New Tax Year Resolution

A few years ago, I visited a fleet owner for a story about driver files. The guy had a manila folder for each one of his owner-operators, about 20 in all. The folders occupied three drawers of a legal-size filing cabinet and were near to bursting with paper. There were the predictable elements — driver abstracts, incident reports — but also there were things I hadn’t expected: a signed independent-contractor agreement, maintenance and fuel receipts, tax records, the truck financing contract, business cards, even copies of the owner-operator’s invoices from other trucking companies he did work for. I asked how all this stuff would help him during a safety audit.

“The safety audit isn’t what I worry about,” he replied. “It’s the tax guy. I’m covering my butt.”

You’ll get all kinds of tax advice this time of year, but none better than that. No law clearly defines what is an “employee” and what is an independent contractor for the purposes of taxation. The Canada Customs and Revenue Agency will trot out its four-part Weibe Door Services test, where you’re judged on the degree of control you have over the worker; the ownership of the tools he uses; whether the worker has any opportunity for profit (or loss); and the degree to which the worker is integrated into your company’s business. Save everyone the trouble and just ask yourself, “Does it walk like a duck?” “Does it talk like a duck?”

The problem is, if you make a mistake and characterize one of your employees as an independent contractor and CCRA disagrees, your company will be liable for income and payroll taxes that should have been withheld on that person’s account, plus interest and penalties. So will the company’s directors.

The numbers can add up. Consider the dispute last year between a Beausejour, Man., trucking company and CCRA over whether some of the firm’s drivers were employees or independent contractors. The owner of Lakeland 2000 argued that drivers who leased trucks from the company were independent and, therefore, Lakeland wasn’t required to collect and remit Canada Pension Plan and Employment Insurance deductions from them. CCRA decided otherwise. The agency backdated its ruling to 1998 and ordered Lakeland to pay a total of $380,000 in overdue deductions, interest, and penalties. The company’s failure to show independent status for its lease-ops (a real stretch for anyone) helped put it out of business.

Not surprisingly, people are more than happy to be characterized as independent contractors for tax purposes. But cut a contractor’s miles or hours and he may start to wonder if maybe he really has been an employee all these years… Feeling needy or entitled or both, he may put in a ruling request for CPP and EI. If he succeeds, the employer will be assessed not only for its portion of CPP and EI but for the employee’s as well — going back three years.
The fleet owner with the fat files used to pay off drivers who pulled this stunt. Five-thousand bucks to shut up and go away. Then he got smart. Now he looks for any little thing that will help clarify the business relationship with his independent contractors. None of his owner-operators works without a contract. He insists on using incorporated contractors only (“Auditors see that and look no further,” he said). Certain operational realities make it hard not to rule that he has control over these guys — the dispatch function, for instance — but he’s taking other steps to make them as distinct as he can.

There’s another benefit here. Remember, an owner-operator or agency driver who is independent for tax purposes is, despite what you’d like to believe, in nearly every case an employee under federal or provincial labour law. In its certification order allowing a Teamsters local to represent drivers working for Mackie Moving Systems, the Canada Industrial Relations Board last year held that the traditional common law tests of control were no longer particularly relevant. Instead, it looked at the economic dependence of contractors on Mackie.

The voluntary nature of this country’s tax-compliance system is a wonderful thing, but it makes for suspicious folk at the CCRA — especially when the trucking industry’s peculiar labour practices are involved. Any truck fleet that uses contractors — whether they’re owner-operators or agency drivers — ought to conduct business with an inevitable audit in mind.