Tax-Exempt Vehicle Allowance for Owners of Small Corporations in Canada

As the owner of a small corporation in Canada, you may be eligible to receive a tax-exempt vehicle allowance if you use your personal vehicle for business purposes. The Canada Revenue Agency (CRA) allows corporations to reimburse employees, including owner-managers, for reasonable vehicle expenses incurred while conducting business activities. These reimbursements can be tax-free, provided they meet specific criteria.

Key Requirements for Tax-Exempt Allowance:

• Business Use Only: The vehicle allowance must be based solely on the kilometers driven for business purposes. Personal use of the vehicle cannot be included in the calculation for tax-free reimbursement.

  
  

• Per-Kilometer Rate: CRA sets maximum per-kilometer rates that can be reimbursed on a tax-free basis. For 2025, the prescribed rates are:

  • $0.72 per kilometer for the first 5,000 kilometers driven.

  • $0.66 per kilometer for each additional kilometer.

    These rates are reviewed annually, and updates are published by the CRA.

    
    

Prior Year KM Rates :

For the Northwest Territories, Yukon and Nunavut, an additional 4 cents per kilometer allowance is added on top of the rates included above.

• Accountable Plan: The reimbursement must be under an "accountable plan," meaning:

  • You must track the business kilometers driven in a log book.

  • The allowance should directly reflect the distance driven for business purposes.

    
    

• Reasonable Allowance: Any allowance exceeding the CRA-prescribed rates, or allowances not based on actual kilometers driven, will be considered taxable benefit to the owner manager or the employee receiving the allowance.

Record-Keeping Requirements:

To qualify for the tax-free allowance, proper record-keeping is crucial. You should maintain:

• A detailed logbook noting the date, destination, purpose, and number of kilometers driven for each business trip.

• There is no requirement to keep the receipts for actual auto expenses that you paid for personally.

Below is an example of a log book for business KM's:

It is worth noting that QuickBooks Online offers a mileage tracking feature that simplifies the process of recording business trips, which is accessible through their app:

For clients that prefer a paper Log-book we have a free template available for download:

Just as a reminder business trip for tax purposes typically refers to travel undertaken primarily for business-related activities, such as meeting with clients or vendors, attending conferences, or conducting business operations away from your regular place of work. However, commuting between home and your regular workplace is not considered a business trip and thus should not be included in the log.

GST implications:

When a corporation registered for Goods and Services Tax (GST) pays a vehicle allowance to employees or owner manager, it may have implications for Input Tax Credits (ITCs). The CRA allows corporations to presume that any eligible vehicle allowance paid has 5% GST in it. This means that the corporation can claim back the GST presumed to be included in the vehicle allowance as ITC on its GST Return, provided the allowance is reasonable and the expenses are incurred in the course of making taxable supplies. It is important for the corporation to maintain proper documentation (log) and ensure that the vehicle (during business trips) is used primarily for business purposes to substantiate the claim for ITCs.

Summary:

An auto allowance provides a dual benefit for the corporation and their owner-manager. For the corporation, the allowance serves as a deductible business expense, reducing taxable income while covering the costs associated with the business use of personal vehicles. Simultaneously, the allowance is considered tax-free for the owner-manager (assuming it meet the criteria discussed above), allowing them to receive compensation for vehicle expenses without incurring additional personal tax liability. This structure effectively supports business operations while ensuring that the owner-operator is reimbursed for their vehicle usage in a tax-efficient manner.