By Stephen Laskowski
Driver Inc. is an emotional issue in our industry – and for good reason. The non-compliant behaviour based on tax evasion and manipulation of the Labour Code is destroying the competitive landscape of the trucking industry and distorting the supply chain in ways we have never seen. Driver Inc is not a ‘new’ entrepreneurial strategy to get a competitive edge in trucking; Without a shred of doubt, it’s a systemic scheme based on profiting from skirting legal obligations, including – but not limited to – corporate and personal tax evasion, labour misclassification, misrepresentation of fleet registrations, insurance irregularities, under reporting of vehicle use and fuel consumption and, in some cases, forced labour through various abuses of immigration programs.
Carriers who abide by the law and refuse to participate in Driver Inc. are what the trucking industry needs; it’s what this economy needs, and, frankly, what our society needs if we want to be able to adequately fund our medical and education systems, infrastructure needs and the social institutions we have come to expect as Canadians – especially with some of the demographic and the socio-economic headwinds we face in the decades ahead.
Compliant carriers form the backbone of the supply chain – they are the true entrepreneurs who are surviving despite having all the cards increasingly stacked against them. They should be applauded and supported for their commitment to trucking the right way and supporting Canada’s social fabric rather than looking for every unscrupulous trick to opt out of their responsibilities. Instead of being dismissed as out-of-touch or not entrepreneurial they should be celebrated and emulated for their sustained success as legal, and responsible corporate citizens.
It’s an undisputable fact that Driver Inc is illegal under every standard we currently have on the books. Let’s explore that without any of the red herrings that have been floating out there recently. To paraphrase Dragnet’s Joe Friday (under 40s can Google it), I’ll proceed here with “just the facts.”
This column will focus on the tax side of the scheme, but it’s important not to forget that the concept of a Personal Services Business (PSB) does not exist from a labour perspective. The Canada Labour Code only has two classifications (1) Employee and (2) Independent Contractor. If you are not a legitimate small business and do not own a truck or make legitimate equipment payments, you are an employee – end of story. Think being incorporated changes things? It doesn’t and ESDC is clear in its ruling on this matter:
“Of note is that whether or not a worker is incorporated does not factor heavily in a determination of employer-employee status. As such, Personal Service Businesses would not have special status….in this case we find that an employer-employee relationship exists and that the Code applies.”
CRA
So how does CRA see things? Like ESDC, CRA has (1) Employees and (2) Independent Contractors, but also has another category called Personal Service Businesses (PSB). Like in the Labour Code, Driver Inc. does not qualify as independent contractors for essentially the same reasons (does not pass the independence test). Therefore, if the worker insists on being an incorporated worker, they become a PSB.
So, what is a PSB then? CRA describes PSBs as an entity that provides services to a business that a regular employee usually performs. The person is labelled as an ‘incorporated employee’ and not a contractor or self-employed individual. So, if you don’t want to be an employee and you don’t qualify as a true independent contractor what does this mean for your taxes now that your company has made you a PSB?
The combined federal and provincial tax rate applicable to PSBs in Ontario is 44.5%, which in nearly all cases will be higher than the effective tax rate payable by the driver on employment income. In addition, you are also not eligible for many business deductions available to true independent contractors. Finally, it comes with many added business, legal and tax expenses a normal employee would not have, like special corporate tax filings. Combine these facts with all the compensation benefits a PSB loses as a non-employee, and the truck driver who becomes a PSB will see their total compensation package shrink considerably when compared to a truck driver who files taxes and receives a compensation package from their company as an employee.
What does that mean? It means there are zero – and I mean zero – tax and compensation reasons why you, as a truck driver, would want to be a PSB. Unless, that is, it’s your plan or your company’s plan that you will not pay your taxes or take deductions that are not legally available to PSBs. Don’t believe me on the PSB tax implications? Fine. Read CRA’s memo on the subject matter.
T4A
Before 2011 it was mandatory for all businesses to issue a T4A to their contractors to show payments made. In 2011, an enforcement moratorium was put in place. Since then, CRA has been trying to resolve some issues in the business community – mostly not pertaining to trucking – around the issuance of T4As. The Canadian Trucking Alliance’s position is to bring back the T4A system, or something similar, just for trucking. Those who would object to this likely do so only for nefarious reasons.
Under a mandatory system with the enforcement moratorium lifted, under a CRA audit, if a carrier does not issue a T4A to a contractor, and CRA cannot track down the contractor, the carrier is now on the hook for those contractor’s taxes. The CRA will get what’s owed one way or the other. Why is this important to the Driver Inc matter? Well, it means carriers can no longer wash their hands of tax obligations and if they start issuing T4As, you can be sure some of their drivers will walk to the next Driver Inc carrier. I understand that is the legal conundrum of T4As and Driver Inc. But to that I say – well, welcome to the club of trying to operate and manage a legal business.
CRA & The Corporate Veil
Some say the T4A is the key to escaping corporate responsibility as the CRA will not pierce the corporate veil between two separate businesses. This is an important point of law that CTA supports. However, CTA also supports the application of law when a criminal conspiracy exists to circumvent the law by arranging a corporate system explicitly designed to create labour misclassification and tax evasion (not tax avoidance). This is an interesting scenario for some in the Driver Inc. community if CRA decides there is enough evidence where the corporate veil protection no longer applies. Interestingly, if accountants or other similar professionals (within a company or not) are found to be aiding or organizing this activity, they can personally be held responsible as well.
Enforcement
When the CRA comes to see you and they find problems, they – as the saying goes – are like guests that won’t leave. The penalties depend on a variety of factors (if you are not paying at all; or just improperly claiming deductions, and how long you have been doing this) but it’s safe to say this will hurt if you are caught. Whether it’s the company itself, a tax or legal professional who convinced you to do this, or you, as the driver – someone will eventually take the fall. And if people are telling you that this is OK; or that there’s some ‘grey area’ or ‘don’t worry, you won’t ever get caught’ – well, chances are you’re looking at the ‘fall guy’ in the mirror.
While each situation may be different, these are the potential consequences according to CRA:
- Late filing/Failure to file penalties.
- Repeated failure to file penalties.
- False statements or omissions (gross negligence) penalties.
- Interest (interest on overdue amounts).
- Potential for additional gross negligence penalty as well on the interest.
- There is no limit to how far the CRA can go back legislatively when an error or omission is discovered that is attributable to carelessness or neglect. In the case of possible PSB corporations, the normal reassessment period is 3 years from the date of the initial notice of assessment.
Driver Inc Decoded
So, if a Driver Inc company is trying to convince you to incorporate or become a PSB, this is what they’re really saying in plain language:
Welcome to my fleet. I want you to become a corporation known as a PSB, take on the legal responsibility of a corporation and pay more taxes than you would as an employee. Also, all the protections and compensation benefits afforded to you under the Canada Labour Code – overtime pay, vacation pay, paid sick days, Canada Pension, Unemployment Insurance, work protections, etc. – are also gone once you sign on to the PSB program. With that, welcome to the underground economy. If the feds don’t catch you, you’re golden; if they do, you’re on your own and good luck facing tens of thousands of dollars in fines and/or backpay and perhaps even jail time for gross violations.
In our next piece, CTA will walk through the Labour Code and explain the monumental impact on a competitive basis, which is jeopardizing the solvency of all carriers who follow the law.
