What is a per diem allowance?

Per diem is a Latin phrase that means “by the day” or “for each day”. You can use it jokingly to refer to your daily coffee budget, but when the term is used in professional contexts, “per diem” usually refers to a travel or meal allowance. It is also sometimes referred to as a “living out allowance”. 

When an employee incurs expenses while travelling for work, they are entitled to some recompense from their employer. One way of doing this is with a fixed per diem allowance to cover the necessary expenses for doing the job, such as transportation, meals and lodging. 

If done right, a per diem allowance is tax-exempt; more on that in a second. 

The benefits of a per diem allowance

The perks of an allowance compared to reimbursing the actual costs include:

• More certainty. The employee knows how much they can spend, and the employer is less likely to be blindsighted by a huge restaurant bill.
• Less work for all parties. There are no requirements to keep receipts documenting how the per diem allowance is spent.

A possible drawback of the allowance could be that the employee might be incentivised to spend as little as possible while travelling, as they can pocket any unspent allowance.

CRA per diem rates

There are no fixed rates for per diem allowances in Canada. Instead, the CRA allows employers to establish their own per diem rates. However, for these to be tax-free, they have to meet certain criteria outlined by the CRA, which we will cover in more detail below. 

Is per diem taxable?

In a word, the allowance has to be “reasonable” to be tax-exempt. That can leave some room for interpretation, so let’s start at the source and take a look at what the CRA says. 

The allowance is only tax-exempt if all of the four conditions below are met:

• The employee travels away from the office
• The allowance is reasonable
• The employer is the primary beneficiary of the allowance
• The allowance is not an additional form of remuneration

The employee travels away from the office

As a general rule, the employee must leave the municipality or the metropolitan area in which the office is located. There are, however, exceptions to this, i.e. when the travel allows the employee to work more efficiently during their shift.

The allowance is reasonable

In 2024, the CRA generally considers up to $23 for a meal to be reasonable. But apart from that, it is difficult to provide you with hard numbers here. In short, the allowance should reflect the expenses incurred by the travelling employee. Those expenses will vary based on factors such as the destination, duration, and purpose of the trip. 

The employer is the primary beneficiary of the allowance

The size of the per diem allowance should benefit the employer for it to be reasonable. While the allowance should, of course, cover the employee’s reasonable costs, the whole process of sending out an employee and paying for it should benefit the company.

The allowance is not an additional form of remuneration

This ties into the previous bullet. If the allowance can be considered a bonus or part of the payment the employee receives for travelling, then it has to be reported as income and will be taxed as such.  

When and how you can receive per diem payments

How you receive per diem payments is up to your employer and can be one of a few options:

• Cash in hand: The per diem money is given to you upfront to be used as needed.
• Corporate credit cards: These may have limits and be tracked to prevent employee fraud.
• Personal spend: If it's a longer trip, you use your own funds and receive reimbursement upon return or frequently, such as on the last day of every month.

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