Tax-free vehicle allowance
How much you can reimburse per kilometre before the payment becomes a taxable benefit: and why paying one flat rate all year usually overshoots.
How this is calculated
A per-kilometre allowance paid to an employee for business driving is tax-free to them, and deductible to you, as long as it is reasonable. The CRA publishes what it considers reasonable each January, and the rate steps down after the first 5,000 kilometres in the year.
That step is where the mistakes happen. Paying the first-tier rate for every kilometre of a 20,000 km year overshoots the reasonable amount, and the excess becomes a taxable benefit to the employee: a payroll problem rather than a mileage one.
The allowance must be based on kilometres actually driven for business. A flat monthly car allowance that ignores distance is a different thing entirely: it is employment income, taxable in full. Commuting between home and a regular workplace is personal driving, not business, however inconvenient that is.
The territories carry a rate four cents higher on both tiers.
Where these figures come from
- Department of Finance Canada — 2026 automobile deduction limits and expense benefit rates , checked August 6, 2026
This tool gives an estimate from published rules and rates. It is not accounting, tax or legal advice, and it does not account for every situation: check the source above, or ask your accountant, before you act on it. Nothing you enter is stored or sent anywhere.