Moore
February 2020 Newsletter

Car Allowances Taxable

In general terms, a car allowance provided by an employer to an employee is not taxable if it is reasonable, but is taxable if it is unreasonable. Furthermore, a special rule in the Income Tax Act says that a car allowance is deemed to be unreasonable if the allowance is not based solely on the number of kilometres driven in the course of employment. In other words, if the allowance is not based on such kilometres driven, it is taxable to the employee.

In the 2018 Positano case, the taxpayers were employed in a family snow-plowing business. One of their duties was to do “snow runs”, under which they would drive to streets and neighborhoods to determine whether snow plowing would be needed. The brothers were paid a car allowance for the snow runs, which were based on estimated travel and average travel distances throughout the year. The CRA held that the allowances were taxable because they were not based solely on the number of kilometres driven in the course of employment.

The taxpayers appealed to the Tax Court of Canada, but the Court upheld the CRA assessment. The Court held that an estimate was not enough to constitute a reasonable vehicle allowance. Rather, a reasonable allowance had to be based on actual kilometres travelled.

Last modified on February 12, 2020 12:00 am