Reasonable per-kilometre allowance

An employer may pay staff a rate for each kilometre they drive their own vehicles for the business. A buyer meets this when reviewing payroll, because the way the allowance is set decides whether it is part of an employee’s income. Under section 6(1)(b) of the Income Tax Act, allowances received by an employee are included in income except the listed cases, and subparagraph (vii.1) lists reasonable allowances for the use of a motor vehicle for travelling in the performance of the duties of the office or employment. That subparagraph has its own carve-out for employees employed in connection with selling property or negotiating contracts, and the paragraph deems an allowance not reasonable in the cases set out in subparagraphs (x) and (xi).

What the CRA looks for

The CRA says an allowance for using an employee’s own vehicle is not taxable if it is based only on business kilometres driven, the per-kilometre rate is reasonable, and the employer did not also reimburse expenses for the same use of the vehicle, other than supplementary business insurance or toll or ferry charges where the allowance was set without including them. It says it generally considers an allowance based on the rates prescribed in section 7306 of the Income Tax Regulations to be reasonable.

What to ask the seller

• Whether the allowance is paid only per kilometre, or also as a flat amount
• Whether employees keep kilometre records
• How the allowance was treated on the T4 slips already filed

See how to handle payroll on closing day and taxable benefits.