Flat-rate Car Allowances for Employees

If you’re an employee who uses your personal car for work purposes, you may be offered a flat-rate car allowance by your employer. A flat-rate car allowance is a monetary amount given to employees when they use a car for work-related activities.

This article will discuss instances where employers offer flat-rate vehicle allowances to their employees, whether they are taxable, and how to report them on your tax return. Plus, we’ll explain how combined allowances work and how you may be taxed.

Employers providing a flat-rate vehicle allowance to their employees

Although it’s not mandatory in Canada, employers commonly reimburse employees who use a vehicle for work-related activities, such as driving to a client meeting or business event, picking up supplies, or making deliveries. However, this is not applicable when commuting from home to your workplace.

Depending on your employment contract, a flat-rate car allowance may be provided in the following ways:

• A fixed amount is added to each paycheque
• A lump sum payment is included as part of your salary
• Cash in hand at the beginning of the month
• A reimbursement is provided after you’ve provided receipts and detailed logs to your employer. Here’s a mileage guide for employees.

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How to determine if your flat-rate car allowances are taxable

Depending on how your employer structures your allowance, it may or may not be subject to tax. There are two types of allowances:

1. Flat-rate allowances only.
2. Combined allowances: Flat-rate and reasonable per-kilometre.

As an employee, figuring out these tax implications can feel overwhelming. To simplify this, we’ve provided some examples below for you to follow along.

1. Flat-rate allowance scenarios

Example #1: reasonable per-kilometre car allowance that is not taxable 

You work for a software company as a salesperson. You have your own vehicle to drive to client meetings. Your employer pays you an allowance based on the reasonable per-kilometre rate (the Canada Revenue Agency’s 2024 rates: 70 cents/km for the first 5,000 km driven, 64 cents/km thereafter). This allowance is not taxable because you’re being reimbursed based on the number of kilometres you’ve driven and is not considered part of your income.

Example #2: flat-rate car allowance that is taxable

You are employed by a courier company and have your own vehicle to make deliveries. Your employment contract stipulates a monthly flat-rate allowance of $500 regardless of the destinations or distances. 

Your fixed-rate allowance is taxable since you’re being reimbursed with a flat-rate amount that doesn’t matter how many kilometres you’ve driven. It is a taxable benefit and must be included as part of your income. Keep in mind that this income is pensionable and insurable. Your employer will also deduct CPP contributions, EI premiums, and income tax.

2. Flat-rate and reasonable per-kilometre combined allowances scenarios 

If your employer gives you a combined allowance that includes a flat rate and a reasonable per-kilometre rate, it is deemed a taxable benefit. It must be reported as part of your income on your tax return. Here are two scenarios of how this works:

Example #1: Variable-rate car allowance that is fully taxable 

Your employer pays you a combined allowance of:

• A daily flat rate to cover the costs of using the vehicle and
• A reasonable per-kilometre rate for each kilometre you’ve driven. 

The CRA views these two amounts as one allowance. Therefore, they are fully taxable because they are not solely based on the kilometres driven for work purposes.

Example #2: Variable-rate car allowance that is partially taxable

Your employer gives you an allowance that consists of:

• A monthly flat rate for travelling within an assigned territory or district.
• A reasonable per-kilometre rate for travelling outside of an assigned territory or district.

Since the monthly flat-rate allowance doesn’t specifically cover your mileage, these two allowances are considered separate payments. Also, the reasonable per-kilometre allowance for travelling beyond the assigned territory is not included as income. As such, only the flat-rate monthly allowance is taxable because it’s not based on the number of kilometres you’ve driven for work-related activities.

On your T4 slip, you’ll need to report the monthly flat-rate allowance in box 14 of “Employment Income” and code 40 of “Other Information.”

How employees can deduct mileage if their flat-rate allowance is taxed 

There may be instances where you’re paying for auto expenses beyond the flat-rate allowance provided by your employer. Especially if your flat-rate allowance is taxed, you’ll want to take advantage of deducting your mileage on your income tax return. 

First, your employer will be responsible for filling out Form T2200, Declaration of Conditions of Employment. By doing so, they are agreeing that you had to pay for out-of-pocket expenses that were part of your employment.

Then on your tax return, you can fill out Form T777 Statement of Employment Expenses to claim any additional vehicle expenses (including mileage) you incurred for which you were not reimbursed. Keep a detailed record of your receipts so that you can support any claims you make.

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