Do you drive your personal vehicle for business purposes? You may be eligible for special allowances in your tax return! Automobile expenses continue to be an area of scrutiny for the taxman, so you shouldn’t be surprised if the Canada Revenue Agency inquires about how you may have claimed any vehicle expenses or employer’s travel allowances on your tax return.
Do You Have to Pay Tax on Car Allowance You Receive from Your Employer? Not Necessarily!
When Car Allowance Taxable in Canada
If you receive a fixed monthly car allowance to cover your work-related car costs, this is considered a benefit. Your car allowance will be taxed as part of your income.
If your employer pays out car allowance on a per-kilometer basis at a much higher or lower rate than the reasonable per-kilometer rate set by the CRA, your car allowance will also be taxed.
If the reimbursement you receive is not based on your actual business kilometers, but say on expenses, your reimbursement will be taxed.
When Car allowance is Not Taxable in Canada
If your employer reimburses you with the official CRA automobile allowance rate per km based on your actual business kilometers driven, your reimbursement will be tax-free.
How to Know If Your Reimbursement Was Taxed
If your payment summary from your employer shows your reimbursement as a benefit, then your reimbursement was taxed. If the payment summary doesn’t show any withheld tax on the car allowance, then your reimbursement is tax-free. The withheld tax from your reimbursement is income, pension, and insurance tax.
The general rule is that if you are an employee of an organization, and you use your car for work, then under certain conditions, you may be able to deduct some of your automobile expenses against employment income. The conditions that must be satisfied in this regard under the Income Tax Act are:
- You must be required under your employment contract to pay your own automobile expenses, and this must be certified by your employer.
- As a matter of routine, you must be required to work away from your employer’s place of business, and
- You must not be the recipient of a “non-taxable” allowance.
If all three of these criteria are met, an employee is permitted to deduct a portion of vehicle costs related to performing their work duties. These
tax deductibility of car expenses depends on the terms and conditions of the employment. The terms and conditions of employment concerning the use of the employee’s personal motor vehicle are confirmed by the employer on form T2200. This form provides important information about the conditions of employment and confirms if all the above-noted conditions are satisfied. It should be noted that employees can deduct vehicle expenses only to the extent that such expenses weren’t recovered through receipt of allowances or reimbursements.
How to Report Car Allowances on Your Tax Return?
Employers and business owners can calculate automobile allowances in three different ways:
- Flat rate Allowance: Flat rate allowances are a method of calculating automobile expenses for employees and business owners. This method allows employers to pay employees a fixed amount per pay period regardless of actual kilometers driven. This fixed amount is paid to employees in each pay period. When using the flat-rate allowance method, the allowance is considered a taxable benefit and must be reported on the employee’s T4. As with other taxable incomes, automobile allowances are subject to CPP contributions, Employment Insurance, and income taxes. Both box 14 and “Other information” of an employee’s T4 slip shall reflect this allowance under code “40.”
- Mileage Rate Allowance: mileage rate allowances consider the amount driven by a personal vehicle for business purposes. Allowances based on mileage driven are considered reimbursement for employee expenses and not a taxable benefit. In this case, they don’t meet the taxable income criteria nor CPP and EI deductions. This category’s allowance shall be paid using the CRA mileage rates posted under “Reasonable per-Kilometre Allowance.”
- Combination of flat rate and mileage rate: depending on the employment contract and expectations, employers can pay a combination of flat rate and per mileage rate. In that case, CPP and EI deductions apply to the combined allowance under the taxable benefit reported on the employee’s T4.
Whether using per-kilometer mileage rates or a combination allowance, employees must keep detailed records of all motor vehicle expenses incurred while conducting work-related activities to substantiate claims made when filing taxes or applying for employer reimbursements.
What is the CRA reasonable allowance for mileage rates for 2023/2024?
If you are catching up with mileage rates and reimbursements for 2023, the CRA rate for automobile allowances calculates 68¢ per kilometer for the first 5,000 kilometers driven and 62¢ per kilometer driven after that. With an additional 4¢ per kilometer if driving in the Northwest Territories, Yukon, and Nunavut.
As of 2024, the CRA will give back 70¢ per kilometer for the first 5,000 kilometers driven and 64¢ per kilometer after that. If you drive in the Northwest Territories, Yukon, or Nunavut, CRA mileage rates are 74¢ per kilometer for the first 5,000 kilometers and 68¢ afterward.
You can check current and prior mileage rates on the CRA website.
Questions about which mileage rate to use and how to report it? Our team of accountants in Toronto can help you navigate the intricacies of car allowance tax implications and use them to set strategies for personal tax minimization. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances and ensure you comply with CRA reporting and payroll deductions.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.