The Canada Revenue Agency (CRA) and Employment and Social Development Canada (ESDC) have clarified how they will treat the practice of so-called Driver Inc. by removing any grey area as it relates to the tax and labour status of incorporated drivers operating company vehicles.
The Driver Inc. model is based on commercial vehicle drivers, who do not own/lease or operate their own vehicle, becoming incorporated and receiving payment from their carrier with no source deductions. This practice opens the door to the possibility of widespread tax manipulation by those engaged in Driver Inc.
In documentation provided to CTA and now published on the agency’s website, CRA explains that while it cannot legally deny any Canadian’s right to incorporate, there are limits in circumstances involving Driver Inc. If, then, an individual incorporates but has labour characteristics virtually indistinguishable from an employee – for example, working exclusively for one employer or not owning/having registered any equipment assets – that person is deemed a Personal Service Business (PSB).
CRA explained to the CTA Board the following facts regarding the tax treatment of PSBs:
- PSBs are not entitled to income tax deductions available to other corporations (e.g., the small business deduction and the general rate reduction).
- PSBs cannot deduct most expenses available to other corporations (e.g., office supplies, meals, cell phone, etc.).
- PSBs are subject to a combined federal and provincial tax rate of 33%.
- Amounts paid by one business for services provided by another business must be reported to the CRA but are not subject to statutory payroll deductions.
- If the corporation pays salary and wages to one or more employees, these amounts will be subject to withholding of income tax, CPP and, in some cases, EI.
Consequently, CRA states that beginning tax year 2018, all payments made to self-employed individuals deemed to be PSBs, like incorporated drivers and owner-operators, must be reported on a T4A slip – Statement of Pension, Retirement, Annuity and Other Income. This is in line with measures already in effect and consistent with how the agency treats all other sectors of the economy, like construction workers.
CRA emphasized to CTA the agency is committed to protecting the fairness and integrity of Canada’s tax system and it takes tax evasion (under-reporting income or claiming ineligible expenses) very seriously.
The CTA Board has approved a lobby and public education campaign aimed at Ottawa on the issue of PSB tax compliance in the trucking sector. The Alliance is also calling on policy makers to provide CRA the manpower and resources to properly enforce the law nationally as well as increased fines for non-compliance of the T4A requirement. CTA will also launch an industry education campaign informing drivers who have self-incorporated of their tax status as a PSB, along with the requirement of fleets to issue T4As to self-employed individuals.
“CTA applauds CRA’s actions. We now have clarity of the rules from a tax filing and enforcement perspective regarding Driver Inc.,” said CTA president Stephen Laskowski. “We will begin educating the industry on this policy and ensure that it is enforced.”
In a letter to CTA, ESDC also reinforced its position on self-incorporated drivers, echoing its long-established guidelines in how it determines employer-employee status. Consequently, incorporated drivers operating company vehicles are entitled to the same treatment under the law with regards to overtime payments, general holidays, vacation time and pay, as well as termination and severance. ESDC will be diligently enforcing this interpretation.
ESDC responded with a memo stating that incorporation does not, in fact, factor heavily in a determination of employer-employee status and as such, “Personal Service Business(es) would not have a special status under the code.” CTA provided ESDC with a scenario of a classic Driver Inc model – in which an incorporated driver is operating company equipment – and under these circumstances, ESDC determined that the “employer-employee relationship exists and that the (Labour) Code applies.”
Furthermore, ESDC outlined its enforcement approach to Driver Inc: “While the Labour Program primarily encounters these cases based on individual complaints, we do conduct inspections in high risk industries and would consider targeting businesses that operate using a Driver Inc. model if they can be identified.”
Meanwhile, CTA is also encouraging ESDC and CRA to work with provincial workers’ compensation boards to ensure all fleets and self-employed drivers are paying their fair share into the provincial systems. Each provincial association member of the Alliance was asked by the CTA Board to raise this matter with their local workers compensation officials.
“We believe Driver Inc. is costing Canadian government hundreds of millions of dollars in lost tax revenue from drivers not filing as a PSB or simply not properly reporting their income,” says Laskowski. “We are hopeful, the combined actions of CRA and ESDC will finally restore labour standard compliance and tax fairness throughout the trucking industry.”
In the coming weeks CTA will roll out an advertising campaign aimed at educating drivers and carrier employees of CRA’s clarification of the Driver Inc model and its treatment of PSBs to require T4As among other conditions. CTA is planning to follow up with a second ad directed at legislators, reminding them of the tax revenue leakage caused by Driver Inc and urging them to support CRA and ESDC with the resources to enforce tax and labour fairness and compliance in the industry.