Tax-free travel allowances

If your employees use their own vehicles for employment purposes, you can help them avoid a lot of paperwork by providing them with a tax-free allowance to cover employment-related travel expenses.

The allowance qualifies for tax-free status if it’s reasonable— and only if it’s based on the actual number of km that the car is used for employment purposes. Provided the per-km reimbursement is reasonable, 100% of the amounts paid are deductible.

Allowances not based on the number of km driven, such as a flat allowance of $400 per month, must be included in the employee’s income. You can reimburse an employee for certain limited expenses (i.e., supplementary business insurance, parking costs incurred for business purposes, and toll and ferry charges) without affecting the tax-free status of the allowance, provided the per-km requirement is met.

If you provide your employees with a combination of flat-rate and per-km allowances (e.g., $200 per month plus $0.25 per km), both components must be included in the employee’s income.

Tax tip: If you currently pay any of your employees a combination of flat-rate and per-km allowance, consider changing the entire allowance to a per-km reimbursement. For 2016, the limit on tax-exempt allowances paid by employers to employees is $0.54 per km for the first 5,000 km driven and $0.48 for each additional km. For Yukon, Northwest Territories and Nunavut, the tax-exempt allowance is $0.04 higher.

Tax tip: If the employment portion of travel expenses exceeds the amount of the tax-free allowance, the employee may be able to include the allowance in their income and claim related expenses. To do this, the allowance must be considered unreasonable. Since this treatment has been the subject of some recent court cases, professional advice may be required.

As with almost everything else, travel allowances also have GST/HST implications to both the employer and the employee. The treatment varies, depending on whether the payment is taxable to the employee (see topic 49).