I’ve been in the accounting industry working with Independent Operators for well over 25 years. About twice a year I have an Operator ask me if they should put their new SUV into their Corporation. If I’m lucky (which would be BEFORE they purchase the $60k vehicle) I tell them NO. Not only should you NOT put it in… you should probably NOT buy/lease it. I know it’s a little personal but still great advice. Too many car salesmen trumpet the horrible advice of “you can write it all off… save taxes and get an awesome ride”. This advice is wrong on two major fronts.
Firstly, it is far too expensive a vehicle for an Operator to be driving! National averages place truck drivers (and Operators) at $60-70k of taxable income per year. Unless the spouse has a secondary income, which doubles that, owning a depreciating personal vehicle of that value with only $60-70k income is foolishness. You’re working your behind off only to give your money to a dealership and financing company. When you lose half the value to depreciation in 5 years you vaporize $6000 a year… that’s 10% of EVERYTHING you make… that’s NOT INCLUDING fuel, insurance, and licensing. That’s pure financial insanity. It’s a choice based on PRIDE, not reality.
Building after tax wealth is a conscious choice to invest in things that INCREASE… not DECREASE. Increase as much as you can while decreasing as little as possible. $60k purchases or leases like that are evidence that someone is thinking wrong… or simply… not thinking. I am associated with a lot of millionaires; people with seven figure wealth (not many with eight figures but plenty with seven). The only one that I know that buys a new vehicle every 4-5 years is the eight-figure guy. The wealthy people I know have bought maybe one or two new vehicles in their life… and only then much later in life (AFTER they were worth seven figures) … you know… when they could actually AFFORD it. I believe that one of the major contributing factors to poverty is the personal vehicles people choose to drive… not the job they choose to work at.
The second error comes in the advice from the salesman “you can write it all off!”. This is NOT true! 99% of Operators who purchase a $60k SUV will use it mostly for PERSONAL use… only a small amount of usage will ever be business. Even then, you MUST keep a logbook for all the KM on the vehicle, splitting them into a business and a personal percentage. Only the business percentage is expensed. 80% of all Operators do NOT have a logbook for their personal vehicle. It’s almost always ESTIMATED. The risk for audit is higher as the amount increases. Anything over $2,500-3,000 annually is above national averages. If you are averaging a depreciation of $6,000 per year your high percentage guess is going to flag an audit most likely. If it’s lower, you’re not expensing it! Most Operators (if not all) don’t have their taxes done by someone who is liable for the results. In the end, Operators carry all liabilities for their tax returns. It’s not an excuse to say “I didn’t know” … it’s your business to know.
The safest and best way to convert taxable income into non-taxable benefits is to have your corporation pay you cents per kilometer (CPKM) for your vehicle. What CRA allows is very realistic and in some cases generous; it all depends on what type of vehicle you use. If you use a very economical vehicle your actual costs are maybe 25 CPKM. If you drive a guzzling SUV or Lamborghini your costs could run 70-80+ CPKM. Currently, Ontario travel reimburses at 59 CPKM, so at 500KM in a month, one vehicle MAKES $170 of after-tax wealth and the other (at 75 CPKM) LOOSES $375. Humble choices can add up to HUGE changes in future wealth.
The tuition for the school of hard knocks is still very high… and some of it… NOT tax deductible.
About the Author:
Robert D. Scheper is a leading Accountant and Consultant exclusively serving the Lease/Owner operator industry in Canada. His first book in the Making Your Miles Count series “taxes, taxes, taxes” was released in 2007. His second book “Choosing a Trucking company” is the most in-depth analysis of the independent operator industry today. He has a Master’s degree (MBA) in financial management and has been serving the industry since he and his wife came off the road in 1993. His dedication, commitment and strong opinions can be read and heard in many articles and seminars.
You can find him at www.makingyourmilescount.com or 1-877-987-9787.
Robert D Scheper operates an accounting and consulting firm in Steinbach, Manitoba. He has a Masters Degree in Business Administration and is the author of the Book “Making Your Miles Count: taxes, taxes, taxes” (now available on CD). You can find him at www.thrconsulting.ca and thrconsulting.blogspot.com or at 1-877-987-9787. You can e-mail him at: firstname.lastname@example.org.