When a business pays a living out allowance to an employee, the business can generally deduct the allowance as a business expense. The employee may or may not have to pay tax on some or all of the allowance. When a business pays an allowance to a contractor, it can also usually deduct the allowance as an expense, however, the contactor has to include the allowance in income and then deduct the relevant expenses on their own tax return.
For income tax and GST purposes, when an employer reimburses an employee for expenses incurred in performing their job, the reimbursement is not income to the employee and is treated as if the employer had incurred the expense directly. This includes paying an employee a “reasonable” allowance for expenses at a special work site or remote work site. This is often called a living out allowance.
If the allowance paid is not reasonable, it is still deductible to the employer as long as a taxable benefit for the excessive allowance has been included on the employee’s T4 slip. The Income Tax Act and the Excise Tax Act do not prescribe a reasonable allowance amount; however, Canada Revenue Agency’s administrative position appears to be that the Treasury Board of Canada allowance rates are the upper limit for allowances. The current rates can be found at
The current (Oct 1, 2007) rates totals $62.00 per day for meals, $17.30 for incidental expenses and $50 per day for private, non-commercial accommodation. The rates are the same in the US and Canada, except in US dollars in the US. Any amount paid in excess of this would not be considered reasonable by Canada Revenue Agency, and would result in a taxable benefit to the employee, unless the employee could establish that their actual costs were equal to the amount of the allowance.
Although the allowance can be paid as a single per diem amount, records have to be kept showing the breakdown of meals expense because deduction of the allowance amount is limited to 50% of the meals portion for both income tax and GST, while 100% of the incidental and accommodation portion can be deducted. No receipts need to be provided by the employee, unless the employee is staying at a commercial establishment and is being reimbursed for the actual amount paid.
Payments of allowances to contractors are treated very much the same by the payer, although not by the recipient. The major difference is that the contractor has to invoice separately for the per diem amount and indicate the amount relating to meals expense. If the contractor does so, the contractor is not limited to 50% of meals expense – they can deduct 100% of any meals expense re-billed to the client. The client is the one who is limited to 50% of the meals expense.