A travel allowance from your employer can land anywhere on the tax spectrum, from completely tax-free to fully taxable, depending on how it is structured. In Canada, the Canada Revenue Agency draws a bright line: allowances calculated on a per-kilometre basis at or below the prescribed rate are excluded from income, while flat-rate payments and above-rate reimbursements must appear on your T4 slip and be reported as employment income. Understanding which side of that line your allowance falls on can save you hundreds, or even thousands, of dollars at tax time.
The CRA “Reasonable Allowance” Test
The Income Tax Act excludes a motor vehicle allowance from an employee’s income only when the CRA considers it “reasonable.” For 2026 the prescribed per-kilometre rates are:
| Region | First 5,000 km | Each additional km |
|---|---|---|
| Provinces | $0.73 | $0.67 |
| Territories (YT, NT, NU) | $0.77 | $0.71 |
To pass the reasonable-allowance test, all three of the following must be true:
- Per-kilometre basis. The allowance is calculated solely on the number of business kilometres driven, not paid as a lump sum.
- At or below the prescribed rate. The rate your employer uses does not exceed the figures above.
- No double-dipping. Your employer does not also reimburse you separately for the same vehicle expenses (fuel receipts, maintenance invoices, etc.). Note: supplementary reimbursements for tolls, ferries, and additional business insurance do not disqualify the allowance.
When all three conditions are met, the allowance stays off your T4 entirely. You do not report it as income, your employer does not withhold CPP, EI, or income tax on it, and you cannot claim vehicle expenses on your personal return for the same kilometres.
When a Travel Allowance Becomes Taxable
If any of the three conditions above is broken, the allowance (or a portion of it) becomes taxable. The most common scenarios are:
Flat monthly car allowance. A fixed payment of, say, $600 per month regardless of kilometres driven fails the per-kilometre test automatically. The entire $7,200 annual amount is taxable employment income. Your employer must include it on your T4 in Box 14 (Employment Income) and again under code 40 (Other Taxable Allowances and Benefits) in the “Other information” area.
Per-kilometre rate above the CRA limit. If your employer reimburses you at $0.85/km, the first $0.73 per kilometre remains non-taxable while the $0.12 excess per kilometre is a taxable benefit reported on your T4.
Mixed reimbursement. You receive a per-km allowance and your employer also pays your gas bills. Because the same vehicle costs are being covered twice, the entire per-km allowance becomes taxable.
Unreasonably low allowance. An employer might pay only $0.25/km, well below the CRA rate. While a low rate does not automatically trigger taxability for the employer, it can leave the employee significantly out-of-pocket. In that case, you may ask your employer to include the allowance in your income so you can claim your full actual expenses instead.
How T4 Box 14 and Box 40 Work
When an automobile allowance is taxable, your employer reports it in two places on your T4:
- Box 14 (Employment Income): The taxable portion of your allowance is added to your wages and salary here. This is the figure used to calculate your overall employment income.
- Code 40 (Other Taxable Allowances and Benefits): The same amount appears again under code 40 in the “Other information” section. This does not double your income. Code 40 is purely informational and helps both you and the CRA identify how much of your Box 14 total comes from benefits and allowances rather than regular pay.
If your allowance is reasonable and non-taxable, it does not appear on your T4 at all.
Claiming Vehicle Expenses When Your Allowance Is Taxable
A taxable allowance is not all bad news. Once the allowance is included in your income, you unlock the right to deduct your actual vehicle expenses on your personal tax return. Here is the step-by-step process:
- Get a signed T2200 from your employer. This Declaration of Conditions of Employment confirms you were required to use your own vehicle for work and pay your own motor vehicle expenses. Without it, no deduction is allowed. Learn more in our T2200 form guide.
- Track every vehicle expense for the full year. Eligible costs include fuel, insurance, maintenance, licence and registration fees, interest on a car loan, and lease payments (subject to CRA caps of $350/month interest and $1,100/month before tax for leases in 2026).
- Maintain a CRA-compliant mileage log. Record the date, destination, purpose, and distance of every business trip. The CRA requires a contemporaneous log, meaning you record trips as they happen, not months later from memory. Tripbook automates this by tracking your drives in the background and generating a CRA-ready report you can hand to your accountant.
- Complete Form T777 (Statement of Employment Expenses). Calculate your business-use percentage by dividing business kilometres by total kilometres for the year. Apply that percentage to your total vehicle expenses. Enter the deductible amount on Line 22900 of your return. See our T777 vehicle expenses guide for a detailed walkthrough.
Example: Sarah receives a flat car allowance of $600/month ($7,200/year taxable). Her total vehicle expenses for the year are $12,500 and her business-use percentage (tracked with Tripbook) is 65%. Her T777 deduction is $12,500 x 0.65 = $8,125. Net result: $8,125 deduction minus $7,200 taxable allowance = $925 net reduction in taxable income. She comes out ahead by claiming her actual expenses.
Keeping Your Allowance Tax-Free: The Mileage Log
Whether your allowance is taxable or not, a proper mileage log is your single most important piece of documentation. For non-taxable per-km allowances, the log substantiates that the kilometres your employer paid for were genuinely business-related. If the CRA audits your employer, a log protects both of you.
A CRA-compliant mileage log must record five fields for every trip:
- Date of the trip
- Destination
- Business purpose
- Odometer reading at the start
- Odometer reading at the end
Keeping a paper logbook is tedious and error-prone. Tripbook eliminates that friction by automatically detecting your drives, categorizing them as business or personal, and producing a year-end report with every field the CRA requires. For more on what the CRA expects, see our guide on how to claim mileage on taxes in Canada.
Quick Reference: Allowance Taxability at a Glance
| Allowance Type | Taxable? | T4 Reporting | Employee Action |
|---|---|---|---|
| Per-km at or below CRA rate | No | Not on T4 | Keep mileage log only |
| Per-km above CRA rate | Excess only | Excess in Box 14 + Code 40 | May claim expenses on excess portion |
| Flat monthly allowance | Yes, in full | Full amount in Box 14 + Code 40 | Claim T777 with T2200 |
| No allowance received | N/A | N/A | Claim T777 with T2200 |
| Mixed (per-km + expense reimbursement) | Yes, in full | Full allowance in Box 14 + Code 40 | Claim T777 with T2200 |
If you receive a taxable allowance and drive regularly for work, claiming your actual vehicle expenses almost always results in a net tax benefit. The key is accurate, real-time kilometre tracking throughout the year.
Download Tripbook from the App Store to automatically log every business drive and generate the CRA-compliant mileage report you need, whether your goal is keeping a per-km allowance tax-free or maximizing your T777 deduction on a flat allowance.
