Automobile & Motor Vehicle Allowances

The Canada Revenue Agency allows for reasonable reimbursement of expenses related to automobile expenses. If the prescribed rate is used then the amount paid is not considered income to the recipient, but is deductible to the business provided that the reimbursement is based on the number of kilometres driven and no other amounts are reimbursed or allowances provided. If these rates are exceeded then source deductions need to be withheld and the amounts reported on the individual’s T4 slip and are taxable, but there is a provision that allows the individual to deduct, on their personal income tax return, the portion of actual expenses related to the employment income, provided certain conditions are met.

Reasonable per-kilometre allowance

If you pay your employee an allowance based on a per-kilometre rate that is considered reasonable, do not deduct CPP contributions, EI premiums, or income tax.

The type of vehicle and the driving conditions usually determine whether an allowance is reasonable. The per-kilometre rates that are usually considered reasonable are the amounts prescribed in section 7306 of the Income Tax Regulations. Although these rates represent the maximum amount you can deduct as business expenses, you can use them as a guideline to determine if the allowance paid to your employee is reasonable.

An allowance is considered to be reasonable if all of the following conditions apply:

• The allowance is based only on the number of business kilometres driven in a year.
• The rate per kilometre is reasonable.
• You did not reimburse the employee for expenses related to the same use of the vehicle. This does not apply to situations where you reimburse an employee for toll or ferry charges or supplementary business insurance, if you have determined the allowance without including these reimbursements.

When your employees complete their income tax and benefit return, they do not include this allowance in income.

Reasonable allowance rates

See our table of automobile allowance rates.

Not all vehicles are automobiles. If this is the case, a higher rate per kilometre can be paid without the amount being a taxable benefit, provided the rate is reasonable. These vehicles include:

• a vehicle driven to transport goods or equipment in the course of business
• in the year it is acquired or leased, a vehicle used (90% or more of the distance driven) to transport goods, equipment, or passengers in the course of business
• pick-up trucks that you bought or leased in the tax year that meet both of the following criteria:
  • are used (50% or more of the distance driven) to transport goods, equipment, or passengers in the course of earning or producing income
  • are used at a remote work location or at a special work site that is at least 30 kilometres away from any community having a population of at least 40,000

CRA link for more information

• CRA: Automobile and motor vehicle allowances