In Canada and several other parts of the world, employees often earn an allowance or mileage reimbursement based on per kilometre rate for use of their vehicle during official assignments. The allowance is not subject to income taxes, Canada Pension Plan (CPP) contributions, or Employee Insurance (EI) premiums.
The Canada Revenue Agency (CRA) states that the reasonable per-kilometre allowances are the amounts prescribed in section 7306 of the Income Tax Regulations.
Although the rates stipulated in section 7306 of the Income Tax Regulations represent the maximum amount that can be deducted as business expenses, employers can simply use them as a guideline when trying to determine allowances payable to their employees.
Essentials of Reasonable Allowance
- The allowance is based only on the number of business kilometers driven in a year.
- The rate per kilometer is reasonable.
- Expenses related to the toll or ferry charges incurred on business trips or supplementary business insurance are reimbursed separately.
- When your employees complete their income tax and benefit return, they do not include this allowance in their income.
Let’s clear up a common confusion.
Mileage allowance vs. Automobile Allowance vs. Car allowance vs. Vehicle Allowance
A mileage allowance is money that you get from your employer for work-related trips. It is often based on distance driven. A common measure used is the number of kilometres driven. You may need to submit a mileage log to claim this payment. The mileage allowance is not taxable.
A car allowance, also known as a flat-rate vehicle allowance, is money an employee receives from their employer; usually as part of their wages. This money is usually meant for vehicle purchase and maintenance. It is taxable.
The CRA uses the broad term ‘Automobile and Motor Vehicle Allowance’ to qualify payment made by an employer to an employee for using their own vehicle in connection with their job.
Automobile Allowance Rates for 2021
CRA Automobile Allowance rates recognized for the year 2021 are stated below.
- CA$0.59¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.53¢ per kilometer driven after the first 5,000 kilometers driven.
However, in the Northwest Territories, Yukon, and Nunavut, there is an additional CA$0.04¢ per kilometer allowed for travel distance.
Past 5 Years Automobile Allowance Rates as Advised by CRA
- Automobile or Vehicle Allowance Rates for 2020:
Provinces
- CA$0.59¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.53¢ per kilometer driven after the first 5,000 kilometers driven.
Territories
- CA$0.63¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.57¢ per kilometer driven after the first 5,000 kilometers driven.
2. Automobile or Vehicle Allowance Rates for 2019:
Provinces
- CA$0.58¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.52¢ per kilometer driven after the first 5,000 kilometers driven.
Territories
- CA$0.62¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.56¢ per kilometer driven after the first 5,000 kilometers driven.
3. Automobile or Vehicle Allowance Rates for 2018:
Provinces
- CA$0.55¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.49¢ per kilometer driven after the first 5,000 kilometers driven.
Territories
- CA$0.59¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.53¢ per kilometer driven after the first 5,000 kilometers driven.
4. Automobile or Vehicle Allowance Rates for 2016-17:
Provinces
- CA$0.54¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.48¢ per kilometer driven after the first 5,000 kilometers driven.
Territories
- CA$0.58¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.52¢ per kilometer driven after the first 5,000 kilometers driven.
5. Automobile or Vehicle Allowance Rates for 2015:
Provinces
- CA$0.55¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.49¢ per kilometer driven after the first 5,000 kilometers driven.
Territories
- CA$0.59¢ per kilometer for the first 5,000 kilometers driven.
- CA$0.53¢ per kilometer driven after the first 5,000 kilometers driven.
Is a vehicle allowance taxable income?
A vehicle or automobile allowance will be considered a taxable benefit when an employee is paid:
- At a per-kilometer rate that CRA considers too high or too low and thus not reasonable
- A flat rate motor vehicle allowance that is not based on the number of kilometers driven
- An allowance that is a combination of flat-rate and reasonable per-kilometer allowance that covers the same use for the vehicle
You should also know that taxable vehicle allowances are also considered insurable and pensionable, so EI premiums and CPP contributions are applicable too.
Who Charges Automobile or Vehicle Allowance?
The officer or employee charges and earns the automobile allowance based on the kilometers covered using his or her personal vehicle during an official assignment.
The officer or employee often makes or file the claims and the employer would consider and approve the claim for payment. The employee could be a staff of government or corporate organizations.
Who Pays Automobile or Vehicle Allowance?
The employer pays the vehicle allowance.
Input Tax Credit on Automobile or Vehicle Allowance?
An employer (office) can claim an input tax credit based on the Automobile or Vehicle Allowance paid to the employees.
Conclusion
It is advisable to adhere to the automobile allowance advised by the CRA to ensure that the charges are reasonable and qualify as an allowance that is not subject to income taxes, CPP contributions, or EI premiums.
