CRA Automobile Allowance Rates 2025: What Business Owners Need to Know

If you reimburse employees for using their personal vehicles on company business, you’ll need to know about the latest changes to CRA automobile allowance rates. The Canada Revenue Agency has increased the prescribed rates for 2025, continuing the pattern of annual adjustments that reflect rising vehicle operating costs.

The 2025 rates are set at 72¢ per kilometer for the first 5,000 kilometers and 66¢ per kilometer for each additional kilometer driven for business purposes. This represents a 2¢ increase from the 2024 rates of 70¢ and 64¢ per kilometer respectively. Business owners with operations in the Northwest Territories, Yukon, and Nunavut can add an extra 4¢ per kilometer to account for higher operating costs in these regions [-5].

These prescribed rates serve as the ceiling for tax-free employee reimbursements, covering expenses such as fuel, insurance, maintenance, and vehicle depreciation. The steady increases reflect the CRA’s response to rising costs that have affected vehicle operation across Canada, particularly as inflation and fuel prices have impacted business expenses over recent years.

Understanding CRA Automobile Allowances

The Canada Revenue Agency’s automobile allowance system affects thousands of Canadian businesses, yet many employers struggle with the nuances of proper implementation. Understanding how these allowances work is essential for maintaining tax compliance while managing employee transportation costs effectively.

What is an automobile allowance?

An automobile allowance is a payment made by employers to employees who use their personal vehicles for business-related activities. These allowances differ from regular salary or wages—they’re specifically intended to cover the costs of operating a vehicle for work purposes. The CRA defines an automobile allowance as “any payment that employees receive from an employer for using their own vehicle in connection with or in the course of their office or employment without having to account for its use”.

The allowance is designed to compensate employees for various vehicle-related expenses:

• Fuel consumption
• Regular maintenance and repairs
• Insurance premiums
• Vehicle depreciation
• Licensing and registration fees

The distinction between an allowance and a reimbursement matters for tax purposes. An allowance represents a predetermined amount paid without requiring detailed expense documentation, while a reimbursement repays specific amounts an employee has already spent on business activities, such as gas purchases or toll fees.

Difference between mileage and flat-rate allowances

The CRA recognizes two primary methods for calculating automobile allowances, with significantly different tax implications for each approach.

Mileage-Based Allowances: These per-kilometer allowances are calculated based on actual business distance driven. The calculation is straightforward: multiply business kilometers by the prescribed CRA rate. For 2025, this means 72¢ per kilometer for the first 5,000 kilometers and 66¢ per kilometer thereafter.

When mileage-based allowances follow the CRA’s prescribed rates, they’re generally considered non-taxable benefits. This creates significant advantages for employers:

• No CPP contributions required
• No EI premiums to withhold
• No inclusion on employees’ T4 slips
• No income tax deductions from these payments

Flat-Rate Allowances: These fixed amounts are paid regularly regardless of actual kilometers driven. An employer might provide $500 monthly to an employee who uses their personal vehicle for work. While administratively simpler, flat-rate allowances are always considered taxable benefits.

Flat-rate allowances create tax obligations:

• The amount must be included in the employee’s income
• CPP contributions, EI premiums, and income tax must be withheld
• The amounts must be reported on the employee’s T4 slip under code ’40’

A combined method using both flat-rate and per-kilometer calculations for the same vehicle is also considered a taxable benefit. Despite their taxable nature, both reasonable and taxable allowances remain deductible business expenses for the employer.

Why CRA sets these rates annually

The CRA revises automobile allowance rates each year to reflect current vehicle operating costs. This annual adjustment process considers several key economic factors:

1. Fluctuating fuel prices – Gas price changes directly impact the rates
2. Overall inflation – General price increases affect all vehicle-related expenses
3. Vehicle depreciation rates – Changes in how quickly vehicles lose value
4. Maintenance and repair costs – Rising expenses for keeping vehicles operational

The CRA’s prescribed rates provide a fair and standardized compensation method without creating additional tax burdens. Regular updates acknowledge that vehicle operation costs change with economic conditions rather than remaining static.

These rates serve as guidelines rather than mandatory requirements. Employers can choose different reimbursement rates, though using the prescribed rates offers administrative simplicity and tax advantages when properly structured.

The consistent upward trend in recent years reflects rising vehicle operation costs, particularly as inflation and fuel prices have increased significantly. The progression from 2022 (59¢ per kilometer for the first 5,000 km) to 2025 (72¢ per kilometer for the first 5,000 km) demonstrates the CRA’s commitment to keeping pace with economic changes.

CRA Automobile Allowance Rates for 2025

The federal government has set the official automobile allowance rates for 2025, maintaining the annual adjustment process that reflects current vehicle operating costs. These figures represent the maximum amounts you can reimburse employees tax-free for business use of personal vehicles.

72¢ per km for the first 5,000 km

The 2025 rate begins at 72 cents per kilometer for the first 5,000 kilometers of business driving. This 2¢ increase from 2024’s rate of 70 cents reflects the CRA’s recognition that vehicle operating costs continue to climb.

This higher initial rate acknowledges that fixed costs like insurance and depreciation must be distributed across business kilometers. When employees use personal vehicles for work, these unavoidable expenses factor into every kilometer driven, making the first portion of business travel more expensive per kilometer.

Accurate mileage tracking becomes essential at this rate level. Proper documentation protects the tax-exempt status of these payments and ensures your reimbursements align with CRA requirements.

66¢ per km after 5,000 km

Once business driving exceeds 5,000 kilometers, the allowable rate drops to 66 cents per kilometer. This represents the same 2¢ increase from 2024’s rate of 64 cents.

The rate reduction reflects basic vehicle economics. After covering fixed costs through the initial 5,000 kilometers, additional business driving primarily incurs variable expenses like fuel and incremental maintenance. Companies with high-mileage employees—sales teams, delivery staff, or field service representatives—benefit from this tiered approach that more accurately matches actual operating costs.

Additional 4¢ per km in the Territories

Business operations in the Northwest Territories, Yukon, and Nunavut receive an extra 4 cents per kilometer above provincial rates. The 2025 territorial rates become:

• 76 cents per kilometer for the first 5,000 kilometers (72¢ + 4¢)
• 70 cents per kilometer for additional kilometers (66¢ + 4¢)

This supplement recognizes the realities of northern vehicle operation: higher fuel costs, limited service facilities, harsh weather conditions, and challenging road surfaces that accelerate wear and tear. The 4¢ differential has remained consistent, suggesting the CRA views the cost gap between provincial and territorial operations as stable.

These prescribed rates establish the ceiling for tax-free allowances. You can reimburse at lower amounts, though this may not fully cover employee costs. Payments above these rates create taxable benefits for employees, while self-employed individuals follow different rules for claiming vehicle expenses.

Comparison with CRA Automobile Allowance 2024

Business owners planning their 2025 transportation budgets will find the year-over-year changes relatively modest compared to previous adjustments. The Department of Finance Canada has maintained a consistent 2¢ increase across all automobile allowance rates, continuing the pattern established in 2024.

2024 rates vs. 2025 rates

The progression from 2024 to 2025 shows a uniform increase across all categories. Provincial rates moved from 70¢ and 64¢ per kilometer to 72¢ and 66¢ respectively. The territorial rates followed the same pattern, rising from 74¢ and 68¢ to 76¢ and 70¢ per kilometer.

This marks the second consecutive year with a 2¢ adjustment, following the more substantial 7¢ jump implemented in 2023. The territorial supplement has remained steady at 4¢ per kilometer, suggesting the cost differential between provincial and territorial operations has stabilized.

What changed and why

The CRA’s December 2024 announcement included several concurrent adjustments to vehicle-related tax provisions. Beyond the allowance rates themselves, the capital cost allowance ceiling for passenger vehicles increased from $51,554.33 to $52,947.69. Deductible leasing costs rose to $1,532.70 per month from the previous $1,463.03. The prescribed rate for taxable benefits related to personal use of employer-provided vehicles also increased by one cent to 34¢ per kilometer.

These coordinated changes reflect a broader adjustment to Canada’s vehicle-related tax framework rather than isolated rate modifications.

Impact of inflation and fuel prices

The measured 2¢ increases in both 2024 and 2025 contrast sharply with the 7¢ jump in 2023, indicating some stabilization in the economic factors driving these adjustments. Fuel price volatility continues to influence the CRA’s calculations, though the impact appears more predictable than in previous years.

Vehicle maintenance costs, insurance premiums, and depreciation rates have all contributed to the upward pressure on allowance rates. The consistent increases mirror Canada’s broader inflation patterns while avoiding the dramatic year-over-year changes that could disrupt business planning.

For business owners, these trends suggest the CRA is balancing fair employee compensation against economic stability, providing predictable adjustments that reflect real-world cost increases without creating administrative burden.

Why the Rate Drops After 5,000 km

You might wonder why the CRA automobile allowance rates decrease after the initial 5,000 kilometers. This two-tiered structure reflects the economic realities of vehicle operation and provides a more accurate reimbursement system for business-related travel.

Fixed vs. variable vehicle costs

The CRA’s two-tiered system recognizes that vehicle expenses fall into two distinct categories: fixed and variable costs. Understanding this distinction explains why rates decrease after the 5,000-kilometer threshold.

Fixed costs remain constant regardless of how many kilometers you drive. These expenses include:

• Insurance premiums
• Vehicle registration and licensing fees
• Basic maintenance schedules
• Depreciation of the vehicle’s value
• Financing costs

Variable expenses fluctuate based on actual usage. These costs typically include:

• Fuel consumption
• Oil changes and fluid replacements
• Tire wear and replacement
• Repairs related to increased usage

The initial higher rate of 72¢ per kilometer for 2025 accounts for both fixed and variable expenses. When a vehicle is first put into business use, all associated fixed costs must be factored into the reimbursement rate.

Fixed costs are distributed across the total kilometers driven. With limited business usage, each kilometer bears a higher portion of these fixed expenses. The first 5,000 kilometers are compensated at a premium rate to account for this higher per-kilometer fixed cost burden.

Economies of scale in vehicle usage

The CRA’s rate structure also reflects a fundamental economic principle: economies of scale. The more you use your vehicle for business purposes, the lower the cost per kilometer becomes.

Once you exceed 5,000 kilometers of business driving, the per-kilometer cost decreases substantially because fixed costs are spread across more kilometers. Each additional kilometer dilutes the per-kilometer impact of those unavoidable fixed expenses.

After the 5,000-kilometer threshold, the allowable reimbursement drops to 66¢ per kilometer. This reduced rate acknowledges that only variable costs (primarily fuel and incremental maintenance) need to be covered for these additional kilometers.

The 6-cent difference between the two rates represents the CRA’s calculation of how fixed costs are amortized across business travel. For example, if you drive 10,000 kilometers for business in 2025, the first 5,000 kilometers are reimbursed at 72¢ (accounting for both fixed and variable costs), while the remaining 5,000 kilometers are reimbursed at 66¢ (primarily covering variable costs).

This structure serves practical purposes for both employers and employees. It simplifies budgeting by establishing clear thresholds that help employers plan reimbursement costs. Since employers can claim tax exemptions based on the CRA’s prescribed rates, organizing transactions around the 5,000-kilometer threshold offers financial benefits.

The two-tier system provides a balanced approach that ensures fair compensation while preventing excessive reimbursements as business mileage accumulates throughout the year.

Tax Implications for Employers and Employees

Understanding the tax treatment of automobile allowances can save both employers and employees money while ensuring CRA compliance. The Canada Revenue Agency has established specific rules that determine whether these payments are taxable, creating important implications for how you structure your reimbursement system.

When is the allowance tax-free?

The good news? Automobile allowances can be completely tax-free when they meet the CRA’s requirements. An allowance qualifies for tax-free treatment when it satisfies all three conditions:

• The allowance is based solely on business kilometers driven in the course of employment duties
• The per-kilometer rate is considered reasonable
• The employer has not reimbursed the employee for expenses related to the same use of the vehicle

The CRA generally considers allowances using the prescribed rates—72¢ for the first 5,000 km and 66¢ thereafter in 2025—to be reasonable. When these conditions are met, the allowance doesn’t need to be included as income on tax forms for either party.

Supplementary reimbursements for business insurance, tolls, or ferry charges won’t affect the tax-free status, provided these costs weren’t already factored into the original allowance calculation.

Employees receiving tax-free allowances must maintain detailed logs of business travel. Without proper documentation showing the kilometers driven for work purposes, the CRA could challenge the tax-free status during an audit.

What makes an allowance taxable?

Not all automobile allowances qualify for tax-free treatment. Several common scenarios will make your allowance taxable:

Fixed monthly car allowances are always considered taxable income. These flat-rate payments, regardless of actual kilometers driven, must be included in the employee’s income and are subject to CPP contributions, EI premiums, and income tax withholding.

Per-kilometer allowances also become taxable when the rate is significantly higher or lower than the CRA’s reasonable rates. This prevents employers from avoiding taxes by setting artificially high rates.

Using combined methods—such as providing both a flat-rate allowance and a per-kilometer rate for the same vehicle—results in the entire amount being treated as taxable income.

Taxable allowances must be reported on the employee’s T4 slip in box 14 “Employment income” and using code 40 in the “Other information” area. Even when taxable to the employee, these allowances remain deductible business expenses for the employer.

Form T2200 and employee deductions

When an automobile allowance is taxable, employees may still reduce their tax burden through deductions. Form T2200 “Declaration of Conditions of Employment” becomes essential in these situations.

Employers must complete and sign Form T2200 for employees who want to deduct employment expenses. This form certifies that the employee was required to pay expenses under their employment contract. Without this completed form, employees cannot claim deductions—even for legitimate work-related vehicle expenses.

The T2200 form stays with the employee as supporting documentation rather than being filed with the CRA. After receiving a completed T2200, employees use Form T777 “Statement of Employment Expenses” to itemize their deductible expenses.

To qualify for vehicle expense deductions, employees must meet several conditions:

1. They were normally required to work away from the employer’s place of business
2. Under their employment contract, they had to pay their own motor vehicle expenses
3. They didn’t receive a non-taxable allowance for motor vehicle expenses
4. They keep a copy of the completed T2200 form

Note that commuting between home and work is considered personal use and cannot be claimed as an employment expense.

For complex situations involving automobile allowances, professional guidance can help ensure you’re structuring these payments optimally for both tax compliance and cost effectiveness. Contact BOMCAS Canada today for all your accounting and tax needs in Canada—their expertise can help you navigate the requirements while minimizing tax burdens for both employers and employees.

Record-Keeping and CRA Compliance

Accurate documentation is essential when claiming tax-free status for automobile allowances. The CRA requires specific records to support business vehicle use, and proper record-keeping protects both you and your employees if an audit occurs.

Mileage log requirements

The CRA considers a detailed logbook the best evidence to support vehicle use claims. For each business trip, drivers must record:

• Date of travel
• Destination and purpose of the trip
• Number of kilometers driven
• Odometer readings at the start and end of each fiscal period

The CRA recognizes two logbook methods. The full logbook method requires documenting every business trip throughout the year. The simplified logbook method allows maintaining records during a three-month sample period after establishing a “base year” with a complete 12-month log.

You can only use the simplified method if business usage remains within 10% of the base year’s patterns. The formula for calculating annual business use with this method is: (Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use.

What employers must document

Employers have specific responsibilities for automobile allowance documentation. You must receive copies of employee vehicle logs. Without proper records, an allowance becomes taxable, regardless of the payment method.

Verify that employee records include:

• Supporting receipts for claimed expenses
• Logbooks showing the separation between business and personal kilometers
• Evidence that demonstrates business-related purposes for claimed trips

When providing allowances based on CRA’s prescribed rates, record-keeping becomes simpler—employees won’t need to keep receipts and invoices of actual vehicle expenses. The focus shifts to accurate mileage documentation.

Best practices for audit readiness

Establish a systematic approach to record-keeping. Encourage employees to use mileage tracking apps or maintain physical logbooks in their vehicles at all times. Digital records are acceptable, including spreadsheets, CSV files, and PDF formats.

Retain all documentation for at least six years following the tax filing date. This retention period aligns with CRA requirements for substantiating claims during an audit.

Conduct periodic reviews of employee logs to identify inconsistencies before they become audit issues. If you use the simplified logbook method, regularly confirm that usage patterns remain within the acceptable 10% variance.

Document all policy changes regarding automobile allowances and communicate them clearly to employees. Formal policies serve as additional evidence of compliance efforts during audits.

Need help setting up compliant record-keeping systems? Contact BOMCAS Canada today for all your accounting and tax needs in Canada—their expertise can help you navigate CRA requirements with confidence.

Special Considerations for the Territories

Business operations in Canada’s northern territories involve unique challenges that the Canada Revenue Agency acknowledges through special allowance provisions. If you have employees working in Yukon, Northwest Territories, or Nunavut, understanding these territorial adjustments is essential for proper reimbursement.

Why the Territories get a higher rate

Operating vehicles in Canada’s northern territories costs significantly more than in the provinces. The CRA provides an additional 4¢ per kilometer for business travel in the Northwest Territories, Yukon, and Nunavut. This brings the 2025 territorial rates to:

• 76¢ per kilometer for the first 5,000 kilometers (72¢ provincial rate + 4¢ territorial supplement)
• 70¢ per kilometer for each additional kilometer (66¢ provincial rate + 4¢ territorial supplement)

The territorial supplement reflects the reality of northern operations where fuel costs typically run 20-30% higher than southern prices. Limited maintenance facilities mean longer travel distances for basic services, while harsh weather conditions require specialized equipment and more frequent maintenance.

The 4¢ territorial supplement has remained constant even as base rates have increased, suggesting the CRA views the cost differential between provincial and territorial operations as relatively stable over time.

Cost of vehicle operation in remote areas

Vehicle operation in Canada’s territories faces challenges that don’t exist in most provincial locations. Extreme cold temperatures affect battery performance, oil viscosity, and overall vehicle reliability, requiring specialized maintenance schedules. The harsh operating environment includes:

• Higher fuel prices due to transportation costs to remote locations
• Increased maintenance expenses from extreme weather conditions
• Limited repair facilities, often resulting in higher service charges
• Specialized equipment requirements such as block heaters and winter tires
• Accelerated vehicle depreciation from challenging road conditions

Unpaved roads and challenging terrain contribute to faster vehicle deterioration. The scarcity of service centers means minor mechanical issues can quickly become major expenses if proper maintenance isn’t performed promptly.

For businesses operating in both territorial and provincial regions, maintaining separate mileage logs for each jurisdiction ensures accurate application of the appropriate rates and maximizes legitimate tax-free reimbursements for employees.

Flat-Rate Allowances vs. Per-Kilometer Reimbursement

Business owners face an important choice when structuring automobile allowances: should you pay a fixed monthly amount or reimburse based on actual kilometers driven? Each approach affects both your tax obligations and your employees’ take-home pay.

Pros and cons of flat-rate allowances

A flat-rate allowance gives employees the same amount each month regardless of how much they drive for business. For example, you might pay a salesperson $836.02 monthly for vehicle expenses. This approach offers clear benefits:

• Predictable budgeting – Fixed monthly costs for employers
• Administrative simplicity – No need to track individual kilometers
• Consistent employee compensation – Stable payments regardless of seasonal travel variations

However, flat-rate allowances create significant tax complications:

• Always taxable – All flat-rate allowances must be included in employee income
• Tax burden for employees – Subject to CPP contributions, EI premiums, and income tax
• Potentially unfair compensation – Overcompensates light drivers while undercompensating heavy drivers

The tax issue is particularly important. According to the CRA, flat-rate allowances are not considered reasonable since they have no relationship to kilometers driven.

When flat-rate becomes a taxable benefit

Any allowance not calculated based on business kilometers driven becomes taxable. The CRA also treats combined allowance systems as entirely taxable, even if part of the payment follows reasonable per-kilometer rates.

For example, if you pay both a daily flat rate and a reasonable per-kilometer rate for the same vehicle, the CRA considers this one allowance and taxes the entire amount. The key distinction is whether allowances serve different purposes: a flat rate for travel within a district and a per-kilometer rate for travel outside that district would result in only the flat-rate portion being taxable.

How to switch to per-km reimbursement

Moving from a flat-rate to a per-kilometer system requires planning but offers significant tax advantages. Here’s how to make the transition:

1. Establish a clear kilometer-tracking system for all employees
2. Select appropriate tracking tools—either paper logs or digital applications
3. Communicate the switch timing and reasoning to affected staff
4. Update payroll systems to process mileage-based reimbursements
5. Ensure proper documentation for CRA compliance

Your new system must meet all three CRA requirements for tax-free status: the allowance must be based solely on business kilometers, use reasonable per-kilometer rates, and not include other reimbursements for the same vehicle use.

Employees currently receiving taxable flat-rate allowances can claim additional vehicle expenses on their tax returns using Form T777, provided their employer completes Form T2200. This offers some tax relief during the transition period.

The Bottom Line

Managing automobile allowances properly can save your business money while keeping employees satisfied with fair compensation. The 2025 rates of 72¢ per kilometer for the first 5,000 kilometers and 66¢ thereafter represent the maximum you can reimburse without creating taxable benefits for employees. Business owners in the territories can add the extra 4¢ per kilometer to account for higher northern operating costs.

The choice between flat-rate and per-kilometer allowances isn’t just about administrative convenience—it directly affects your employees’ take-home pay. Flat-rate allowances always become taxable income, while properly structured per-kilometer reimbursements following CRA prescribed rates remain tax-free.

Record-keeping becomes your best protection during a CRA audit. Detailed mileage logs that document business purposes, dates, and distances traveled support the tax-exempt status of your allowances. The CRA’s two-tiered rate structure after 5,000 kilometers reflects the reality that fixed vehicle costs spread across higher mileage, reducing the per-kilometer burden.

The consistent annual increases in allowance rates—from significant jumps in 2023 to the steady 2¢ increases in 2024 and 2025—show the CRA’s commitment to keeping reimbursements aligned with actual vehicle operating costs. These adjustments acknowledge that fuel, maintenance, and insurance costs continue to rise across Canada.

Review your automobile allowance policies each year to ensure they align with current CRA rates and requirements. This annual check helps maintain tax advantages while providing fair compensation for employees who use personal vehicles for business travel. Contact BOMCAS Canada today for all your accounting and tax needs in Canada—their expertise can help structure your automobile allowance program for maximum tax efficiency while ensuring complete CRA compliance.

With proper planning and documentation, automobile allowances benefit both employers and employees without creating unexpected tax complications. The key lies in understanding the rules and applying them consistently throughout your organization.

FAQs

Q1. What are the CRA automobile allowance rates for 2025? For 2025, the CRA has set the rates at 72 cents per kilometer for the first 5,000 kilometers and 66 cents per kilometer thereafter. An additional 4 cents per kilometer applies for driving in the Territories.

Q2. Why do the CRA automobile allowance rates decrease after 5,000 kilometers? The rates decrease to reflect the distribution of fixed costs over more kilometers. After 5,000 kilometers, only variable costs like fuel and incremental maintenance need to be covered, resulting in a lower per-kilometer rate.

Q3. How can employers ensure their automobile allowances remain tax-free? To keep allowances tax-free, they must be based solely on business kilometers driven, use reasonable per-kilometer rates (like the CRA’s prescribed rates), and not include other reimbursements for the same vehicle use.

Q4. What record-keeping is required for CRA-compliant automobile allowances? Detailed mileage logs are essential, including date, destination, purpose of each trip, and kilometers driven. Employers should also maintain copies of employee vehicle logs and supporting documentation for at least six years.

Q5. Are flat-rate automobile allowances taxable? Yes, all flat-rate automobile allowances are considered taxable benefits by the CRA. They must be included in the employee’s income and are subject to CPP contributions, EI premiums, and income tax withholding.