him and he said he still wore his Lewis uniform.
He said he was obliged to sell DSD products at a set price and distribute them as before to make commission on his sales.
DSD countered that it had not carried on business in the Lewis name – and Tesiorowski wasn’t required to wear the uniform.
The agreement he’d signed with DSD clearly stated the driver had to provide his own vehicle. Tesiorowski didn’t have the money for the lease payments so the company helped him out and helped him lease his truck.
DSD has provided Tesiorowski with $500 a week until he was up and running and making his own commissions, but it wasn’t obliged to do so.
The company also produced invoices where it had billed Tesiorowski back for truck insurance, lease payments and fuel, which it had paid on a day-to-day basis.
Tesiorowski didn’t punch a clock, there was no supervision and he had no vacations or benefits. And the agreement Tesiorowski signed clearly said he wasn’t an employee.
And while Tesiorowski was obliged to sell baked goods at a set price for “national accounts,” he was also free to sell products to other accounts for whatever he could get.
Applying the “Wiebe Door” test, London Deputy Tax Court Judge J.F. Somers concluded Tesiorowski was an independent contractor, not an employee.
He set his own hours and established his own clientele, even though he drove the same route as with his former employer.
Somebody else leased his truck, but he was accountable for its cost even though DSD covered expenses for him.
He had a chance of making a profit or suffering a loss, and he set his own prices for many of his accounts.
He even applied for his own GST number which, according to Somers, indicated “his acceptance of being an independent contractor.” He was therefore not integrated into the payer’s business, but acted on his own.
These court decisions send a strong message to drivers, owner/operators and fleet owners: if doesn’t matter what sort of contract you have – the taxman will look past how you’ve “papered” your arrangement and decide whether someone’s really an employee based on what’s really happening between the money-payer and the person who receives it.
The message here for drivers and owner/operators is (assuming you even want to be an independent contractor), don’t allow the fleet operator to give you too many benefits or perks – pay for them yourself and negotiate a higher per-mile rate to cover the cost.
And try to “own” your own truck – maybe even assume the fleet owner’s lease of the vehicle so it’s really your “tool,” and not his. Again, your mileage will reflect any added cost.
Also – make sure you properly “invoice” your engager.
Whether you’re paid for mileage, or by the day, or by the hour, you’ll have to document all that and send him a bill – and it probably wouldn’t hurt to have an invoice form that’s not drawn up by the fleet operator.
For fleet operators: think very hard about whether it’s even worth it to save a few bucks in administrative costs just to keep your drivers on as independent contractors?
Maybe it’s beneficial (and it’s certainly less risky) to have them on board as employees, and for you to make all the tax and pension deductions the law demands.
Talk to your tax advisors and crunch the numbers.
One thing to remember for operators who want to keep their drivers as independents: make sure there’s solid evidence of an arm’s length relationship – that means you don’t pay drivers health and pension benefits (they pay them).
You should also minimize perks (like on-the-road meals and hotels).
And make sure they’re registered to collect GST, which you’ll have to pay them on top of whatever you’re already paying them (GST is not payable on salaries, but it is payable on the services of an independent contractor).
It also wouldn’t hurt to have them lease their vehicles directly from the leasing company rather than have you pay that cost. You’ll have to pay them more to cover the added cost, but you’ll save by having the driver assume the lease.