Submitted by Kevin on Sun, 03/02/2014 - 15:41
It has become time to dispell another myth and explain something that causes a lot of confusion and problems. The issue is tax free allowances. The purpose of a tax free allowance is to allow corporations to reimburse employees for corporate costs that the employee pays, or to give employees money in advance so that they can pay expenses they will be incurring for the corporation.
One of the biggest and most prevalent allowances is called Living Out Allowance (LOA) and is provided by oil companies to their employees and contractors to cover the fact that they are often away from home and in remote locations. The allowance is for accommodations and meals and is tax free and therefore not to be included in the employees income.
Now for the problem. If you are given an allowance which is tax free and you then spend it for the purposes outlined (food and lodging) you cannot claim the expenses. Basically there has to be balance. If you don’t report the income then you cannot claim the expenses you incurred for which the allowance was intended. If your expenses
are greater than the allowance, then you will want to include the allowance in income and claim the expense.
Nothing is ever free. The Living Out Allowance is meant to compensate you for expenses you will incur while you work away from your home. The distinction as to something being tax free or not is for the payer of the allowance so they know that it does not have to be included in the employees income (on their T-4 slip). For a contractor they have the choice outlined above. Include the LOA in income and deduct the relevant expenses, or do not include it in income and do not deduct the accommodation and meal expenses incurred while away from home.
There are other allowances which are "tax free" such as vehicle allowances, and the same rules apply as outlined above. The purpose of the tax free allowance is to ensure that the employee is NOT unduly penalized or put in a worse position from a tax perspective. See every once in a while the CRA get it right and are trying to make sure that you are treated fairly and equitably. Go figure.