Pay an employee for using their own vehicle, and there's a right way and a wrong way to structure it — get it wrong, and a simple reimbursement turns into taxable income with a T4 problem attached.

Allowance, Reimbursement, or Advance — They're Not the Same Thing

An allowance is an amount paid to an employee for using their own vehicle without requiring them to account for each underlying vehicle expense. A per-kilometre allowance calculates that payment from the business kilometres driven. A reimbursement repays actual amounts the employee spent, backed by receipts. An accountable advance is money given ahead of time that the employee has to account for afterward, returning anything unspent. Each follows slightly different rules, but the per-kilometre allowance is what most small businesses actually use, since it doesn't require chasing down a receipt for every fill-up.

What Makes an Allowance "Reasonable" to the CRA

For a per-kilometre allowance to stay non-taxable, all three of these have to be true:

• It's based only on business kilometres actually driven, not a flat amount.
• The rate itself is reasonable.
• The employee isn't also being separately reimbursed for the same vehicle use (a couple of narrow exceptions apply — supplementary business insurance, tolls, and ferry charges can be reimbursed on top without breaking this rule).

For 2026, CRA generally considers its prescribed rates reasonable: 73 cents per kilometre for the first 5,000 kilometres driven and 67 cents for each kilometre after that (77 cents and 71 cents in the territories). A different rate — higher or lower — can still be reasonable depending on the actual circumstances, such as the type of vehicle, driving conditions, or unusually high fuel costs in a specific location. But if the rate genuinely isn't reasonable for the situation, the consequence isn't a small adjustment.

If the Allowance Isn't Reasonable, the Whole Thing Becomes Taxable

If an allowance fails the reasonableness test, it's not just the excess that's taxable. If the rate is too high or too low to be reasonable in the circumstances, or the allowance isn't based solely on actual business kilometres driven, the entire allowance becomes taxable income to the employee — not just the portion over the prescribed rate.

A flat monthly car allowance is the clearest example. Pay someone $500 a month regardless of how much they actually drove, and that allowance was never based on kilometres in the first place — the whole $500 becomes taxable, every month, not just some portion of it. This is the scenario that trips people up most, because a flat allowance often feels administratively simpler, right up until it creates a bigger tax headache than the paperwork it was meant to avoid.

Don't Casually Combine a Flat Rate and a Per-Kilometre Rate

There's a trap worth knowing about: if you pay a flat per-diem rate to cover an employee's fixed vehicle costs and a reasonable per-kilometre rate for the same driving, CRA treats those two payments as one combined allowance — and because it isn't based solely on kilometres, the whole thing becomes taxable.

There's a real distinction worth knowing, though. If the flat rate and the per-kilometre rate cover genuinely different driving — say, a flat monthly amount for travel inside the employee's regular work district, and a separate per-kilometre rate for trips outside that district — CRA looks at those as two separate allowances. The per-kilometre portion for the outside-district driving can stay non-taxable, while the flat-rate portion for inside-district driving is taxed on its own. The dividing line is whether the two payments are covering the same use of the vehicle or genuinely different uses.

Records Matter as Much as the Rate

A reasonable rate isn't enough on its own — the allowance has to be based on the employee's actual business kilometres. That means the kilometres need records behind them: a mileage record showing the business trips, with enough detail to support the distance travelled and the purpose of each one. Without records supporting the kilometres the allowance was calculated on, the employer has a much harder time demonstrating that the payment actually met CRA's conditions for a non-taxable allowance.

This Only Applies to Employee-Owned Vehicles

Everything above is about an employee using their own personal vehicle. An employer-owned or employer-leased vehicle available for personal use follows different taxable-benefit rules. For a vehicle that meets CRA's definition of an automobile, those rules generally involve a standby charge for having the vehicle available for personal use and an operating expense benefit related to personal driving — because that situation flips the question entirely, from reimbursing personal costs to taxing personal use of a company asset.

Check the Current Rate — Don't Work From Memory

These rates get reviewed and adjusted every year. The kilometre threshold where the rate drops has stayed fairly consistent, but the actual dollar figures haven't — confirming this year's number before setting a mileage policy beats relying on what the rate was last year, or the year before that.

Most provinces share the same rate. The territories use a higher prescribed rate: 77 cents for the first 5,000 kilometres and 71 cents after that in 2026.

Deciding whether to lease or buy a vehicle in the first place, rather than reimburse an employee's own? RSB's lease-or-buy guide and vehicle mileage log guide cover that side of things.

FAQ

Does this rate apply to a self-employed person claiming their own vehicle?
Not directly — a self-employed individual generally claims actual expenses based on business-use percentage and a mileage log, not a per-kilometre allowance paid to themselves. The reasonable-rate rule is specifically about an employer paying an employee.

Can an employer just reimburse actual expenses instead of paying a per-kilometre allowance?
Yes — that's a valid alternative, provided the amounts are reasonable and backed by receipts, expense reports, or similar records. It means more recordkeeping on both sides to actually support the reimbursement.

I found a different CRA kilometre rate online. Which one do I use?
CRA publishes more than one set of kilometre rates for different purposes. The rates in this article — 73/67 cents in the provinces and 77/71 cents in the territories for 2026 — are the prescribed rates used to determine whether an employer's per-kilometre allowance for an employee using their own vehicle is reasonable. CRA also publishes separate travel-directive rates for its own employees and certain government travel, which aren't the rates being discussed here.

What happens if the allowance ends up taxable?
It has to be included in the employee's employment income and reported on their T4, with income tax, CPP, and EI withheld as applicable. The employee may then be able to deduct eligible employment vehicle expenses if they meet the requirements, which generally includes having the employer complete Form T2200 (the CRA form an employer signs to certify the conditions of the employee's job that support claiming those expenses).

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