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May 10, 2022 - 2 min read

CRA vehicle allowance rules for employers

Whether your employees drive company cars or their personal vehicles for business, they generally expect to be compensated for work-related car expenses.

Paying out a vehicle allowance is tax-free for your business if done under specific regulations (as reimbursements are deductible business costs), and it also helps your company pay less tax.

In the sections below, we'll go through the CRA vehicle allowance requirements for employers and business owners, as well as your options and best practices for a mileage allowance program.

Mileage reimbursement for teams with Driversnote

If you are a manager or an employee looking for a solution for your team, you can try our team solution. 

Driversnote Teams allows you to create as many free and paid accounts as you want, whenever you want. Assemble users into groups and pay with a single credit card for everyone.

Does the manager who approves mileage reports not drive for work? Create a free account for them!

Is an employee leaving your company? You can easily transfer their license to another user or cancel it.

Wondering how to create a team? Check out the video below.

CRA rules for vehicle allowances

The CRA considers an allowance to be any payment to employees for their business-related use of a personal vehicle. Vehicle allowances are paid out with employees’ salaries and are taxable unless based on the reasonable CRA vehicle expenses per km rate.

The CRA considers an allowance “reasonable”, which means it will not be taxed when it fulfils the following criteria:

  • The allowance is paid out only for the number of business-related kilometres of employees
  • You use a reasonable per-kilometre rate - at or slightly lower than the official CRA vehicle allowance rates
  • You haven’t provided any other employee reimbursement for the same business usage of the vehicle

If the employee reimbursement you provide meets all the aforementioned criteria, you will not need to deduct income tax, EI premiums or CPP contributions.

Any vehicle allowance you pay out that does not meet these criteria should be taxed.

Instances the CRA considers vehicle allowances taxable

  • You provide a per-kilometre rate that is too high compared to the reasonable per-kilometre CRA rates for vehicle expenses of employees.
  • You provide a rate that is too low compared to the official CRA vehicle allowance rates.
  • You provide an allowance at a flat rate which is not based on the number of business kilometres employees have driven.

In all instances, the CRA will consider the vehicle allowance a benefit, and you will have to deduct income, pension and insurance tax from it.

In these situations, employees might be able to claim their vehicle expenses from the CRA on their tax returns.

Employees using company-provided vehicles

If an employee is using a company car, the rules are a little more complicated, depending on if you pay operating costs, if the employee is able to use the car for personal purposes, and more. Learn more about these rules here, as they will impact taxation and other costs required by the CRA.

The standard CRA vehicle allowance rate

Each year, the CRA sets a reasonable per-kilometre rate for work-related car expenses. It represents the highest rate at which you can reimburse each kilometre driven for business while still getting a tax deduction.

The same applies to your employees: when they are reimbursed at the vehicle allowance rate per kilometre, they do not pay tax off of the reimbursement. 

Other methods of covering employee car expenses may be treated as income and taxed.

How much you can pay for vehicle expenses per kilometre

You can choose to use a different cents per km rate than the CRA official, but most companies consider the CRA rate the standard. If you provide a higher per-kilometre rate for employee vehicle allowances, the CRA will consider the whole allowance taxable.

The reasonable vehicle allowance rates per km for 2022 are:

  • 61 cents per km for the first 5,000 kilometres driven
  • 55 cents for each km after that

The Northwest Territories, Yukon, and Nunavut have an additional 4cents per km for business-related driving.

Best practices when providing a CRA vehicle allowance

It is a good idea to have employees record their business-related kilometres. This helps your company avoid over-reported vehicle allowance claims and ensures that your employees receive what they're entitled to. Employees won’t need to keep invoices and receipts of vehicle expenses if you provide an allowance based on the CRA rate per kilometre.

FAQ

In simple terms, business mileage is when you drive from one place of business to another. For example, you travel between work sites and meeting locations. It also counts when you're going out for a business lunch, running to the post office or bank, or stopping by the store for office supplies. Other examples include attending a conference or a meeting in another company's office.
The CRA does not include commuting in business mileage but considers it to be a personal expense. Any time you commute from home to work and back, you need to log it in your log if you use the same car for both business and personal, but it cannot be deducted as business mileage.

How to automate your mileage logbook

Manually filling out your logbook can get tedious - see how to automatically track trips for your mileage reimbursement or deductions.

This material has been prepared for general informational purposes only, and should not be taken as professional advice from Driversnote. You should consider seeking independent legal, taxation, or financial advice from a professional to check how this information relates to your own circumstances. Relevant laws also change from time to time.