Is a Car Allowance Taxable in Canada? Flat vs Per-Kilometre

"Car allowance" covers three very different arrangements. One employer pays you $500 a month for your car. Another pays you so many cents for every kilometre you drive for work. A third pays you back for the gas receipts you hand in. All three get called a car allowance in conversation, and they are taxed in three different ways.

Whether yours is taxable does not depend on the amount or on what your offer letter calls it. It depends on how the payment is measured. The Income Tax Act has a short test for that, and a flat monthly amount fails it every time, however reasonable the number looks. This page reads the test, sorts the common arrangements, and works one employee's 2026 through three of them.

The test in the Act

An allowance an employee receives is employment income under paragraph 6(1)(b) of the Income Tax Act, unless an exception applies. The exception for a car is subparagraph 6(1)(b)(vii.1): "reasonable allowances for the use of a motor vehicle received by an employee ... from the employer for travelling in the performance of the duties of the office or employment."

The word doing the work is reasonable, and the Act does not leave it open. It then says an allowance for the use of a motor vehicle "shall be deemed not to be a reasonable allowance":

• (x) where the measurement of the use of the vehicle for the purpose of the allowance "is not based solely on the number of kilometres for which the vehicle is used" in the course of the employment, or
• (xi) where the employee "both receives an allowance in respect of that use and is reimbursed in whole or in part for expenses in respect of that use."

So a tax-free car allowance has to clear three bars:

1. It is measured only by kilometres driven for work.
2. The rate per kilometre is reasonable.
3. Your employer does not also reimburse your costs for the same driving. Paragraph (xi) carves out reimbursed supplementary business insurance and toll or ferry charges, as long as the allowance was set without reference to them.

Fail any one and the whole allowance is taxable.

Why a flat monthly allowance is always taxable

A flat amount per month is not measured by kilometres at all. It is the same in a month you drove 2,000 kilometres for work and in a month you were on holiday. Paragraph (x) deems it unreasonable, and an unreasonable allowance is income under 6(1)(b).

The CRA gives this exact case as its first taxable example: salespeople who each receive a monthly flat-rate allowance of $600 "no matter where they go or how far they drive," written into their employment contracts. Taxable, because the allowance "is not based on the number of kilometres driven."

Averaging at year end does not fix it. The CRA says that if you receive a flat-rate or lump-sum allowance not based on kilometres, your employer "cannot average the allowances at the end of the year to determine a reasonable per-kilometre rate." Dividing $6,000 by 8,000 kilometres in December does not turn it into 75 cents a kilometre after the fact.

What happens when it is taxable

A taxable allowance is included in full on your T4, in box 14 (employment income), with code 40 in the other information area. The CRA tells the employer to withhold income tax, CPP and EI on it, the same as salary. It is not scaled back to some reasonable portion; the whole amount is income.

The upside is that it reopens a deduction. Paragraph 8(1)(h.1) of the Act lets an employee deduct motor vehicle expenses if they were ordinarily required to work away from the employer's place of business or in different places, and were required under their contract to pay their own vehicle expenses. The deduction is barred if you "received an allowance for motor vehicle expenses that was, because of paragraph 6(1)(b), not included in computing the taxpayer's income for the year." A flat allowance was included, so that bar does not apply.

You claim on Form T777 through line 22900, and you need a Form T2200 completed by your employer confirming the conditions of your employment. The claim is your actual vehicle costs times the share of your kilometres driven for work. How to fill in both forms is covered in employee vehicle expenses on the T2200 and T777, and how to work out the share in calculating your business-use percentage.

A per-kilometre allowance: not taxable if the rate is reasonable

An allowance paid per kilometre of work driving clears the first bar by construction. What is left is whether the rate is reasonable, and whether anything else pays for the same driving.

For the rate, the CRA says it "generally" considers an allowance based on the per-kilometre rates prescribed in section 7306 of the Income Tax Regulations to be reasonable. For 2026 those rates are:

2026	First 5,000 km	Each km after 5,000
Provinces	73 cents	67 cents
Yukon, Northwest Territories, Nunavut	77 cents	71 cents

For 2025 they were 72 and 66 cents in the provinces, and 76 and 70 cents in the territories. The first 5,000 kilometres are counted across the year, not per month.

It is a benchmark, not a hard line. In law, section 7306 limits what the employer can deduct for paying an allowance (paragraph 18(1)(r) of the Act). The CRA says a rate higher or lower than it "may not be considered reasonable," that the type of vehicle, the driving conditions or higher local fuel costs may justify a different rate, and that a rate can fail "because they are either too high or too low." A rate well under the benchmark is not automatically safe.

Nor is the rate yours to claim. It sets what your employer can pay you tax free; it is not a figure you multiply your own kilometres by on a return. Who can actually use the CRA mileage rate covers that in full.

The records sit with your employer

The CRA's instruction to the employer is to get the records from you: a log of kilometres driven for work, and of each work trip with its date, destination and purpose. Its page is blunt about the consequence: "If no record is kept, the allowance or reimbursement is generally taxable." A per-kilometre allowance is only as tax free as the log behind it, so the log is something you hand over, not something you keep in a drawer. What a CRA logbook has to contain lists the entries.

The kilometres that count are the ones driven for your employment. The CRA treats driving between home and a regular place of employment as personal, and driving between home and a point of call (a client's site, a repair call) as work driving where your employer requires or allows you to go there directly. Commuting versus business driving goes through the line.

A reimbursement is a different thing

An allowance is paid without you having to account for how you spent it. A reimbursement pays you back for amounts you actually spent, usually against an expense report with receipts.

Under the CRA's page, a reimbursement for using your own vehicle is not taxable when it is for expenses of using the vehicle in your employment, the amounts are reasonable, and your records (receipts, expense reports, log books) support it. Generally it is taxable only if it covers personal expenses. So a fuel reimbursement for the work share of your gas is fine on its own.

Where a reimbursement causes trouble is alongside an allowance. Under paragraph (xi), a per-kilometre allowance plus reimbursed gas for the same driving makes the allowance unreasonable, and the allowance becomes taxable. Tolls, ferries and supplementary business insurance are the only reimbursements the Act lets sit next to an allowance.

It also affects your own deduction: you are not considered to have paid your own motor vehicle expenses "if your employer reimburses you or you refuse a reimbursement or reasonable allowance from your employer." Turning down a tax-free allowance so that you can claim the T777 instead does not work.

Mixed arrangements

Many pay packages combine a flat piece with a per-kilometre piece. The CRA's page decides them on one question: do the two amounts cover the same use of the vehicle?

• Same use: one allowance, all taxable. The CRA's example is a flat per-diem for each day the car is needed, meant to offset fixed costs, plus a reasonable per-kilometre rate for operating costs. Both cover some of the same costs of the same driving, so "the combined amount is considered one allowance," it is not based only on kilometres, and the total is taxable, the per-kilometre part included.
• Different use: two allowances, judged separately. The CRA's example is a flat monthly rate for travel inside the employment district plus a reasonable per-kilometre rate for travel outside it. The flat amount does not cover any of the driving the per-kilometre amount pays for, so the per-kilometre allowance for travel outside the district is not taxable, and the flat amount for travel inside it is taxable.

If your arrangement fits neither cleanly, the question for your employer is the same: does any fixed amount pay for driving that the per-kilometre amount also pays for?

An employer can also pay a per-kilometre allowance in advance at a rate fixed at the start of the year, with a true-up by December 31 (or when your employment ends, if earlier) in which you repay any overpayment. Paying a per-kilometre allowance from your own corporation walks through that true-up from the payer's side.

The same year, three ways

One employee, all of 2026, in a province. She drives 8,000 kilometres for work out of 20,000 total, so her work share is 8,000 ÷ 20,000 = 40%. She owns the car outright, has no loan on it, and does not claim capital cost allowance on it. Her 2026 costs:

2026 cost	Amount
Fuel	$2,800
Insurance	$1,900
Maintenance and repairs	$800
Licence and registration	$200
Total	$5,700

Her work share of those costs is $5,700 × 40% = $2,280.

Arrangement A, a flat $500 a month. $500 × 12 = $6,000. It is not based on kilometres, so all $6,000 goes in box 14 of her T4. Her employer completes a T2200, and she claims $2,280 on the T777. Net, $6,000 − $2,280 = $3,720 of the allowance is taxed.

Arrangement B, the 2026 per-kilometre rates. 5,000 × $0.73 = $3,650, plus 3,000 × $0.67 = $2,010, for $5,660. It is based only on work kilometres, at the CRA's benchmark, with no reimbursement alongside, so none of it is income. She has no T777 vehicle claim, because she received a non-taxable allowance.

Arrangement C, reimbursement of her work share of actual costs. Her employer pays her back 40% of each cost against receipts and her log, $2,280 for the year. Not taxable. She has no T777 vehicle claim, because her costs were reimbursed.

	A: flat $500/month	B: 2026 per-km rates	C: reimbursement
Cash received	$6,000	$5,660	$2,280
Added to income (T4 box 14)	$6,000	$0	$0
T777 vehicle deduction	$2,280	$0	$0
Net amount taxed	$3,720	$0	$0

What the table shows: A pays the most cash and leaves $3,720 taxed at her marginal rate, and it only nets out that well if she has a T2200 and keeps the log to support the $2,280. B pays nearly as much cash with none of it taxed. C is tax free but pays back only what the driving actually cost her.

Now suppose her employer instead paid $200 a month on top of the per-kilometre allowance, to cover the fixed costs of the same car and the same driving. That is the per-diem case: one allowance covering the same use, $2,400 + $5,660 = $8,060, all of it taxable, including the $5,660 that would have been tax free on its own. Adding the flat piece cost her the exemption on the whole allowance.

When a tax-free allowance is too low for you

Arrangement B assumes the allowance covers the driving. If your per-kilometre allowance is non-taxable but your actual costs for the work driving are higher, the CRA's line 22900 page allows a way back to the T777: you can deduct your motor vehicle expenses if you can show your employment-related vehicle expenses exceed the allowance, and you voluntarily include the allowance in income, and the other conditions of the claim are met (including the T2200). The driver above cannot use it, since her $2,280 of costs does not exceed her $5,660 allowance. For an expensive car driven for work on a low rate, it can.

What to ask your employer

Before you sign, or when an allowance changes, these questions settle which row of the table you are in:

1. Is it paid per kilometre of work driving, or as a fixed amount? A fixed monthly, weekly or daily amount is taxable, whatever it is called.
2. What is the rate, and for which year? For 2026 the CRA benchmark is 73 cents for the first 5,000 kilometres and 67 cents after that, or 77 and 71 cents in the territories.
3. Is anything else paid for the same driving? Reimbursed gas or repairs next to a per-kilometre allowance makes the allowance taxable. Tolls, ferries and supplementary business insurance are the exceptions.
4. Is there a fixed piece on top, and what does it cover? If it covers the same driving as the per-kilometre amount, the combined total is taxable.
5. What records do you want from me, and how often? The employer has to get them from you, and without them the allowance is generally taxable.
6. If the allowance is taxable, will you complete a T2200? Without one there is no T777 claim, and the allowance is taxed with nothing to offset it.

Claimable Drive, in beta for iPhone, records drives in the background, lets you swipe each one business or personal, and works out the business-use percentage from those swipes.

FAQ

Is a monthly car allowance taxable in Canada? Yes. Paragraph 6(1)(b)(x) of the Income Tax Act deems an allowance not based solely on kilometres driven for work to be unreasonable, so a flat monthly amount is employment income. It goes in box 14 of your T4, and you may be able to claim your actual vehicle costs on a T777 if your employer completes a T2200.

Is a per-kilometre car allowance taxable? Not if it is based only on kilometres driven for work, the rate is reasonable, and your employer does not also reimburse costs for the same driving. The CRA generally treats the section 7306 rates as reasonable: for 2026, 73 cents for the first 5,000 kilometres and 67 cents after that in the provinces.

Is a mileage reimbursement taxable? Not if it repays reasonable, documented costs of using your own vehicle for work. Paired with an allowance for the same driving, it makes the allowance taxable under paragraph 6(1)(b)(xi).

My employer pays a flat amount plus cents per kilometre. Is any of it tax free? If both cover the same driving, the CRA treats them as one allowance and the whole amount is taxable. If the flat amount covers different driving (travel inside the employment district, say, with a per-kilometre rate outside it), only the flat part is taxable.

Can I refuse a tax-free allowance and claim my costs on the T777 instead? No. The CRA does not treat you as having paid your own motor vehicle expenses if you refuse a reimbursement or a reasonable allowance from your employer. What you can do, if your tax-free allowance is lower than your actual work driving costs, is include the allowance in income and claim the expenses, provided you can show the expenses exceed it.

I sell for my employer on commission. Does the same test apply? Your exemption sits in subparagraph 6(1)(b)(v) instead, but the deeming rules in (x) and (xi) apply to it too: the car allowance must be measured only by kilometres and not doubled up with a reimbursement.

Sources

1. Income Tax Act, section 6, paragraph 6(1)(b), subparagraphs (v) and (vii.1), and the deeming rules in (x) and (xi), including the carve-out for supplementary business insurance and toll or ferry charges.
2. Income Tax Act, section 8, paragraph 8(1)(h.1), the employee's motor vehicle deduction and its bar for an allowance excluded from income by paragraph 6(1)(b).
3. Income Tax Act, section 18, paragraph 18(1)(r), the payer's deduction limit on an automobile allowance.
4. Income Tax Regulations, section 7306, the prescribed per-kilometre amount for the purposes of paragraph 18(1)(r).
5. Department of Finance Canada, Government Announces the 2026 Automobile Deduction Limits and Expense Benefit Rates for Businesses, January 14, 2026, the 2026 per-kilometre allowance rates for the provinces and the territories.
6. CRA, Automobile or motor vehicle benefits, allowances or reimbursements provided to an employee for the use of their own vehicle, the definitions of an allowance and a reimbursement, the three conditions, the reasonable-rate position and the rate table by year, the flat-rate and combined-allowance examples, averaging, advances and the year-end true-up, records, and T4 reporting.
7. CRA, Line 22900, Other employment expenses, the conditions for an employee's motor vehicle claim, the reimbursed and refused-allowance rule, and the voluntary inclusion of a non-taxable allowance.
8. CRA, Form T2200, Declaration of Conditions of Employment, the employer's declaration an employee keeps to support a T777 claim.