March 24, 2021

Living Out Allowance (LOA) for Contractors

The Living out Allowance (LOA), also referred to as subsistence, is common among oilfield contractors in Northern Alberta, but it’s often misunderstood. This article explains what it is and how it can reduce your taxes.

A lot of welders and oilfield contractors can get some kind of LOA or subsistence, but it’s important to keep a record of work-related travel. Your bookkeeper may not know about this allowance and won’t necessarily provide it if you don’t have the right support.

If you’re an employee then your employer decides whether they’ll pay you a living out allowance, but they don’t have any obligation to pay it.

Living Out Allowance

Okay – let’s get into it!

A living out allowance is exactly what it sounds like – an allowance for time spent away from home when working. Employers can pay this to employees and, as long as it’s “reasonable”, it’s tax-free.

“Reasonable” isn’t defined by the CRA, but 2020 rates posted by Canada’s National Joint Council provide some good guidance:

Total daily meals – $93.50 with receipts
Daily Incidentals – $17.30
Private accommodations – $50
Hotels – $ Varies. Provide screenshots of rates in the area.

You need receipts to back up these amounts unless you use CRA’s simplified method, which allows you to claim $23/meal for every 4 hours away from the office (up to $69/day). Note that this is the CRA’s administrative position (not tax legislation) as of 2020, which may change and may not hold up in court.

Lodging/incidental expenses can be claimed if you work at a remote location or special work site (see below).

Special Work Sites

For non-taxable (reasonable) lodging expenses, you need to meet all of the following conditions:

  1. The employee was required to be away from home
  2. Work at the special site was temporary
  3. The employee maintained a home at another location which:
    1. Was available for them to use and wasn’t rented to someone else
    2. Due to distance, the employee couldn’t reasonably be expected to return daily
  4. The employee had to be away for at least 36 hours

If these conditions are met, a TD4 form must be completed to exclude these benefits from the employees T4.

Remote Work Locations

A work location is remote if it’s over 80km’s from an established community of over 1,000 people. For non-taxable (reasonable) lodging expenses, you need to meet all of the following conditions:

  1. It’s not reasonable for the employee to set up and maintain their own housing because of the location remoteness
  2. The employer didn’t provide accommodations to the employee
  3. The employee was away at least 36 hours

A TD4 form is not required for remote work locations.

LOA Owner Operator (Corporation) Example

An owner operator is a small business owner who also runs their daily business operations. There are a lot of oilfield related owner operated companies in Grande Prairie and Northern Alberta. This could be welders, OH&S, instrumentation techs etc.

LOA Example for Owner Operator

Bobs company ABC Ltd. (“ABC”) contracts out to one of their customers, Canadian Oil Limited (“COL”). Bob’s primary residence (home) is in Grande Prairie. ABC is working at a COL site that’s located between Grande Cache and Grande Prairie (80 km’s away from each community). Bob is away from home each trip for at least 36 hours. ABC works at this site for 120 days (not consecutive) during 2020.

Example

Meals (120 days x $69)
$8,280
Accommodations (120 days x $50)
$6,000
Incidentals (120 days x $17.30)
$2,076
Total LOA Claim
$16,356

The subsistence (LOA) allowance could be more as long as it can be argued reasonable for the circumstances. This $16,356 would be an expense in ABC and provided to Bob as a tax-free allowance.

There are some steps that should be taken to get this claim:

  • ABC would invoice COL for services provided and include an LOA rate as a separate line item as part of their fees.
  • ABC should pay Bob as an employee and have a company policy that outlines LOA rates. This means that Bob shouldn’t only be taking dividends, because without a salary there is no employee-employer relationship.
  • Bob should maintain a travel log for any out-of-town jobs and travelling.
  • Bob and ABC would fill out and sign Form TD4 for any work done at special sites throughout the year
  • In order to get a Living Out Allowance, Bob would need to pay for his own meals and lodging. ABC could then pay Bob a tax-free allowance and ABC would be able to get a tax deduction.

Double dipping (ABC paying for all of Bob’s meals and lodging expenses and also paying him a LOA) can result in double taxation.

In a lot of cases it’s easiest to just deduct living out expenses (hotels, meals etc) directly in your corporation and forget about the LOA (you should still keep some kind of backup to support the expenses). However, the difference between what you actually pay for groceries and what you can claim as a reasonable meals expense (i.e. $2k vs. $8k) can add up… so there’s definitely value in looking at using the LOA (subsistence).

Conclusion

  • You can’t be deducting all your travel expenses in your corporation and claiming subsistence – this is double dipping.
  • You need to keep appropriate documentation.
  • The amounts claimed need to be reasonable for your circumstances.
  • You need to be an employee for the LOA to be tax-free. You can be an employee of your own corporation.
  • The correct forms should be signed when applicable

Also – if you’re an owner operator with most of your income coming from one company then you may be deemed to have a “Personal Service Business” (PSB). You can’t claim subsistence and there are other negative tax consequences of being a PSB.

Still confused? Yeah… it’s not always straight-forward. And the rules are always changing. As a contractor, you shouldn’t have to interpret the income tax act. That’s what your accountant is there for.

Simplify specializes in taking the pain out of accounting for oilfield contractors and tradespersons. We offer customized premium accounting plans at fixed prices using the latest technology. You pay for a result, not the time taken to get there. And we’re always here to answer your questions (at no extra cost).

Looking for some accounting peace of mind? We’d love to chat! Get in touch today for a free quote.

Note that tax legislation and rates change regularly. A qualified CPA should be consulted about individual circumstances.

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