Employer mileage reimbursement in Canada follows strict CRA rules that determine whether the money your company pays you for driving is tax-free or fully taxable income. Getting this wrong costs employees hundreds of dollars every year and exposes employers to payroll reassessments. This guide covers the 2026 prescribed rates, the difference between per-kilometre and flat allowances, T4 reporting obligations, and what employees can do when their allowance falls short.
2026 CRA Prescribed Automobile Allowance Rates
The CRA publishes new reasonable automobile allowance rates each January. For 2026, the prescribed rates under section 7306 of the Income Tax Regulations are:
| Region | First 5,000 km | Each Additional km |
|---|---|---|
| All provinces | $0.73/km | $0.67/km |
| Yukon, NWT, Nunavut | $0.77/km | $0.71/km |
An allowance paid at or below these rates is considered “reasonable” by the CRA, provided three conditions are met:
- The allowance is based solely on the number of business kilometres driven
- The employee does not receive any other reimbursement for the same vehicle use
- The employee accounts for kilometres driven during the year
When all three conditions hold, the allowance is non-taxable. The employer does not deduct CPP, EI, or income tax, and the amount does not appear on the employee’s T4 slip. For a full breakdown of these rates and how they changed from prior years, see CRA mileage rate 2026.
Per-Kilometre vs Flat Rate: When Each Becomes Taxable
The structure of the allowance determines its tax treatment more than the dollar amount.
Per-kilometre allowances tied to documented business trips are the only type the CRA considers potentially non-taxable. If the per-km rate is at or below the prescribed amount, the entire payment is tax-free.
Flat monthly allowances — a fixed dollar amount regardless of kilometres driven — are almost always fully taxable. Because the payment has no relationship to actual business use, the CRA treats the entire amount as employment income. Whether an employee drives 200 km or 2,000 km in a month, a $500 flat allowance is $500 of taxable income.
Combined allowances that blend a flat monthly amount with a per-km component are also generally taxable in full. The one exception: if the flat portion covers travel within an assigned territory and the per-km portion covers travel outside that territory, the CRA treats them as separate payments. Only the flat portion is taxable; the per-km portion remains non-taxable if it meets the reasonableness test.
What about rates above the CRA limit? If an employer pays $0.85/km, the entire allowance — not just the excess — becomes taxable. The CRA does not split the payment at the prescribed threshold. The full amount must be included in income on the T4.
Employee Election: Including Allowance in Income and Claiming Actual Expenses
Employees who receive a taxable allowance (flat rate or above-CRA per-km) have an important option. Because the allowance is included in their T4 income, they can claim their actual vehicle expenses on Form T777, Statement of Employment Expenses. This election can produce a significant tax benefit when actual costs exceed the allowance received.
Employees who receive a non-taxable per-km allowance that falls below their real costs also have a path forward. They can ask their employer to include the allowance in income on the T4, then deduct actual expenses on T777. To do this, the employee needs:
- Form T2200 — Declaration of Conditions of Employment, signed by the employer
- A complete mileage log with dates, destinations, purposes, and odometer readings
- Receipts for fuel, insurance, maintenance, and other vehicle costs
Example — flat allowance vs actual expenses:
Sarah receives a $400/month flat car allowance ($4,800/year). She drove 14,000 business km out of 22,000 total km. Her actual vehicle costs for the year were $9,500.
- Business-use percentage: 14,000 / 22,000 = 63.6%
- Deductible actual expenses: $9,500 x 63.6% = $6,042
- Net benefit of claiming actual: $6,042 - $4,800 = $1,242 additional deduction
By including the $4,800 flat allowance in income and claiming $6,042 on T777, Sarah reduces her taxable income by $1,242 compared to simply pocketing the allowance.
For step-by-step instructions on completing the employment expenses form, see T777 statement of employment expenses vehicle. To understand what your employer needs to provide, see T2200 form vehicle expenses.
Employer T4 Reporting Obligations
Employers must handle vehicle allowances correctly on payroll or risk CRA reassessment. Here is a summary of the reporting rules:
| Allowance Type | Taxable? | Include on T4? | Withhold CPP/EI/Tax? |
|---|---|---|---|
| Per-km at or below CRA rate | No | No | No |
| Per-km above CRA rate | Yes — full amount | Yes (Box 14, Code 40) | Yes |
| Flat monthly amount | Yes — full amount | Yes (Box 14, Code 40) | Yes |
| Combined flat + per-km | Yes — full amount* | Yes | Yes |
*Exception for territory-based split as described above.
When an allowance is taxable, the employer must include the full amount in Box 14 (Employment Income) and report it under Code 40 (Other Taxable Allowances and Benefits) on the T4. CPP contributions, EI premiums, and income tax must be withheld at source.
Flat-rate allowances are one of the most common triggers for CRA payroll audits. If a company has been paying flat allowances without withholding, a reassessment can result in back taxes, penalties, and interest for both employer and employee.
Setting Up a CRA-Compliant Reimbursement Policy
Employers building or updating a vehicle reimbursement policy should follow these principles:
Use the CRA prescribed per-km rate. Paying exactly $0.73/km (first 5,000 km) and $0.67/km (additional km) keeps every dollar tax-free for the employee and fully deductible for the business. No T4 reporting is required, and payroll administration is straightforward.
Require a mileage log for every trip. The CRA expects a contemporaneous record showing the date, destination, business purpose, and distance for each trip. An employer is entitled to request this documentation before processing reimbursement.
Process reimbursements against submitted records. Pay employees based on logged kilometres, not estimates or advances. Advances that are not reconciled against actual km driven may be treated as flat allowances by the CRA.
Keep records for six years. Both employer and employee should retain mileage logs, reimbursement records, and any T2200 forms for at least six years in case of a CRA audit.
Tripbook generates CRA-compliant mileage reports that employees can submit directly to their employer for reimbursement. Every trip includes the date, destination, purpose, and odometer readings the CRA requires.
Key Takeaways for Employer Mileage Reimbursement Canada
- Per-km at or below the CRA rate = non-taxable, no T4 reporting needed
- Per-km above the CRA rate = the full allowance is taxable, not just the excess
- Flat monthly allowances = fully taxable regardless of how much the employee drives
- Employee election = when the allowance is taxable, employees can claim actual expenses on T777 with a T2200
- Mileage logs are mandatory for both tax-free reimbursement and expense claims
Whether you are an employer designing a policy or an employee trying to maximize your after-tax benefit, the foundation is accurate kilometre tracking. Download Tripbook to automate your mileage log and keep every employer mileage reimbursement Canada claim audit-ready.
