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Reasonable Automobile Allowances – What does it really mean?

Many companies provide an automobile allowance to their employees if they are required to use their own vehicle for business purposes. Since each company has different requirements from their employees (for example, the amount of driving they need to do for the role), the question that is often asked of a payroll specialist is “how much should I be giving my employee for car allowance?”

The Canada Revenue Agency (CRA) has guides as to what they consider “reasonable”. The CRA says that ALL of the following must apply in order for a car allowance to be considered reasonable, and thus a non-taxable allowance:

  • The allowance is based only on the number of business kilometers driven in a year
  • The rate per kilometer is reasonable
  • The employee was not reimbursed for expenses related to the same use, except in 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

Over the years there have been many variations of car allowance amounts – anywhere from $200.00 to $1000.00 per month. Employers must be careful when providing a non-taxable car allowance. If the amount is too low or too high, then it would be considered taxable.

The other option that most employers use is the flat rate allowance. This is a flat rate paid to the employee and is not related to the number of kilometers driven. This would be a taxable benefit however, and should be included in the employee’s income. This will also allow the employee to claim allowable expenses on their tax return. This becomes the responsibility of the employee to claim these allowable expenses and maintain records to support the claim. They will also have to keep track of the kilometers driven for the business.

Each company has different expectations of their employees, and the job description of that employee may determine how much time is spent behind the wheel. If the non-taxable allowance is too high or too low, the employee may face a bill from CRA at year end. If they are audited, this could also create a domino effect that leads to a company-wide audit. Getting advice is very important to ensure everyone will be happy in the end! If you have any questions or concerns about allowances or other payroll items, please reach out to your PEO Canada payroll contact for assistance.

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