See the sourced 2026 Ontario tax guide: rates, limits and deadlines →
What to take away
- A company car creates a taxable benefit only for personal driving; commuting to a regular workplace counts as personal.
- A car allowance is tax-free only if it is based on business kilometres alone and the per-kilometre rate is reasonable.
- Owner-managers are treated like employees for these rules, so a corporation-owned car needs the same records.
Two ways to cover driving, two tax results
A company car means the business owns or leases the vehicle and lets an employee use it. An allowance means the employee drives their own vehicle and the business pays an amount for that use. A third option, reimbursing actual expenses against receipts, is generally not taxable when the costs relate to work use and the amounts are reasonable and supported.
The CRA’s rules apply to employees and also to people who do not deal at arm’s length with them. The guidance says that includes a shareholder, so if you own your corporation and drive a corporate vehicle, you should read this as written for you as well.
What counts as business driving
Both routes depend on separating business kilometres from personal kilometres. The CRA treats travel between home and a regular place of employment as personal driving, even if the employee is on call. Vacations and personal errands are also personal.
Driving between work locations, visits to customers and trips to a point of call are generally business driving. Travel from home directly to a point of call can qualify if it is reasonable and on the way to or from work. Expect to be asked for a logbook or daily record showing dates, destinations, purposes and kilometres, whichever route you choose.
How a company car is taxed
If the employee has personal use of an employer-provided automobile, the taxable benefit is generally a standby charge plus an operating expense benefit, less amounts the employee reimburses. If there is no personal driving, there is generally no benefit, provided the car is returned to the business premises at the end of each workday. A vehicle counts as available when the employee has access to it, including weekends and holidays.
For an owned car, the standby charge can be worked out in a simplified way at 24% of the car’s cost when the business owns the car, the employee uses the same car all year, the employee does not mainly sell or lease automobiles and the reduced charge below does not apply. Otherwise it is worked out in detail at 2% of cost for each 30-day period the car was available. For a leased car, the CRA uses two-thirds of a monthly lease cost figure. Different rules apply to employees who mainly sell or lease automobiles.
The reduced standby charge and operating costs
The standby charge can be reduced when the employer required the employee to use the car for their duties, more than 50% of the driving is for business, and personal driving is no more than 1,667 kilometres per 30-day period and 20,004 kilometres a year. Then the charge is scaled to personal kilometres.
For operating costs paid by the business, the benefit is generally personal kilometres multiplied by 34 cents for 2026. An optional alternative is half the standby charge, but only if a standby charge applies, the car is used more than 50% for employment, and the employee tells the employer in writing before the end of the year. Reimbursements for operating costs count if made no later than 45 days after year end.
How a car allowance is taxed
An allowance for the employee’s own vehicle is not taxable only if it is based solely on business kilometres driven and the rate is reasonable. The CRA generally accepts rates based on the section 7306 amounts. For 2026 those are 73 cents per kilometre for the first 5,000 kilometres and 67 cents after that in the provinces.
A flat monthly amount, a rate that is too high or too low, or a flat amount combined with a per-kilometre rate for the same vehicle use is generally taxable. Reimbursing the employee’s costs for that same use on top of a per-kilometre allowance can also cause problems. You cannot average a flat amount at year end to create a reasonable rate. If you pay advances, the employee should account for business kilometres by December 31 or the end of employment, whichever is earlier, and repay any excess.
An illustrative comparison
These round numbers are illustrative only. Assume a company car costing $40,000 under the owned-car rules, with no reimbursements and no reduced charge. The simplified standby charge is 24%, or $9,600. If the employee drives 10,000 personal kilometres, the fixed-rate operating benefit is $3,400 at 34 cents. The taxable benefit is about $13,000 for the year.
Now compare an allowance for an employee’s own car with 10,000 business kilometres. At 73 cents for the first 5,000 and 67 cents for the next 5,000, the allowance is $7,000 and, if it meets the conditions, is not taxable. The two arrangements answer different questions, so the figures are not a verdict on which is cheaper; the business also bears the costs of owning the car.
Payroll, reporting and GST/HST
For a taxable personal-use benefit, withhold income tax and CPP but not EI, and include the amount in the pay period in which it is enjoyed. The employee’s T4 reports it in code 34, and a shareholder may be reported on a T4A in code 028. A taxable allowance is different: withhold income tax, CPP and EI, report it in box 14 with code 40 under other information, and do not remit GST/HST on it.
GST/HST on the personal-use benefit of a car may need to be remitted in some situations, so confirm that with your accountant. If an allowance is taxable, the employee may be able to claim employment expenses and may need Form T2200 from you.
The business-side limits
If the business buys a passenger vehicle, the deductible cost is capped. For vehicles acquired on or after January 1, 2026, the Class 10.1 ceiling is $39,000 before tax and the zero-emission Class 54 ceiling is $61,000. The maximum deductible lease cost is $1,100 per month and interest on a vehicle loan is $350 per month, both before tax.
Those caps affect the corporation’s deduction, not the employee’s benefit, so check them alongside the benefit when you compare options. Our articles on vehicle expenses and buying a vehicle through your corporation cover those questions.
Choosing between them and what to bring
An allowance is generally simpler to administer when business use is modest and the employee already owns a suitable vehicle. A company car can make sense when a vehicle is needed for the work and mostly stays on the job, but personal use must be tracked and taxed. Owner-managers should weigh the personal benefit as well as the corporate deduction.
Bring the purchase or lease agreement, a logbook for each vehicle, the proposed allowance rate, any reimbursement arrangement and recent payroll reports. Ask which method fits your use, what to withhold and how to report it on the T4 or T4A.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- What is a taxable benefitCanada Revenue Agency
- Motor vehicle provided by the employerCanada Revenue Agency
- Automobile provided by the employerCanada Revenue Agency
- Automobile or motor vehicle benefits: allowances or reimbursements provided to an employee for the use of their own vehicleCanada Revenue Agency
- Government Announces the 2026 Automobile Deduction Limits and Expense Benefit Rates for BusinessesDepartment of Finance Canada
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.