Per Diem vs Actual Expenses: Which Should a Canadian Business Use?

Use actual expenses when trips are infrequent, varied, or expensive. Use a per diem when trips are frequent, short, and similar to each other. The reason is not preference: an allowance and a reimbursement are different legal things in Canada, taxed under different provisions, and the choice between them trades administrative cost against tax precision in a way you can actually calculate before you commit.

Most Canadian small businesses drift into one of the two without deciding. They start reimbursing receipts because that is obvious, then get tired of chasing coffee receipts from a technician who drives four days a week, then invent a flat daily amount and pay it through payroll without checking whether it is taxable. That last step is where it goes wrong, and it goes wrong quietly, because nothing bounces.

The 60-second version

• A per diem is an allowance; a reimbursement is a repayment. Paragraph 6(1)(b) of the Income Tax Act taxes allowances unless they fit an exception [1].
• The GST/HST paths differ. Allowances go through ETA s. 174, reimbursements through s. 175 [3][4].
• "Reasonable" is the load-bearing word. An unreasonable allowance becomes T4 income, and a per-kilometre allowance not based solely on kilometres driven fails the test outright.
• The simplified method is not a general business-travel shortcut. CRA publishes it for specific claims, not as a substitute for a corporation's actual travel costs [7].
• The 50 percent meal limit survives either choice. Section 67.1 applies to meal amounts however they are paid [5].
• Per diems cost less to run and usually more in tax; actuals are the reverse. Pick based on trip volume, not on which feels tidier.

What is the actual difference between an allowance and a reimbursement?

A reimbursement repays a specific amount an employee spent, evidenced by a receipt. You are buying the hotel room; the employee fronted the money. A per diem pays a fixed amount for a trip regardless of what was spent. The employee may come out ahead or behind, and neither of you counts.

The Income Tax Act treats them very differently. Paragraph 6(1)(b) begins from the position that allowances for personal or living expenses are included in the employee's income, then carves out exceptions [1]. The exceptions that matter to most small businesses are the ones for reasonable allowances for travel expenses and for the use of a motor vehicle in the course of employment. If your per diem fits an exception, it is not income to the employee. If it does not, it is salary by another name and belongs on the T4.

A reimbursement of a genuine business expense is a different animal: you are not conferring anything on the employee, you are restoring them to where they were. It is generally not income at all. CRA Guide T4130 walks through the boundary cases, and it is the document to read before designing anything [2].

What makes a per diem "reasonable"?

Reasonableness is the hinge the whole thing turns on, and the Act does not define it with a number. Two practical rules do most of the work.

First, the allowance should bear a defensible relationship to what the trip actually costs. A meal allowance set at a figure nobody can explain is not defensible years later, when the person who set it has left. Write down how you arrived at it and keep that note with the policy.

Second, for vehicle allowances there is a bright line. Paragraph 6(1)(b) treats a per-kilometre allowance as not reasonable where the measurement is not based solely on the kilometres actually driven in the course of employment. In plain terms, a flat monthly car allowance is taxable, and a combined flat-plus-per-kilometre arrangement generally is too. CRA publishes the per-kilometre amounts it treats as reasonable, and the rates change annually, so take the current figure from CRA rather than from a policy document written three years ago [6]. The mechanics of supporting a vehicle claim are covered in our guide to mileage logs and CRA vehicle expense records.

How does GST/HST work differently on each?

This is the part most businesses miss, and it is worth real money.

When you reimburse an employee for a business expense, section 175 of the Excise Tax Act deems you to have acquired the property or service and to have paid the tax the employee paid [4]. The tax flows through to you, and you claim an input tax credit based on the actual tax on the actual receipt.

When you pay a qualifying allowance instead, there is no receipt, so section 174 supplies a parallel route: the payer is deemed to have received a supply and to have paid tax on it, computed on the allowance itself [3]. The conditions are specific. The allowance must relate to supplies acquired in Canada in connection with the payer's activities, and the payer must have considered the allowance reasonable at the time it was paid. Chapter 9 of the GST/HST Memoranda Series covers both routes in detail [8].

The practical consequence: a per diem does not cost you your input tax credits, but it does mean the credit is computed from a formula rather than from what was really paid. If your people spend heavily in high-HST provinces and the allowance is set conservatively, actuals recover more. If your allowance is generous relative to real spend, the s. 174 route can recover more than the underlying purchases would have supported - which is exactly why the reasonableness condition is there. For how input tax credits get claimed and supported generally, see our input tax credit guide.

Simplified method or detailed method?

There is a persistent belief that CRA offers a flat per-meal rate any business can use instead of keeping receipts. That is a misreading of a real but narrower rule.

CRA publishes flat meal and per-kilometre rates for the simplified method, and it publishes them against specific claims: moving expenses, medical expense travel, the northern residents deductions, and meals claimed by transport employees on Form TL2 [7]. It is an administrative concession attached to those deductions. A corporation deducting its own business travel does not get to swap actual costs for the simplified rate simply because the rate exists. Before relying on it, check the CRA page for the specific deduction you are claiming and confirm the method is offered there.

The detailed method means what it says: actual amounts, actual receipts, kept. It is more work and it is the default. Our broader walkthrough of business travel expenses in Canada covers what has to be on those records.

Does paying a per diem get you around the 50 percent meal rule?

No. Section 67.1 limits the deduction for food, beverages, and entertainment to 50 percent of the lesser of the amount paid and a reasonable amount [5]. It attaches to the nature of the expense, not to the payment mechanism. A meal per diem is a payment in respect of meals, and the limit applies, with a corresponding GST/HST adjustment on the credit side.

What this means in practice is that your meal per diem needs to be coded as meals, not buried in a single "travel allowance" line. If it is not separated, either you over-claim and create an adjustment, or your accountant applies the 50 percent limit to the whole allowance including the lodging and mileage components and you under-claim. Both happen. The fix is a coding discipline, not a policy change, and it is the same discipline described in the 50 percent meals and entertainment rule.

How do you weigh administrative cost against tax outcome?

Count trips, not dollars. The administrative cost of actuals scales with the number of claim lines: every receipt is a capture, a code, an approval, and a filing obligation. The administrative cost of a per diem is close to fixed - you set a rate, you record the trip, you pay.

So a business with two people making forty short trips a month is spending far more on processing than it recovers in precision, and should be on per diems for meals and kilometres. A business sending one person to three trade shows a year, with flights and hotels, should be on actuals: the input tax credits on those invoices are worth more than the hour it takes to file them, and a per diem large enough to cover a conference hotel would struggle the reasonableness test anyway.

Many businesses end up with a split, and that is fine: actuals for lodging, airfare, and anything with a supplier invoice; a per diem for meals and kilometres. It is the arrangement that puts each expense on the path where its paperwork is cheapest.

Whichever way you go, the trip record is the thing that has to exist. MapleExpense logs each trip with date, route, purpose, and the business-versus-personal flag, and keeps that record alongside the receipts from the same trip, so the allowance you paid and the reason you paid it are in one place when someone asks two years later. Where you are on actuals, forwarding supplier invoices to your MapleExpense intake address gets the vendor, date, total, and tax extracted without anyone retyping them.

Finally, write the choice down. Which method applies to which cost, what the rates are, where the rates came from, and who updates them when CRA republishes. A per diem policy with no stated review date is how businesses end up defending a rate that was reasonable in 2022. The one-page structure in an employee expense reimbursement policy is enough to hold all of it.

Frequently asked questions

What is the difference between a per diem and a reimbursement in Canada?

A per diem is an allowance: a fixed amount paid to an employee for a trip without requiring receipts. A reimbursement is a repayment of a specific amount the employee actually spent, supported by a receipt. The distinction matters because they are taxed under different rules. Allowances are caught by paragraph 6(1)(b) of the Income Tax Act and are included in the employee's income unless they fall within one of the listed exceptions for reasonable travel and motor vehicle allowances. A reimbursement of a genuine business expense is generally not income to the employee at all.

Is a per diem taxable in Canada?

A per diem is taxable to the employee unless it fits one of the exceptions in paragraph 6(1)(b) of the Income Tax Act, most commonly the exceptions for reasonable allowances for travel expenses or for the use of a motor vehicle in the course of employment. Two things break the exception: an allowance that is not reasonable in amount, and a per-kilometre allowance that is not based solely on the kilometres actually driven. If the allowance is taxable, it goes on the T4 and the employee pays tax on it like salary.

Can you claim GST/HST input tax credits on a per diem?

Yes. Section 174 of the Excise Tax Act lets a registrant that pays a qualifying allowance treat itself as having acquired the underlying property or service and paid tax on it, so an input tax credit can be claimed on the allowance even though there is no receipt. The conditions are specific: the allowance must be for taxable supplies acquired in Canada in relation to the payer's activities, and the payer must have considered the allowance reasonable. Reimbursements are handled separately, under section 175.

What is the simplified method for travel expenses?

The simplified method is a CRA administrative option that lets certain claimants use a flat rate per meal and a flat per-kilometre rate instead of keeping every receipt. It is not a general-purpose shortcut for business travel. CRA publishes it for specific claims, including moving expenses, medical expense travel, the northern residents deductions, and meals claimed by transport employees on Form TL2. A corporation deducting business travel generally cannot substitute the simplified rate for actual costs, and should verify eligibility on the CRA page for the specific deduction being claimed.

Do you still need receipts if you pay a per diem?

You do not need receipts from the employee for the per diem itself, which is the entire administrative point of paying one. You do need to document that the trip happened and that the allowance was reasonable: dates, destination, business purpose, and the rate used. Keep the record that shows how the rate was set, because the reasonableness test in paragraph 6(1)(b) is applied to the allowance, and a rate nobody can explain is hard to defend years later.

Which is cheaper to administer, per diem or actual expenses?

Per diems are cheaper to administer and usually more expensive in tax outcome; actuals are the reverse. A per diem removes receipt collection, approval of individual line items, and most disputes about what counts. Actual-expense reimbursement recovers the exact GST/HST paid, matches the true cost of each trip, and avoids any argument about whether an allowance was reasonable. The right answer depends on trip volume: a business with frequent short, similar trips usually comes out ahead on per diems, and a business with a few large, varied trips is better off on actuals.

Does the 50 percent meal limit apply to a per diem?

Yes. Section 67.1 of the Income Tax Act limits the deduction for food, beverages, and entertainment to 50 percent of the lower of the amount paid and a reasonable amount, and the limit applies to amounts paid in respect of meals whether they are reimbursed against receipts or paid as an allowance. Paying a meal per diem does not convert a meal into a fully deductible expense. The corresponding GST/HST adjustment also applies.

Sources cited in this article

1. Income Tax Act, s. 6(1)(b)
   Allowances for personal or living expenses are included in employment income, subject to the listed exceptions including reasonable travel and motor vehicle allowances.
   https://laws-lois.justice.gc.ca/eng/acts/i-3.3/section-6.html
2. CRA Guide T4130, Employers' Guide - Taxable Benefits and Allowances
   CRA's working guide on when an allowance or reimbursement becomes a taxable benefit and how to report it.
   https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130.html
3. Excise Tax Act, s. 174
   Deems a person paying a qualifying travel or motor vehicle allowance to have acquired the underlying supply and paid tax on it, enabling an input tax credit without a receipt.
   https://laws-lois.justice.gc.ca/eng/acts/e-15/section-174.html
4. Excise Tax Act, s. 175
   Deems a person reimbursing an employee, partner, or volunteer to have acquired the property or service and paid the tax the individual paid.
   https://laws-lois.justice.gc.ca/eng/acts/e-15/section-175.html
5. Income Tax Act, s. 67.1
   Limits the deduction for food, beverages, and entertainment to 50 percent of the lesser of the amount paid and a reasonable amount.
   https://laws-lois.justice.gc.ca/eng/acts/i-3.3/section-67.1.html
6. CRA, Automobile allowance rates
   The current prescribed per-kilometre rates CRA treats as reasonable for motor vehicle allowances.
   https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-allowance-rates.html
7. CRA, Meal and vehicle rates used to calculate travel expenses
   The flat rates published for the simplified method, with the list of claims the method applies to.
   https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25500-northern-residents-deductions/meal-vehicle-rates-previous-years.html
8. CRA, GST/HST Memoranda Series
   Chapter 9 covers allowances and reimbursements and how input tax credits are computed on each.
   https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/gst-hst-memoranda-series.html

All sources verified 2026-09-23. Spotted a link that has moved? Email [email protected] and we will correct it.