Part of The trucking guide
Should an owner-operator incorporate?
Incorporating can cut an owner-operator's tax while they build up money in the business. It also adds cost and paperwork, and for drivers who work for just one carrier it can backfire badly. Here's how to tell which side of the line you're on.
Key takeaways
- In Alberta, active business income up to $500,000 is taxed at 11% inside a corporation, but only the money you leave in the corporation stays at that rate
- If you need every dollar to live on, incorporating usually saves little and costs more to run
- A "corporation" that works like an employee of one carrier can be a personal services business, taxed at about 41% with almost no deductions
"You should incorporate" is advice owner-operators hear all the time, from other drivers, dealers and carriers. Sometimes it's right. Sometimes it costs more than it saves. And for one group of drivers it's a serious tax trap.
This article is part of our guide to the financial side of running a trucking company.
How incorporating saves tax
A corporation is taxed separately from you. In Alberta, a Canadian-controlled private corporation pays a combined 11% on its first $500,000 of active business income each year: 9% federal and 2% Alberta.
You pay personal tax only on what you take out of the corporation, as salary or dividends. The saving comes from money you leave in the corporation, taxed at 11% instead of your personal rate, which for a profitable owner-operator can easily be over 30%.
When you eventually take that money out, you pay personal tax on it. So incorporating is mostly a deferral: tax later instead of tax now. The deferral is worth a lot if you're building up savings for a down payment on a second truck, a repair reserve, or slower years.
Example: two owner-operators, same income
Both earn about $150,000 a year after truck costs.
Raj needs about $140,000 a year to cover his mortgage and family. Almost everything he earns comes out of the business. Incorporating would save him very little tax, and would add the cost of a corporate tax return, a separate bank account, payroll or dividend paperwork, and annual filings.
Karen lives on about $80,000 and wants to buy a second truck within two years. Leaving $70,000 a year in a corporation, taxed at 11% (about $7,700) instead of her personal marginal rate, leaves her much more cash to put toward the next truck. She pays personal tax on it only when she takes it out, possibly in a year when her income is lower.
For Karen, incorporating clearly makes sense. For Raj, it probably doesn't yet.
What a corporation costs to run
- A corporate tax return (T2) and financial statements every year
- An annual return with the Alberta corporate registry
- Separate bank accounts and books. Personal and business money can't mix
- Payroll or dividend paperwork whenever you pay yourself
- More planning: salary vs dividends, shareholder loans, and how money gets out of the company
Budget for those costs before deciding. For a small corporation they're usually a few thousand dollars a year.
Salary or dividends?
Once incorporated, you choose how to pay yourself:
- Salary: a deduction for the corporation; you contribute to CPP (both shares); creates RRSP room; needs a payroll account and remittances.
- Dividends: no CPP and no payroll; taxed differently in your hands; no RRSP room.
Most owner-operators end up with a mix, and the right mix changes as income changes. This is the kind of yearly planning we do with incorporated clients.
The personal services business trap
This is where incorporation goes wrong for many drivers.
If your corporation provides services that you would otherwise provide as an employee of the carrier, the CRA can treat it as a personal services business (PSB). A PSB:
- loses the small business rate and pays a higher federal rate. In Alberta, that works out to roughly 41% combined, compared with 11%
- can deduct almost nothing except salary and benefits paid to you
- often faces this on several past years at once, with interest
The CRA has said that most of the personal services businesses it identifies in transportation are in freight trucking. Enforcement has stepped up, including penalties for carriers that don't report payments to incorporated drivers on a T4A. That's why "Driver Inc." setups are such a risk. See paying drivers.
Who's at risk
| Higher risk of being a PSB | Lower risk |
|---|---|
| Drives the carrier's truck | Owns or leases your own tractor |
| One carrier, full time | Several customers, or your own authority |
| Carrier sets your schedule and dispatch | You choose your loads |
| Paid like a wage (per km, no risk of loss) | You carry the costs and can lose money on a load |
A genuine owner-operator with their own truck, insurance and business risk is usually on the safe side. A company driver who incorporated because someone said it would save tax usually isn't.
Example: the incorporated company driver
Sam drives the carrier's tractor, full time, under the carrier's dispatch, and bills through "Sam Trucking Ltd." He earns $95,000 and has been paying 11% corporate tax, claiming his phone, meals and some vehicle costs.
If the CRA decides Sam Trucking is a personal services business, it can reassess several years. The corporate rate becomes about 41%, most of the deductions are denied, and interest is added. The carrier may face its own assessment for unpaid CPP and EI. A small tax saving each year becomes a large bill all at once.
Questions to answer before you incorporate
- Will I leave a meaningful amount of profit in the business each year?
- Do I own or lease my own truck, and carry the business risk?
- Do I work for more than one customer, or could I?
- Am I ready to keep the business completely separate from my personal money?
- Have I priced the extra accounting and filing costs?
If you answered "no" to the first two, incorporation is unlikely to help, and could hurt.
The bottom line
For the right owner-operator, incorporating is one of the best tax decisions they'll make. For the wrong one, it's an expensive mistake that can take years to surface. Before you incorporate, or if you already have and aren't sure you're on the right side of the line, book a call with us. It's also worth reading how truck depreciation and meal claims work inside a corporation.
Sources
This article is general information, not advice for your situation. Rules and rates change, so talk to us before acting on it.