An employee receives a flat-rate automobile allowance that is not based on kilometres driven for business purposes. How is this allowance generally…

An automobile allowance paid as a flat rate, without regard to the actual kilometres driven for business, does not meet the Canada Revenue Agency (CRA) criteria for a non-taxable allowance. The CRA considers such payments to be arbitrary amounts. Therefore, the full amount of the allowance must be included in the employee's income as a taxable benefit and is subject to Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax deductions. A reasonable per-kilometre allowance, based on CRA-prescribed rates, would be non-taxable.

A. A non-taxable reimbursement requires substantiation of actual expenses incurred by the employee, which is not the case with a flat-rate allowance.

B. A tax-free allowance must be reasonable and based on the number of business kilometres driven, which this flat-rate allowance is not.

D. A retiring allowance is a specific payment made upon or after retirement or loss of office, unrelated to vehicle usage.

1. Canada Revenue Agency. (2023). T4130 Employers' Guide - Taxable Benefits and Allowances. Chapter 3, "Automobile and motor vehicle benefits and allowances," Section "When the allowance is a taxable benefit."

2. National Payroll Institute. (2023). Payroll Fundamentals 1. Chapter 4: Taxable Benefits and Allowances.