If you pay your employee an allowance based on a flat rate that is not related to the number of kilometres driven, it is a taxable benefit and has to be included in the employee's income.
Employees may be able to claim allowable employment expenses on their return.
Do not include the GST/HST in the value of this allowance.
Example: Employee who is paid a flat rate allowance
You own an office supply company where you employ workers on the road as salespersons. Each salesperson has a specific territory to cover and they use their own vehicle. They are paid a monthly flat rate allowance of $600 no matter where they go or how far they drive. This was agreed on when they were hired and is cited in their respective employment contracts.
In this example, the flat rate allowance is considered a taxable benefit because it is not based on the number of business kilometers driven. Therefore, the allowance must be included in the employees' income.
If the allowance does not cover all of the employee's out-of-pocket expenses, they would be eligible to claim their auto and motor vehicle expenses on their income tax return. To do so, you as the employer will need to complete Form T2200, Declaration of Conditions of Employment. For more information, see Employees' allowable employment expenses.
If the allowance is taxable, it is also pensionable and insurable. Deduct CPP contributions, EI premiums, and income tax.
Reporting the benefit
Report the taxable allowance in box 14 "Employment income" and in the "Other information" area under code 40 at the bottom of the employee's T4 slip. For more information, see T4 - Information for employers.
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