Averaging allowances
To comply with the rules on reasonable per-kilometre allowances, employees have to file expense claims with you on an ongoing basis, starting at the beginning of the year.
A flat-rate or lump-sum allowance that is not based on the number of kilometres driven cannot be averaged at the end of the year to determine a reasonable per-kilometre rate and then be excluded from the employee's income.
The CRA understands the administrative problems that can result from this. As a result, the CRA is giving you a choice. If you make accountable advances to employees for vehicle expenses, you do not have to include them in the employee's income if all of the following conditions are met:
- there is a pre-established per-kilometre rate that is not more than a reasonable amount
- the rate and the advances are reasonable under the circumstances
- you document this method in the employee's record
- no other provision of the Income Tax Act requires you to include the advances in the employee's income
Employees have to account for the business kilometres they travelled and any advances they received. They have to do so on the date their employment ends in the year, or by December 31, whichever is earlier.
At that time, you have to pay any amounts you owe the employee and the employee has to repay any amount over actual expenses. Where no repayment occurs, you cannot simply report the excess advances on the employee's T4 slip.
For more information on vehicle allowances, go to What is a taxable benefit.
Example: Averaging allowances for automobile and motor vehicle expensesÂ
You are a manager for an insurance company. Your employees travel frequently to meet new and existing clients as part of their duties. Given the frequency of travel of representatives, you use the averaging allowances method to calculate the accountable advance your employees receive each pay to cover eligible expenses relating to the use of their personal vehicles. The amounts are based on the reasonable per-kilometre rate prescribed in section 7306 of the Income Tax Regulations, and are recorded in the employees' files.
At the end of the year, the employees provide you with a log book that lists the amount of business kilometres they have travelled and any advances they have received. You review the advances paid to your employees and their eligible expenses, at which time the company will pay any amounts owing to the employee or the employee will reimburse any amounts received that exceed their eligible expenses.
In this example, the advance is not considered a taxable benefit because:
- there is a pre-established per-kilometre rate that is not more than a reasonable amount
- the rate and the advance are reasonable under the circumstances
- the method is documented in the employee's file
The advance should not be included in the employees' income.
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