The Per Diem Diet

If your accountant has never heard of Don Wilkinson, maybe an introduction is in order. Wilkinson is the Winnipeg owner-operator who challenged the amount the Canada Customs and Revenue Agency allows transport workers to deduct for meals away from home. Last year, a federal tax court judge granted Wilkinson’s claim of $40 per day minus 50%, CCRA’s standard allowable deduction for travel-related business meals.

We reported the story in our March issue and floated the idea of companies paying their drivers a per diem when they travel as a way to avoid TL2s altogether-who expects business expenses incurred while on the job to be paid with taxable personal income? We’re still getting calls and letters, many with a tinge of doubt-typically along the lines of, “If it sounds too good to be true, it probably is.”

It seems further explanation is in order.

Like anyone else who works away from his employer’s place of business and who does not receive an allowance for meals, a truck driver can claim his actual meal cost provided that each expense is reasonable, itemized, and verified by a receipt. But Wilkinson, like most truck drivers, used the CCRA’s “simplified” calculation method. It requires drivers to keep a travel record but not receipts for each meal. Drivers may claim $11 a meal, again minus 50%.

Wilkinson challenged the fairness of the figure-established 10 years ago-saying it was insufficient given inflation and the operating conditions of most long-haul truck drivers today. That is, they log a lot of miles in the United States and spend U.S. dollars.

The judge’s decision doesn’t establish exactly what is “reasonable” for truck drivers to claim under the simplified method. It only states that, in Wilkinson’s case, $33 a day is insufficient and $40 is more appropriate. Any driver is welcome to make a similar argument, but should expect to find himself defending it in court.

Amid all this talk of per diems, you have to wonder: why not bypass TL2s and court dates completely? What if trucking companies paid their drivers a non-taxable per diem at some agreed-upon corporate rate in exchange for reduced per-mile pay? The driver wouldn’t report the meal allowances as income, and wouldn’t claim a meal-expenses deduction on his tax return. Like most people, he’d turn in a meal claim at the end of each month, and his employer would pay it.

Incorporated owner-operators could work out a similar agreement. As an employee of their own company, they could draw a per diem as part of their compensation. The corporation would pay tax on the non-deductible portion, which is 50%, but the combination of personal income tax savings, corporate income tax savings, and reduced Canada Pension Plan contributions-because of lower taxable earnings reflected on the owner-operator’s T4-could amount to thousands of dollars a year.

ADJUSTING THE NUMBERS

We’ve had inquiries from fleet managers who want to know where to start adjusting their mileage rate in order to compensate for the per diem in exchange for a tax-free daily meal allowance.

Say $48 is the per diem you want to shoot for. In rationalizing the spread between mileage and the allowance, deduct the equivalent of $48 off what your drivers might have earned on mileage in one day (say they run 120,000 miles a year). It’s tricky: daily mileage is rarely the same.

Here’s one solution. Start with an annual earnings target for your drivers ($42,000). Then determine, using last year’s logs, how many days they spent away from home (we’ve used 200 in all our examples) and multiply that figure by the per-diem allowance you want to offer (200 days away x $48 per day = $9600). Now, knock that amount off the drivers’ expected earnings to arrive at a “revised” mileage rate ($42,000 – $9600 = $32,400 ÷ 120,000).

You may run into problems trying to quantify the non-earning days when the driver is laid over, or running fewer miles than usual. Try taking an average based on previous months (miles divided by days away), or you can just assume that, on average, your drivers are away 20 days out of the month, and base their projected expenses that way.

On the other hand, you and your drivers could agree to a “reasonable” reduction in pay-somewhere around eight cents per mile, we guess-in lieu of a per diem for all the time away. This idea has benefits for both sides.

It’s worth the time spent tweaking numbers with your accountant to see if it works for you.

SIDEBAR: Working for Food

This chart represents a typical Canadian company driver (or incorporated owner-operator paid as a company driver) with an annual income of $48,000. Assuming the driver spends 200 days away from home, compare the tax benefits of using the TL2 simplified meal tax deduction (50% of the allowable $33 a day) versus a $48 per diem paid by his company. Source deductions have been rounded for clarity, and may vary slightly from province to province.

Our chart illustrates a typical Canadian company driver (or incorporated owner-operator paid as a company driver) with an annual income of $48,000. The tax deductions have been rounded for clarity, and will vary only slightly from province to province. Your exact numbers may be slightly different. EMPLOYEE TL2 Plan $48 Per Diem Gross pay $48,000 $38,400 Personal deductions $8000 $8000 Taxable earnings $40,000 $30,400 Taxable earnings over $30,000 $10,000 $400 Federal income tax $7000 $4888 Provincial income tax $2780 $1836 EI premiums $917 $684 CPP premiums $1490 $1307 Gross payable $12,187 $8,715 Meal-deduction tax savings -$1033 0 Net tax payable $11,154 $8715 Add per-diem income 0 $9600 After-Tax Income $36,846 $39,285

Net benefit of per diem to employee: increase in after-tax income of $2439 EMPLOYER COST TL2 Plan $48 Per Diem Gross pay $48,000 $38,400 EI premiums $1260 $957 CPP premiums $1720 $1307 WCB premiums @ $5.90 per 100 $2040 $1550 Gross outlay before per diem $53,020 $42,214 Add per-diem cost 0 $9600 Tax on 50% of per diem (@19%) 0 $912 Gross Labor Cost $53,020 $52,726

Net benefit of per diem to employer: decrease in gross labor cost of $294

As you can see, an employee using the per diem method keeps an extra $2439 over the employee using the TL2 method. Employers paying their drivers a per diem after adjusting the mileage rate to reflect the per diem offering, lowers the gross cost of employing the driver by $294 per year.