The oil & gas industry in Alberta has gone through a rough couple of years with pay cuts, reductions to subsistence, and loss of overtime rates and extra hours. It's more important now than ever to reduce your tax bill. In this article I will discuss some of the most common tax efficiencies for oilfield contractors who are incorporated.
Quick Method of GST
There are two ways to file GST. Normally you collect 5% GST on any invoices you create. Then, you also track GST on any purchases you make, such as fuel, tools, meals, phone, etc. This GST is referred to as "input tax credits" or ITCs for short. When GST is filed, you take the total GST you collected on invoices and subtract and GST you paid on purchases.
However, there is an election that can be filed call the Quick method of GST. The intent of this election is to make it easier for small business to track their GST. Generally, as long as your annual sales are less than $400,000, you are eligible for the Quick Method of GST.
The Quick method of GST is simply 3.6% of total sales including the GST collected, minus $300. You also do not get to claim any GST paid on purchases (ITCs).
Normal method of GST:
Sales in Year: $150,000
GST collected on Sales: 5% of $150,000 = $7,500
GST on purchases: $500
Total GST owing at year end: $7,000
Quick method of GST:
Sales in Year: $150,000
GST collected on Sales: 5% of $150,000 = $7,500
Total GST owing at year end: $5,370
Total savings from using Quick Method: $1,630
It is quite advantageous for most oilfield contractors to use the Quick Method election. In my example it saved the business $1,630 in the year. In some cases where the business is purchasing lots of materials or equipment in the year, it does not make sense to use the quick method, but it is always something we always evaluate to know for sure.
Home Office Expense
If you are an oilfield contractor, you likely have a home office that you operate out of. You use it do your billing, scheduling, bookkeeping and so on. However, to deduct home office expenses, you must meet one of the following criteria:
It is your principal place of business. This means you do not have another office that you go to on a more frequent basis.
You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
For most oilfield contractors, they will meet this first criteria but not the second. Fortunately, they only must meet one of the criteria.
You can deduct a reasonable portion of the following expenses:
Mortgage Interest
Property Taxes
Rent
Utilities
Maintenance
To calculate the reasonable portion, you divide the square footage of the home office by the square footage of the home. If you also use the home office for personal use, you must prorate it for the business use.
Example:
Home office: 200 sqft
Home: 1400 sqft
Mortgage Interest - $8000
Property Taxes - $3500
Utilities - $4,000
Maintenance $400
Home office Expense = $15,900 x (200sqft / 1400sqft) = $2,271
At a tax rate of 11%, total tax savings of a home office is $250
Meals
Generally, meals are only 50% deductible. This means than if you spend $1000 on meals in a year, you can deduct $500 worth of expenses. Multiple this by the corporate tax rate of 11%, and this is only $55 in tax savings.
However, there is an exception to the 50% deducibility rule that applies to oilfield contractors. If you work more than 30 kms away from an urban centre that has a population of 40,000 residents or more, meals are 100% deductible. To qualify, you must be away from home or at the worksite, location, or area for more than 36 hours. For many contractors who work up north on shifts, this is the case.
At a tax rate of 11%, total tax savings is $110 (provided that all meals are 100% deductible)
Subsistence & Accommodation Allowances
Instead of claiming meals in a year, you can also claim an allowance for meals and accommodations. I will also discuss the allowance for accommodations and incidentals as they work very similar. These allowances allow the owner to be personally reimbursed without any tax consequences.
The deductibility of the allowances follows the same rules as the meals. They are 100% deductible if you are further than 30km for an urban centre (40,000 residents) for more than 36 hours.
In my example, the oilfield contractor works in Red Earth, AB for 60 days of they year. He takes all three allowances. Red Earth is more than 30km away from an urban centre, so it is 100% deductible to the corporation. The individual will take a total of $8,779 in tax free allowances for the year.
The tax savings on allowance is more difficult to calculate because it depends on how much the individual spends on these expenses. In most cases the allowances method is more beneficial than expensing meals and accommodations but is depends on the situation.
Phone
Almost everyone these days need to use their phone for work, and not just for phone calls. You likely use apps for work, like using an LSD locator app like LeaseTracker, taking pictures of equipment, or use a directory like RiggerTalk to find local oil & gas services.
Your monthly phone bill can be deducted as an expense in the business. For example, the average phone bill is $100/ month or $1,200 in the year. This is a about $132 savings for the year. You can also deduct the cost of the phone as a capital cost allowance.
Automobile
Owning an automobile in your contracting business is another significant tax savings. There are two components to the automobile deductions, the capital cost allowance (CCA) and the expenses related to the vehicle such as fuel & maintenance.
In 2018 the federal government came out with a new program called the accelerated investment incentive (aii). The purpose of this program is to encourage businesses to purchase new assets, and in return, the businesses who receive significant tax savings. For example, if you purchased a new work truck in the year for $50,000, this is how much you will save on your taxes:
Tax savings in before accelerated investment incentive: $825
Tax savings with accelerated investment incentive: $2,475
Bonus: If you pay GST on the new truck, you will save $2,500 when you file your GST return.
Total tax savings of purchasing new truck: $4,975
I do not recommend you go buy a new truck for the sake of tax savings, however, if you are in the market for a new vehicle, this is a great way to save on taxes.
There are other expenses that you can also deduct in your business for your vehicle:
Fuel - $2,000
Insurance & registration - $1,200
Repairs and maintenance - $1,000
Total tax savings of automobile expenses: $462
Note: If you do not have another personal vehicle or a spouse who owns a vehicle, the CRA will expect that you take a personal taxable benefit on the truck for personal use.
Corporate Tax Rates
I felt the corporate tax rate deserved an honorable mention as the tax rates have come down in the past few years for small businesses. The current tax rate for small business is 11% in Alberta.
Summary
There are many tax advantages available to oilfield contractors. If you have questions about the topics discussed or believe you are missing out on tax savings, please contact us.