Allowance, reimbursement and advance
The CRA separates three things. An allowance is paid in addition to salary without the employee having to account for the vehicle’s use. A reimbursement repays costs the employee actually incurred and is supported by an expense claim. An accountable advance is paid ahead of expected costs, and the employee must support it with vouchers and return any unspent amount.
The distinction matters because the tax result differs. A reimbursement or accountable advance that is reasonable and documented is generally not taxable, while an allowance has to pass more tests.
When an allowance is not taxable
An allowance is not taxable when all three conditions are met. It is based only on business kilometres driven, the per-kilometre rate is reasonable, and you did not also reimburse expenses for the same use of the vehicle. Generally, the CRA considers a rate within the prescribed amounts reasonable. For 2026 those are 73 cents per kilometre for the first 5,000 kilometres and 67 cents after that in a province, with 77 and 71 cents in the territories.
Business driving means travel between work locations or to a point of call such as a client’s premises. Driving between home and a regular place of employment is generally personal. You need the employee’s kilometre records, such as a log of each trip with date, destination and purpose. Without records, the allowance is generally taxable.
An illustrative example
Suppose an Ontario employee drives 6,000 business kilometres in 2026 and you pay the prescribed rates. The first 5,000 kilometres at $0.73 is $3,650 and the remaining 1,000 at $0.67 is $670, so the allowance is $4,320. If the employee kept proper logs, this would generally not be taxable.
Now suppose you pay a flat $600 each month regardless of distance. The CRA treats a flat amount that is not tied to kilometres as taxable. The same applies when a flat per-diem is combined with a per-kilometre rate for the same vehicle use. A taxable allowance is included in income, CPP and EI are withheld, and it is reported on the T4 slip.
What to discuss with your accountant
Common mistakes are using a flat monthly amount, skipping the logs and paying an allowance on top of fuel reimbursement. Employees who receive a taxable allowance may be able to claim vehicle expenses if they meet the conditions, which can include a signed T2200, so ask what your employee will need from you.
Decide the rate, the records and the year-end review in writing before the first payment. If you are choosing between an allowance and a company vehicle, bring the expected kilometres and costs to that conversation.
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.
- Automobile or motor vehicle benefits: allowances or reimbursements provided to an employee for the use of their own vehicleCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.