In certain situations, a company can pay and deduct a living out allowance and the employee does not have to report the allowance in their income.
In order for this to apply, the allowance needs to be reasonable. Additional criteria must be met as stated below for employees at a special work site and employees in a remote location.
Reasonable Amounts for a Living Out Allowance
CRA does not define “Reasonable” but states that the Treasury Board of Canada rates are the upper limit for allowances. Effective January 1, 2017, these are;
- $50 for private non-commercial accommodations
- $81.15 for all daily meals ($17.15 for breakfast, $18.05 for lunch and $45.95 for supper). CRA has outlined that their simplified meal rate is $51 per day
- $17.50 for incidentals
- For commercial accommodations (hotel), reasonable would need to be proven via the market rate for the hotels in the area.
These rates are reduced by 25% once the employee has stayed at the same location for 30 consecutive days.
For employees away from the office who return home at the end of the day, CRA’s simplified meal allowance is $51/day. This is based on $17 for every 4 hours away from the office.
Receipts will need to be kept for all expenses except when using the simplified method.
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Employee at a Special work site
An employer can exclude from income the value of board and lodging, or the reasonable allowance for board and lodging, if all the following conditions are met:
- The employee’s duties required them to be away from their principal place of residence.
- The work at the special work site was of a temporary nature.
- The employee kept, at another location, a self-contained domestic establishment as his or her principal place of residence which:
- Was available for the employee’s occupancy, and the employee did not rent it to any other person; and
- Due to distance, the employee could not reasonably be expected to return daily from the special work site.
- The employee had to be away for a period of at least 36 hours. This period can include time spent travelling between the employee’s principal place of residence and a special work site.
If the conditions are met, a TD4 form (Declaration of Exemption) must be completed. The result is that the benefit is excluded from the employees T4.
Remote work locations
A work location is considered to be remote when it is 80 kilometers or more from the nearest established community with a population of at least 1,000 people.
An established community has essential services or such services available within a reasonable commuting distance (such as a food store, a clothing store, access to accommodations, certain medical services, and certain educational facilities).
An employer can exclude from income the value of board and lodging, or the reasonable allowance for board and lodging if all of the following conditions are met:
- The employee could not reasonably be expected to set up and maintain a self-contained domestic establishment due to the remoteness of the location and distance from any established community.
- The employer did not provide a self-contained domestic establishment for the employee.
- The employee had to be away for a period of at least 36 hours. This period can include time spent travelling between the employee’s principal place of residence and a remote location.
If the employee is at a remote work location, a TD4 form is not required. The benefit is excluded from the employees T4.
What if the living out allowance is for a contractor?
A business that provides a living out allowance for a contractor will record the transaction the same way as they do their employees. It is very important that before the company provides the payout to the contractor that the contractor provides an invoice with the living out allowance stated separately from the contractors’ fee.
When a contractor is an incorporated company which receives a living out allowance from the customer, this allowance is to be included in the contractor’s revenue. The allowance must be listed separately on the invoice to the customer. Then, a separate allowance paid to the employee through his/her company is deducted. CRA does not quantify “reasonable” and may request back up for this allowance such as market rates for living in a particular city, hotel rates etc.
CRA deems the allowance not reasonable
If CRA deems the allowance not reasonable, the allowance is still deductible to the company, however the excessive portion of the allowance will be taxable in the hands of the employee.
Please note that an employer is under no obligation to pay out a living out allowance. It is something that is available for them to use but that is at their discretion. Your employment agreement should have more details on what allowances are given and to whom.
If you feel that your employer is being unfair, we suggest making an appointment with your Human Resources representative.
For more detailed information please call KWB at 780-466-6204 or email us by clicking here.
Thanks to Johnny Kwong of KWB Chartered Accountants for providing this content.