Car Allowance CRA: For Employers and Employees
Whether you are an employer providing vehicle-related compensation or an employee receiving it, understanding how the Canada Revenue Agency (the “CRA”) treats car allowances is crucial for staying compliant and avoiding unexpected assessments. The CRA closely monitors how car allowances are structured, reported, and taxed. Failing to align your practices with CRA expectations can result in taxable benefits, penalties, and/or audits.
What Is Car Allowance?
A car allowance is an amount of money paid by an employer to an employee to compensate for use of their automobile or motor vehicle in connection with or in the course of their office or employment duties. It is typically used to reimburse employees for travel costs incurred while performing work-related duties; this does not include commuting to and from their regular workplace.
Car allowances can take several forms:
- A flat-rate allowance (e.g. $500/month regardless of mileage)
- A per-kilometer reimbursement based on distance driven for business purposes
- A combination of both, or some other form of structured policies
Each method has different implications for how the allowance is taxed and reported to the CRA.
CRA’s Position on Taxable vs. Non-Taxable Car Allowances
The CRA distinguishes between taxable and non-taxable car allowances based on how they are calculated:
Non-Taxable Car Allowances
A car allowance is non-taxable if it:
- Is based solely on kilometres driven
- Uses reasonable per-kilometre rates set by the CRA
- Covers only business-related travel
For 2025, the CRA’s prescribed non-taxable rates are:
- $0.72/km for the first 5,000 kilometres
- $0.66/km for each additional kilometre
These rates apply to passenger vehicles and may vary for provinces and territories or different vehicle types.
When employers pay mileage reimbursements at or below these rates, and employees do not receive any other vehicle-related benefits, the amounts do not need to be included in income or reported on a T4 slip.
Taxable Car Allowances
A car allowance may become taxable if:
- It is a flat monthly amount, regardless of distance driven
- The rate paid exceeds the CRA’s prescribed per-kilometre rate
- It includes personal travel or commuting
In these cases, the allowance is considered a taxable benefit and must be included in the employees’ income. The employer must report it on the employee’s T4 slip in Box 14 and may also need to withhold income tax, CPP, and EI contributions.
Flat-Rate Allowances: Why They Often Raise Red Flags
Flat-rate car allowances are attractive because they offer predictability for both employers and employees. However, they are almost always considered taxable by the CRA because they do not reflect actual business use. Whether the employee drives 50 or 500 kilometers in a month, the allowance remains the same, and possibly not meeting the CRA’s “reasonableness” test.
Flat-rate payments are one of the most common triggers for payroll audits and reassessments, especially when companies do not withhold tax or issue proper T4 reporting.
Record-Keeping Requirements
To support a non-taxable car allowance, the CRA requires detailed documentation of mileage. Employees should maintain a logbook that includes:
- Date of the trip
- Starting point and destination
- Purpose of the trip
- Odometer readings before and after
- Total kilometers driven
Without a proper log, the CRA may reassess a non-taxable allowance as a taxable benefit, even if paid on a per-kilometre basis. Employers should retain copies of employee mileage claims and ensure the rates used align with CRA guidelines.
Claiming Vehicle Expenses Without a Car Allowance
In some cases, employees do not receive any allowance but still use their personal vehicle for work. If their employer signs a Form T2200, they may be able to deduct vehicle expenses on their personal tax return.
Eligible expenses include:
- Fuel
- Insurance
- Lease payments
- Maintenance and repairs
- Parking and tolls (not including commuting)
The deduction must be prorated based on business use versus total kilometers driven. The employee must maintain a logbook and retain all receipts.
Penalties for Incorrect Reporting
Misreporting car allowances, whether by failing to report a taxable benefit or claiming an inappropriate deduction, can lead to:
- Reassessments of employee and employer returns
- Interest and penalties on unremitted source deductions
- Increased scrutiny of other payroll practices
- Denial of GST/HST claims
Employers should regularly review their vehicle reimbursement policies to ensure compliance with current CRA guidelines.
When to Contact a Tax Lawyer
If you have been audited or reassessed due to a car allowance issue, or if you are unsure whether your car allowance structure is compliant, a tax lawyer can provide guidance and protection. Legal counsel can help:
- Respond to CRA audit requests
- Structure or revise vehicle reimbursement programs
- Navigate tax disputes and negotiate settlements
- Reduce or eliminate penalties through taxpayer relief applications
Employers and high-earning employees alike benefit from understanding how the CRA approaches car-related benefits and how to mitigate risk.
Schedule a Free Consultation with Rosen & Associates Tax Law
Whether you’re navigating a CRA audit related to car allowances or seeking to proactively structure a compliant vehicle reimbursement program, Rosen & Associates Tax Law can help. We provide strategic advice tailored to your unique employment or business situation. Schedule your free consultation here.
Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Bhavika Chadha