Do your employees use their vehicle for work? Here’s what you need to know
Do your employees use their personal vehicles for work-related travel? If so, you may provide them with an automobile or motor vehicle allowance to help cover expenses. It is important that you understand your responsibilities around these allowances.
What is an automobile or motor vehicle allowance?
An automobile or motor vehicle allowance is any payment that you give your employees for using their own vehicle in connection with their employment. This payment forms part of their salary or wages. An allowance is a taxable benefit to your employees unless it is based on a reasonable per-kilometre rate.
What are your responsibilities?
Determine if the allowance is reasonable
The Canada Revenue Agency (CRA) considers an allowance to be reasonable if the allowance is based only on the number of business kilometres driven in a year and if the per-kilometre rate is reasonable. Generally, a reasonable per-kilometre rate is one that is designed to cover an employee's out-of-pocket costs. The CRA considers the per-kilometre rates prescribed in section 7306 of the Income Tax Regulations to be reasonable.
What is a reasonable amount:
For 2019, a reasonable rate is 58 cents per kilometre for the first 5,000 kilometres driven and 52 cents/km after that. In the territories, the rate is 4 cents/km higher.
For 2018, a reasonable rate is 55 cents per kilometre for the first 5,000 kilometres driven and 49 cents/km after that. In the territories, the rate is 4 cents/km higher.
If the allowance is reasonable:
If you pay your employees an allowance that the CRA considers reasonable, do not include this amount as income on their T4. You also do not deduct CPP contributions, EI premiums, or income tax from the allowance.
If the allowance is unreasonable:
If you pay your employees an allowance that the CRA considers unreasonable, because it is either too low or too high, it is a taxable benefit. You will need to complete the following steps:
- Include the amount of the allowance in your employee's income.
- Calculate payroll deductions (CPP deductions, EI premiums and income tax).
- Prepare and file T4 slips for your employees.
Provide your employee with a Form T2200, if required
Where allowances are included in income, the employee may be entitled to deduct motor vehicle employment expenses. In order to deduct these expenses, the allowance must be included in income, and the employee must obtain a completed Form T2200, Declaration of Conditions of Employment, from you. The deduction of motor vehicle employment expenses is usually limited to situations where, the employee was required to carry out the duties of employment away from the employer's regular place of business or in multiple locations.
Where can you find more information?
To assist you in determining the taxability of a benefit, the payroll deductions you have to withhold, and how to report the amount on an information slip, the CRA publishes the following guides:
- T4130 Employers' Guide – Taxable Benefits and Allowances
- T4001 Employers' Guide – Payroll Deductions and Remittances
- T4044 Employment Expenses – Includes Form T2200
- RC4120 Employers' Guide – Filing the T4 Slip and Summary
Canada Revenue Agency
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