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-kilometer 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.
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.
To schedule a tax consultation, or have your corporate tax filed, please contact High & Wide Financial at 416-838-5988, 416-833-5268, or send an email to email@example.com.