TaxMatters@EY - May 2013

Automobile allowances – driving within the limits

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Lucie Champagne and Bob Neale, Toronto

Recently, the Canada Revenue Agency (CRA) answered two questions dealing with automobile allowances paid to employees while they’re carrying on employment duties away from the employer’s regular place of business.

While the CRA reconfirmed its views with respect to assessing the reasonability of an allowance paid, it announced a new position in situations where the employee receives an allowance for only a portion of the kilometres travelled.


Under the Income Tax Act (the Act), a taxpayer must generally include in employment income all amounts received in the year as an allowance for any purpose, subject to certain exceptions. Specifically, a reasonable automobile allowance received by an employee who used his or her automobile in carrying out employment duties is excluded from the employee’s income provided it is based solely on the number of kilometres travelled in the course of the employer’s business.

The CRA benchmarks what it considers to be a reasonable allowance on the basis of the per-kilometre amounts in Regulation 7306. Other amounts may also be considered reasonable, but these must be supported by facts.

Reasonable allowance

In technical interpretation 2012-0454131C6, the CRA reconfirmed that the automobile allowance rates used by the Treasury Board of Canada Secretariat (TBCS) are generally considered to be reasonable for purposes of paragraph 6(1)(b) of the Act. This position was first announced in CRA technical interpretation 2007-0235131E5.

This confirmation is good news for many employees, since the TBCS rates exceed the prescribed rates in Reg. 7306 for certain provinces. For example, for 2013, the per-kilometre TBCS rates for Ontario, Quebec and Newfoundland and Labrador are $0.55, $0.57 and $0.53, respectively, compared to a rate of $0.54/km for the first 5,000 km and $0.48 for any kilometres thereafter in Reg. 7306.

The CRA also confirmed that it has not instructed its auditors to automatically conclude that any allowance in excess of the amounts in Reg. 7306 is unreasonable. It is the CRA’s view that the limits in Reg. 7306 are simply a guideline to assess the reasonableness of an allowance received; it may be reasonable in certain circumstance to use a different amount.

While an employee may receive a higher amount, the employer can only deduct the amount computed in accordance with the Reg. 7306 in computing business income. Consequently, it will be interesting to see whether many employers adopt the TBCS rates.

New administrative position

In CRA technical interpretation 2012-0454141C6, the CRA reversed the administrative position in technical interpretation 2010-0387391E5 with respect to the payment of an automobile allowance that only covers a portion of the kilometres by the employee.

The earlier technical interpretation provided that where an employee receives an automobile allowance for a portion of the eligible kilometres travelled, the total distance travelled could be divided into two trips. For example, if an employee travelled a total of 60 km but only received an allowance for the last 20 km, the employee was considered to have received a reasonable allowance for those 20 km and this allowance was excluded from the employee’s income. The employee could then claim an automobile travel expense deduction under paragraph 8(1)(h.1) of the Act in respect of the first 40 km travelled.

Under the revised administrative position, which became effective on 15 July 2011, it is now the CRA’s view that in such a scenario the allowance received must be included in the employee’s income under paragraph 6(1)(b) of the Act. However, the employee may deduct from his or her income, under paragraph 8(1)(h.1) of the Act, automobile travel expenses in respect of the 60 km travelled.

The CRA’s new position seems to provide a better outcome for taxpayers. Intuitively, providing an allowance for only a portion of the eligible distance travelled raises questions as to whether this allowance is in fact reasonable.


Automobile allowances and expenses are arguably one of the most frequently encountered employment benefits. Employers and employees should familiarize themselves with the CRA’s latest comments.