The institution in charge of drawing up and enforcing tax laws in the Great White North is the Canada Revenue Agency (CRA). And this authority should be consulted regarding the legal framework for reimbursing your employees.
The main point of our article will be the CRA mileage rate and automobile income tax deduction limits in 2023. Still, we’ll also talk about everything you should know to reimburse your employees properly while keeping your expenses in check. Here’s a hint: a reliable and accurate mileage-tracking tool is what you need.
An additional 4¢ per kilometer in the Northwest Territories, Yukon, and Nunavut.
The Canada Revenue Agency determines an annual per-kilometer rate as a guideline for Canadian employers to set the rate at which they reimburse their employees.
The CRA mileage rate isn’t mandatory, meaningbusiness owners can choose to pay less or more than that for motor vehicle expenses. It’s worth mentioning that this is a tax law and has nothing to do with employment regulations. Therefore, it doesn’t specify the minimum amount an employer has to pay their employees when using their personal vehicles for business purposes.
So, the CRA mileage rate is the highest amount per business kilometer you can reimburse and still get a tax deduction.
Employers typically choose to stick to this prescribed rate for practical reasons, as it allows them to compensate their employees fairly while cutting their tax bill.
Note that if you reimburse your employees at a higher rate, this will be constituted a taxable income.
What Are Other Automobile Deduction Limits You Can Take Advantage Of?
Business owners and self-employed individuals in Canada are also eligible for other automobile deduction limits. This means you can claim a tax deduction for the cost of the vehicle. This deduction is referred to as capital cost allowance (CCA), allowing you to recover the cost of the vehicle over several years as it depreciates.
The CRA groups different types of vehicles into classes and assigns a percentage to each class. This percentage is called the CCA rate, representing how fast a vehicle depreciates.
The limit on capital cost changes every year, too, and here are the latest CRA stipulations:
If your vehicle belongs to Class 10.1, the capital cost allowance limit is increased from $34,000 to $36,000 plus GST/HST. This limit applies to both new and used vehicles purchased on or after January 1, 2023.
For Class 54 zero-emission passenger vehicles, the capital cost allowance limit is increased from $59,000 to $62,000 before tax. This limit applies to both new and used vehicles purchased on or after January 1, 2023.
For new leases signed on or after January 1, 2023, the deductible costs will increase from $900 to $950 per month before tax.
Example of Mileage Reimbursement Using the CRA Mileage Rate 2023
Let’s say your employee drove 1,500 kilometers, and the CRA mileage rate 2023 is 68¢ for the first 5,000 kilometers driven.
The formula for calculating the reimbursement amount is 0.68×1,500 = $1020. Therefore, in this case, $1020 is the maximum non-taxable reimbursement you can give your employee who drove 1,500 kilometers in a tax year.
What Was the CRA Mileage Rate in 2022?
The CRA mileage rate for 2022 was, on average 7¢ lower, meaning that it was set at
61¢ for the first 5,000 kilometers driven
55¢ after the first 5,000 kilometers
An additional 4¢ per kilometer in the Northwest Territories, Yukon, and Nunavut.
This increase is the consequence of higher driving costs. The CRA adjusts the rate for inflation as well as fuel prices, maintenance, insurance, and repair costs. Practically, the agency considers all the factors of owning and operating a motor vehicle.
The CRA mileage rate is higher for the Northwest Territories, Yukon, and Nunavut because these regions are considered prescribed northern zones with higher travel costs than in other parts of Canada. The 4¢ per kilometer added to standard automobile allowance rates reflects higher vehicle operating expenses in these areas, such as fuel, maintenance, insurance, and depreciation.
The higher costs in these regions are due to various factors, such as the harsh climate, the limited infrastructure, the distance from major urban centers, and the lack of competition among suppliers.
For example, fuelprices are often much higher in these regions due to transportation and storage costs. Harsh weather conditions are another factor that accounts for this additional benefit.
What Are Mileage Reimbursement Rules for Employers in Canada?
When talking about mileage reimbursement in Canada and the CRA mileage rate 2023, it’s important to clarify what this refers to and in what cases employees are entitled to these expenses.
Do I Have to Reimburse My Employees?
Legally speaking, you don’t have to, and it all depends on your agreement or contract with the employee.
But, even though no law requires you to reimburse your employees for the business use of their personal vehicle, there’s no reason why you shouldn’t cover these expenses.
First of all, it’s very unlikely that someone would accept using their personal vehicle for business purposes without being adequately compensated. Let’s not forget that it’s not only about paying gas bills, as the vehicle loses its value pretty quickly. For example, most new cars lose 20% of their value over the first year. After five years, a typical car’s value will drop to only 40% of its initial value. So, if you want to attract top talent, you should definitely offer a fair mileage reimbursement policy.
Another factor you should remember is that your company can claim a mileage tax deduction at the end of the year. In other words, not only will you keep your employees happy, but you’ll also benefit from tax write-offs.
Do Your Employees Qualify for Mileage Reimbursement?
If your employees use their personal vehicles for business-related purposes, you can decide to reimburse them for the expenses they paid out of their own pocket.
Here are some examples in which your employees qualify for CRA mileage reimbursement:
Commuting between different work locations, such as construction sites or client homes
Picking up or delivering work-related items.
You probably notice that commuting from home to work and vice versa isn’t listed as a reimbursable expense and doesn’t constitute a taxable benefit. The reason for this is straightforward: the CRA, like its US equivalent, the IRS, perceives the location where your employees live as their choice.
Therefore, those travel expenses aren’t tax-deductible.
Can My Company Claim a Mileage Tax Deduction?
As we’ve already established, the answer is yes.
Basically, if your employees are using their personal vehicles for work-related purposes and you reimburse them for these expenses, your company will be able to claim a write-off on the taxes.
However, there are some rules to follow to qualify for a mileage tax deduction.
Paying a reasonable per-kilometer allowance
Apart from using the prescribed CRA mileage rate for 2023, an allowance will be considered reasonable and tax-deductible only if:
It covers the number of kilometers a year driven for business purposes.
It’s based on a reasonable per-kilometer rate.
The employee hasn’t already been reimbursed for the same use of their vehicle. This doesn’t refer to reimbursing tolls or additional travel insurance that weren’t included in this allowance.
It’s worth mentioning that a reasonable per-kilometer allowance isn’t treated as an income, so your employees won’t have to include it in their tax returns.
Using a company car
The situation is more complex if your employees use company cars.
In that case, it all depends on who covers operating expenses and whether the cars are used for business purposes only. That’s why it’s best to consult your accountant and check how to get a bigger tax return.
A flat-rate car allowance
A flat-rate car allowance that isn’t calculated based on the number of kilometers driven is considered taxable income.
As this is a lump sum you give to your employees in advance, it can’t be averaged at the end of the year and translated to a per-kilometer allowance to be excluded from the employee’s income.
However, the CRA allows a workaround to help you handle this situation without including a flat-rate allowance in your employee’s income. Find more about how to average allowances here.
Best Practices for Implementing the CRA Mileage Rate
To claim your tax deduction, you must substantiate that you’ve properly implemented the standard mileage rate. Another crucial factor is proving that your business mileage records are accurate.
How to Stay CRA-Compliant?
According to the CRA, keeping a detailed logbook for the entire year is the best way to provide evidence about your business travel and substantiate your mileage claim.
Whenever you or your employees use a personal vehicle for business purposes, the following information should be entered in the logbook to stay compliant:
Date of the trip
Mileage at the start of the trip
Mileage at the end of the trip
Total kilometers driven.
How to Make Sure Your Employees Are Accurately Reimbursed?
The best way to cut your company car expenses and ensure your employees aren’t reporting their personal driving as business miles is to have them:
Keep a logbook with all the previously mentioned details.
Submit reports on time.
Save all the documentation related to their business trips since the CRA can conduct an audit and request to check all the data, such as odometer readings, toll receipts, traffic cameras, and all the other business expenses.
Such exhaustive records will help you hold your employees accountable, properly reimburse them, and prevent any issues with the CRA.
Easier said than done, particularly if your employees have to enter all the details manually, using the pen-and-paper approach. Not to mention that this method is error-prone, which can lead to inaccurate records.
Using a robust mileage tracker app like Timeero can help you streamline this process, save a lot of time otherwise spent making entries in the logbook and double-checking them, and, most importantly, stay CRA compliant.
That way, you won’t have to count on your employees to accurately log their business miles or avoid longer routes. Its GPS-tracking can tell you where exactly every employee is while they’re at work or traveling for business. All your employees have to do is clock in and out using their mobile apps.
In addition, geofencing technology reminds your employees to clock in or out so that they can’t forget to do so or try to pad miles.
Moreover, you’ll get a breadcrumb trail path of their every route. Yes, that means it’s possible to replay entire routes and see where they drove while performing a business task or traveling to a client’s house.
Finally, Timeero works offline and doesn’t require installing expensive hardware.
Since it automatically captures the location, date, and purpose of the trip, Timeero is a great choice if you need a tool for tracking your whole company’s mileage without having to worry about whether someone forgot to make an entry in the logbook.
The app also keeps a detailed history log of changes in the employee’s time or mileage, preventing any confusion or complications.
How to Claim Mileage on Taxes in Canada?
The CRA is very strict and persistent in preventing excessive claims for business uses of personal cars. Therefore the Agency tends to scrutinize the cases in which all or most mileage driven is claimed as business use.
If an audit is requested, you’ll need to determine exactly how many non-business-related miles/kilometers every employee drove and be able to prove this.
To figure this out, determine the total miles or, in Canada, kilometers you or your employees drove using the odometer readings at the beginning and the end of the tax year and compare the two.
Then, determine the number of business miles/kilometers driven in that period and subtract it from the total miles/kilometers driven. The sum you get is the personal mileage.
Implement a policy for the personal use of company vehicles
If you have company vehicles that your employees use, it’s important to monitor mileage and separate business-related and personal miles/kilometers.
Don’t forget that commuting from home to the place of work isn’t considered a business-related purpose, and as such, it’s taxable.
Therefore, it’s essential to have a policy in place that will allow you to claim mileage with the CRA.
This policy should outline the following:
Who can drive the vehicle - is it only the employee or their spouse too?
Is personal use allowed, and to what extent? Define what’s allowed and what’s not. For example, explain whether your employee can use the company vehicle for a family trip.
Other than keeping track of mileage and separating business from personal uses of a vehicle, you and your employees have to keep all the relevant documentation, including
Receipts for gas, oil, repairs, insurance, or any other operating and maintenance expenses
Vehicle registration certificate
Lease contract and documentation, if applicable
The method you used to determine your claim, i.e., if you used the CRA mileage rate 2023 or something else.
Understanding the CRA Mileage Rate 2023
Making sure your employees are fairly reimbursed for using their personal vehicles for business-related purposes while cutting your expenses and saving money can be challenging.
Using the CRA mileage rate method can help you achieve both goals. First, your employees will be properly compensated for the expenses resulting from the business use of their personal vehicle. At the same time, your company can claim a tax deduction for these business mileage reimbursements.
A mileage tracking solution like Timeero will facilitate the entire process, as you won’t have to worry whether your employees are keeping accurate mileage records.
Capture mileage in real-time and avoid inaccurate reporting with Timeero.
Natasa is a writer specializing in the IT and software industry with 6+ years of experience in content writing and online marketing. During that period, she wrote more than 1,000 articles and several ebooks. She majored in English language and literature and loves cats, sneakers, and candy. When she's not working, she's probably binge-watching Netflix.