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Car Allowances for Employees in Canada
December 20, 2023 - 2 min read

Car Allowances for Employees in Canada

Car allowances are payments an employee gets from their employer for using their personal vehicle while working. The regular payment is intended to be put toward either buying or leasing a vehicle.

The amount will be applied to your salary or wages if you are eligible for a car allowance. Unless it is calculated using a reasonable per-kilometre rate, car allowances are taxable.

In addition, no mileage logs or proof of business usage of the car allowance are required. You just go about your business and take advantage of what is effectively a benefit. The choice of whether to utilise the car allowance for a car payment or to cover gas prices, wear and tear, and other automotive expenses is left up to you.

The ease of the car allowance for employees is one of its benefits. It is simple to manage, implement, and account for.

How you can use car allowances

You can use the car allowance you receive to purchase or lease a vehicle. It's possible that you may spend the car allowance just to keep your current vehicle in good working order, too. You will be responsible for paying registration fees, insurance premiums, and any other associated costs. You could use the car allowance for really any expenses you wish, as you don't need to prove to your employer how you spend it.

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Are car allowances taxable in Canada?

Fixed monthly vehicle allowances that cover your work-related car expenses are taxable as part of your income in Canada.  

Your employer must pay taxes on your car allowance if they pay it at a rate per work kilometre that is significantly higher or lower than the CRA's established reasonable rate.

However, your reimbursement will be tax-free if your company uses the official CRA automobile allowance rate per km based on the actual business miles you drive.

The official rate per business kilometre for 2024 is 70 cents. After the first 5,000 km, the rate drops to 64 cents per kilometre. Read more about the per-kilometre CRA rate for 2024.

The CRA views a car allowance as reasonable if:

  • The allowance is based on a per-kilometre amount.
  • The per kilometre amount is less than or equal to the official rate (the CRA determines the prescribed rate as a per-kilometre amount); and,
  • The cost of utilising the vehicle is not covered in full or in part by the employer.

In this case you will have to keep a logbook of your business driving that adheres to the CRA requirements for keeping a mileage log. You can also read about the general rules on mileage reimbursement and deductions in Canada in our mileage guide.

We recommend automating your mileage recording with a mileage tracker like Driversnote, which will save you time and ensure compliant logs for your car allowance.

Is it possible to deduct business mileage while getting a car allowance?

You might be eligible to deduct mileage on your annual tax return if your company doesn't also reimburse you for your business travel expenses, or if you receive a car allowance that is taxable.

You should keep copies of all the expense reports submitted for the year, together with all the car charges incurred, in order to claim these costs. If more than one car is used, you should keep a thorough expense report for each vehicle.

FAQ

There are several reasons why employers pay out car allowances: allowances help employees with purchasing or maintaining a vehicle, can make the job position more appealing to new hires and raise general staff welfare and satisfaction.
Depending on the type of car allowance you receive, it can cover either the purchase or lease of a new vehicle or all costs associated with owning and operating your current vehicle for business purposes.
The current, reasonable car allowance rate is 70¢ per kilometre for the first 5,000 kilometres driven, and 64 per km after that. Note that receiving a car allowance at a different per-kilometre rate or as a lump sum might be taxed.
The tax on a car allowance depends on several factors, such as whether it is considered a taxable benefit or an expense reimbursement. If the car allowance is classified as a taxable benefit, it will be subject to income tax.

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