Today, many companies provide an automobile allowance to their employees, as they are required to use their own vehicle for business purposes. Since each company has different requirements from their employees, (the amount of driving they need to do) , the question that is always asked of the payroll specialist is – how much should I be giving my employee for car allowance?
CRA has guides as to what they consider “reasonable”. CRA says that ALL of the following must apply in order for a car allowance to be reasonable, which would make this a non-taxable allowance;
· The allowance is based only on the number of business kilometres driven in a year;
· The rate per kilometre is reasonable; and
· You did not reimburse the employee for expenses related to the same use, except in situations where you reimburse an employee for toll or ferry charges or supplementary business insurance if you have determined the allowance without including these reimbursements.
In my 9 years here at PEO Canada, I have seen many variations of car allowance amounts; anywhere from $200.00 per month to $1000.00 per month. Employers must be careful when providing a non-taxable car allowance. If the amount is too low or too high, then it would be considered taxable.
The other option that most employers use is the flat rate allowance. This is a flat- rate paid to the employee, and is not related to the number of kilometers driven. This however, would be a taxable benefit and should be included in the employee’s income. This will also allow the employee to claim allowable expenses on their return. This becomes the responsibility of the employee to claim these allowable expenses and maintain record to support the claim. They will also have to keep track of the kilometers driven for business.
Each company has different expectations of their employees and the job description of that employee may determine how much time is spent behind the wheel. If the non- taxable allowance is too high or to low, the employee may face a bill from CRA at year end – if they are audited, which could also create a domino effect to a company audit. Getting advice is very important – everyone will be happy in the end!