Living Out Allowance: Everything You Need To Know

Living Out Allowance: Everything You Need To Know

Oil and gas industry workers often receive board, lodging and transportation allowances as part of their compensation. The common questions are, “How does the “Live Out Allowance” work and is it tax-free?” The answer is: If you work at special work sites or remote locations and meet certain conditions, the Living Out Allowance you receive is not taxable benefits, but the amount must be reasonable.

Board, lodging, and transportation at special work sites

Generally, a special work site is where temporary duties are performed by an employee who lives at another location as their primary residence. Because of how far the two areas are, the employee is not expected to return to their home daily. If all of the following conditions are met, the reasonable amounts LOA will be tax-free.

1. The employee needs to perform their job duties at the special work site
2. The assignment is temporary.
3. The employees kept a separate dwelling as their primary residence.
4. The employee must be out for work for at least 36 hours.
5. the transportation allowance covers travel from your employee’s home to the special work site

If you meet all of these conditions, Form TD4 should be completed. The amount of board, lodging and transportation allowance does not need to be reported on Box 14 or Box 30 of T4 slips and is not included in taxable income. Form TD4 must be kept with payroll records. 

What if the special work site is in a prescribed zone?

Suppose the special work site is in a prescribed zone, and the employees maintained their principal place of residence outside of a prescribed area. In that case, the board and lodging benefit or allowance must be indicated on box 31 of T4 or box 124 of T4A slip as this amount may affect their claim for a Northern residency deduction. 

For example,  $4,000 was paid for board and lodging at a special work site. Of the $4,000, $1,200 relates to a special work site located in a prescribed zone. $1,200 needs to be identified in box 31 of T4 slips.

Board and lodging, and transportation at a remote work location

The remote location is at least 80 kilometres from the nearest established community with a population of at least 1,000 people.

1. The employee could not reasonably be expected to set up and maintain a self-contained domestic establishment because of the remoteness of the location.
2. The employee hasn’t been provided with a self-contained domestic establishment
3. The employee must be out for work at least 36 hours
4.  Transportation allowance cover from anywhere to the remote work location, including foreign country location.

If an allowance was paid to employees who work at a remote work location, the Form TD4 does not need to fill out, and allowance is excluded from T4 slips.

What does the tax-free living allowance look like in the eyes of CRA?

The CRA’s website doesn’t define “reasonable.” Still, the 2022 rates of the National Joint Council of Canada (NJC) offer some helpful information on what to consider when determining a reasonable living out allowance:

After 30 days, the meal allowance will be reduced by 25%, and after 121 days, it will be reduced by 50%. CRA has a simple method for meal allowance of $69 per day.  After 121 days of service, the private accommodation allowance will be 25 Canadian dollars per day. The reasonableness of a commercial accommodation depends on the area’s fair market hotel prices. You will need to keep your receipts well.

What happens if the self-employed contractor receives a living out allowance?

It is common for Oilfield contractors to receive an LOA allowance. The reasonable living out allowance can be deducted as an operating expense, and its employee who received LOA won’t have to pay income tax on it. To claim the LOA, the following points need to be kept in mind:

1. Allowances or any other kind of subsistence you receive are considered revenue for an independent contractor. An invoice must be issued, and GST/HST must be collected.
2. Set up payroll and pay reasonable amount LOA with payroll. No employment relationship exists, no LOA 
3. Be sure to fill out the TD4 form for every job performed on a special site
4. Pay for your accommodation and meals by yourself and keep the receipts, it is really important.
5. Do not deduct business expenses subsisted by living out allowance, such as rent, travel and meals.
6. Please keep a log of your mileage. Include out-of-town and in-town mileage, as well as job to job mileage.

What if CRA deems the LOA amount to be unreasonable?

Please note that a job agency is not obligated to judge the reasonableness of LOA. LOA is an expense of the job agency and revenue for the independent contractor. If CRA deems the LOA amount to be unreasonable, the excessive part of LOA will be counted as employment income of payee and be added back to box 14 of payee’s T4. In addition, if PSB rules apply, the whole LOA amount cannot be deducted as an operating expense by PSB unless it is added back to employment income.

To claim tax-free living allowances, it’s important to know your company type and set the reasonable living out allowance upfront. The tax implications on LOA are complicated, so if you have questions about this area, please get in touch with your advisor. If you do not have a tax account yet, Qing Shi CPA is willing to help you.

Resource:

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/boarding-lodging