Per-Kilometre Allowance From Your Own Corporation in Canada

Almost everyone who searches for the CRA per-kilometre rate cannot use it. It is not a deduction. It is the ceiling on an allowance, which is a payment one person makes to another for the use of that other person's vehicle, and a sole proprietor has nobody to pay them one.

An incorporated owner does. Your corporation is a separate person, you are an officer or employee of it, and the car in your driveway is yours and not the company's. That is exactly the fact pattern the allowance rules are built for, and it is one of the few places where multiplying kilometres by the published rate is the right answer rather than the wrong one.

It is also a payment with conditions attached. Meet them and the money leaves the corporation deductible and arrives with you tax free. Miss one and the whole allowance becomes employment income on your T4, which is a much worse outcome than never having paid it. This page is those conditions.

If you are not incorporated, this is not your page. The mileage calculator computes what a sole proprietor or a T2200 employee actually deducts, which is a business-use share of real vehicle costs, and shows it beside the rate figure so the difference is visible.

Who can be paid one

The allowance rules run on office or employment. An allowance for the use of a vehicle "in connection with or in the course of their office or employment" is the CRA's own phrasing, and the GST/HST guidance is blunter still: employee includes an officer.

So an owner-manager of their own corporation qualifies, in respect of a vehicle they personally own, for driving done in the course of the corporation's business. What does not qualify:

• A sole proprietor or partner paying themselves. There is no second person. Money moved from the business to you is a draw, not an allowance, and the vehicle deduction is a business-use share of actual costs on a T2125.
• A company car. If the corporation owns or leases the vehicle, you are in the automobile benefit rules instead, with a standby charge and an operating expense benefit. The per-kilometre allowance is for an employee's own vehicle.
• A contractor you pay. If the person is self-employed rather than your employee, the allowance provisions do not apply to the payment.

Capacity matters, and it is easy to get wrong when you are both people in the transaction. A vehicle amount provided to you in your capacity as an officer or employee belongs on a T4. One provided to you in your capacity as a shareholder is a shareholder benefit and is reported as other income on a T4A. If you draw dividends and take no salary, and there is no employment or office relationship doing any work, an allowance is a harder story to tell. Pay it for real business driving, in your capacity as the person doing the driving, and keep the records that show it.

The three conditions

An allowance you pay for the use of an employee's own vehicle is not taxable to them if all three of the following hold.

1. It is based only on business kilometres driven. Only. Not partly. A per-kilometre amount for the kilometres actually driven in the course of the work, and nothing else riding along with it.

2. The per-kilometre rate is reasonable. See the next section.

3. You did not also reimburse the same use of the vehicle. If the corporation pays the allowance and also picks up the fuel for the same driving, the allowance stops being an allowance. There is a narrow carve-out: reimbursing supplementary business insurance, or toll and ferry charges, does not break it, provided the allowance was set without taking those into account.

Fail any one of the three and the allowance is taxable in full. It is not scaled back to the reasonable portion, it goes into income.

What "reasonable" means

The CRA generally accepts an allowance paid at the per-kilometre rates prescribed in section 7306 of the Income Tax Regulations as reasonable. Those are the figures published each year, tiered so that the first block of business kilometres carries a higher amount than the kilometres after it, with an uplift for kilometres driven in Yukon, the Northwest Territories and Nunavut. The current amounts, and what they come to on your kilometres, are on the mileage calculator, which reads them from one pinned constant so this page does not have to restate a figure that moves every January.

Two things about "reasonable" that catch people:

Too low is also unreasonable. The test is not a ceiling with a free zone underneath it. A rate that does not plausibly cover the main costs of owning and running the vehicle for the work can fail the test in the same way an inflated one does, and the consequence is identical: the allowance becomes taxable.

It is a facts test, not a lookup. The prescribed rates are a safe harbour, not the definition. The CRA's guidance is that all the relevant facts have to be considered, and it names the sort of thing that moves the answer: the type of vehicle, the driving conditions, higher fuel cost in a particular location. A rate above or below the prescribed one may be reasonable in a specific situation. It just has to be defensible on those facts rather than on preference.

Five ways an allowance goes taxable

Every one of these is a shape the CRA names.

1. A flat monthly car allowance. A fixed amount per month regardless of distance is not based on the number of kilometres driven. Taxable, however sensible the amount.
2. A flat per-diem plus a per-kilometre rate for the same use. The two are treated as one allowance, and that one allowance is not based only on kilometres. The whole combined amount is taxable, including the part that was per-kilometre.
3. Averaging at year end. You cannot pay flat or lump-sum allowances through the year and then divide by kilometres in December to produce a "reasonable per-kilometre rate" after the fact. The averaging does not rescue it.
4. No records. If no record is kept, the allowance is generally taxable. This is not a paperwork technicality, it is one of the named outcomes.
5. A rate that is not reasonable, in either direction, on the facts.

And one shape that survives, because it is the exception that makes the rule legible: a flat rate for travel inside an employment district, plus a reasonable per-kilometre rate for travel outside it. Because the flat amount does not cover any of the same use of the vehicle that the per-kilometre amount covers, the two are assessed separately. The per-kilometre allowance is not taxable; the flat one is. The test throughout is whether two payments are covering the same driving.

The corporation has to get the records

Not know they exist. Get them.

The CRA's instruction to the payer is direct: you must obtain from the employee the records supporting the kilometres you are paying for. Expense claims, receipts, logs. For a per-kilometre allowance that means a log of the kilometres driven for the work, and a log of each work trip with its date, destination and purpose.

For an owner-manager this is the step that quietly does not happen, because the person keeping the log and the person paying the allowance are the same human being and it feels like moving paper from one pocket to another. It is not. The corporation is claiming a deduction, and the deduction is supported by records the corporation holds. What the log has to contain is the same in this case as in every other, and the simplified three-month logbook is a poorer fit here than for a percentage claim, because an allowance is paid on actual kilometres rather than on a projected share.

Paying it in advance, and the year-end true-up

Waiting for expense claims before paying anything is administratively grim, so there is a route for paying in advance. The allowances may stay non-taxable if:

• there is a pre-established per-kilometre rate in place from the start of the year,
• the rate and the advances are reasonable and you can justify them,
• the method is recorded in the employee's file, and
• nothing else in the Act requires the advances to be included in income.

Then there is a settlement, and it is the part people skip. By the earlier of the date employment ends and December 31, the employee accounts for the business kilometres actually driven and the advances actually received. Kilometres times the pre-established rate, less what was paid, gives a difference:

• Positive, the corporation pays the employee the difference at that time.
• Negative, the employee repays the corporation the difference at that time.

You cannot simply report the excess advance on the T4 and call it settled. The mechanism is a real payment in one direction or the other.

What the corporation deducts

The allowance is a business expense, with a limit written into the Act. Paragraph 18(1)(r) denies the deduction of an allowance for the use of an automobile to the extent it exceeds the prescribed amount, except where the excess is required to be included in the individual's income.

Read the exception, because it changes the shape of the risk. Overpaying is not a disaster that vaporises money. It means the excess is not deductible as an allowance, unless it is in the recipient's income, in which case it is deductible as remuneration and taxed in their hands like salary. So the real consequence of an unreasonable allowance is not usually a lost deduction, it is the loss of the tax-free character on the recipient's side, plus payroll withholding and reporting on an amount you were treating as a reimbursement.

The GST/HST the corporation gets back

This one is genuinely missed, and it is money.

Where the conditions of section 174 of the Excise Tax Act are met, the person paying a reasonable motor vehicle allowance is deemed to have paid the GST/HST on the underlying supplies, and a registrant can claim an input tax credit as if it had incurred the expense directly. The amount deemed paid is a tax fraction of the allowance, and the fraction depends on where the driving happened, since it follows the rate in play in those provinces.

The conditions are the ones already on this page plus two GST-specific ones: the allowance has to be for the use of a motor vehicle in Canada in relation to the payer's activities, and some part of the allowance has to be deductible for income tax purposes. And the CRA's stated position is that where a motor vehicle allowance is reasonable for income tax purposes, it accepts that determination for GST/HST purposes too. One test, both outcomes.

If GST/HST input tax credits are new territory, the ITC guide covers what a registrant can claim and how the apportionment works.

If the allowance is taxable after all

It is not the end of the claim, it just moves. An allowance included in your income puts you back in the employee position: with a signed T2200 you deduct actual vehicle costs, prorated by employment use, on a T777. That is the same arithmetic a sole proprietor does on a T2125, and the mileage calculator runs it.

One trap on the way there. You are not considered to have paid your own vehicle expenses if your employer reimburses you, or if you refuse a reimbursement or a reasonable allowance from your employer. Turning down a non-taxable allowance in order to claim actual costs instead does not work. Decide which side of the line you are on before the year starts, not in April.

FAQ

Can I pay myself a per-kilometre allowance from my own corporation? Yes, for the use of a vehicle you personally own, for driving done in the course of the corporation's business, in your capacity as an officer or employee of it. The allowance is tax free to you and deductible to the corporation if it is based only on business kilometres, the rate is reasonable, and the corporation does not also reimburse you for the same use of the vehicle.

Can a sole proprietor do the same thing? No. An allowance is a payment from one person to another, and a sole proprietorship is not a separate person from you. You deduct a business-use share of what the vehicle actually cost, on your T2125.

What makes a per-kilometre rate reasonable? The CRA generally treats the rates prescribed in section 7306 of the Income Tax Regulations as reasonable. A higher or lower rate may still be reasonable on the facts, such as the type of vehicle or local fuel cost, but a rate that is too low fails the test just as a rate that is too high does, and the consequence in both cases is that the allowance becomes taxable.

Is a flat monthly car allowance tax free? No. A flat monthly amount is not based on the number of kilometres driven, so it is taxable employment income. Combining a flat amount with a per-kilometre amount for the same driving is worse: the two are treated as one allowance and the whole thing is taxable.

Can the corporation claim GST/HST back on the allowance? Yes, if it is a registrant and the conditions of section 174 of the Excise Tax Act are met. The payer is deemed to have paid tax equal to a tax fraction of the allowance and can claim an input tax credit as if it had incurred the expense itself. A motor vehicle allowance that is reasonable for income tax purposes is accepted as reasonable for GST/HST purposes.

Does the corporation need my logbook, or is my own copy enough? The corporation has to obtain the records. The CRA's instruction to the payer is explicit, and if no record is kept the allowance is generally taxable. For an owner-manager that means the log lives in the company's file, not only on your phone.

What if the corporation owns the car instead? Then this page does not apply. A vehicle the corporation owns or leases and makes available to you is an automobile benefit, with a standby charge and an operating expense benefit, which is a different and usually more expensive set of rules.

Sources

1. CRA, Automobile or motor vehicle benefits, allowances or reimbursements provided to an employee for the use of their own vehicle, the three conditions, what makes a rate reasonable, the taxable shapes and their examples, the record requirement, and the advance and year-end true-up rules.
2. Income Tax Act, paragraph 18(1)(r), the payer's deduction limit on an automobile allowance and the exception where the excess is in the recipient's income.
3. Income Tax Regulations, section 7306, the prescribed per-kilometre amount for the purposes of paragraph 18(1)(r).
4. GST/HST Memorandum 9-3, Allowances, section 174 of the Excise Tax Act, the input tax credit on a reasonable allowance and the conditions attached to it.
5. CRA Guide T4130, Employers' Guide, Taxable Benefits and Allowances, reporting in the employee capacity versus the shareholder capacity, and the automobile benefit rules that apply instead when the corporation owns or leases the vehicle.
6. CRA, Line 22900, Other employment expenses, the T2200 and T777 route where an allowance is taxable, and the rule about refusing a reasonable allowance.