Per-kilometre allowance rates that are not considered reasonable
If you pay your employee an allowance based on a per-kilometre rate that is not considered reasonable (because it is either too high or too low), it is a taxable benefit and has to be included in the employee's income.
Example: Employee who is paid an allowance that is not based on the prescribed rate
You are a controller at a retirement home. Currently, employees receive a rate of $0.35 per kilometre for automobile and motor vehicle allowances when they have to travel for work to help the residents with their daily tasks. This rate was negotiated in the last collective agreement and the collective agreement is signed for four years. You understands that the $0.35 rate is lower than the reasonable per-kilometre rate prescribed in section 7306 of the Income Tax Regulations.
In this example, the allowance is considered a taxable benefit because the rate per kilometre is not considered reasonable because it is lower than the reasonable per-kilometre rate. Therefore, the allowance must be included in the employees' income, and CPP, EI, and income tax must be deducted from the allowance.
It is important to note that collective agreements do not supersede the Income Tax Act.
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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