Canada's automobile allowance rates for 2026: 73 cents and the 5,000 km step

Canada handles business driving in a personal vehicle much as the UK does: the employer can pay a per kilometre allowance free of tax, and there is a lower rate once the distance passes a threshold. The detail that catches people out is not the rate. It is the conditions an allowance has to meet before it counts as reasonable at all.

The 2026 limits

Each year the Department of Finance sets the limit on the tax exempt allowance an employer can deduct. For 2026, announced on 14 January 2026 and effective from 1 January:

Both are one cent up on 2025. The step happens at 5,000 kilometres in the calendar year, so a provincial employee who drives 8,000 business kilometres would be looking at 5,000 at 73 cents ($3,650) plus 3,000 at 67 cents ($2,010), or $5,660 in total.

Strictly, these figures are the most an employer can deduct as an expense for the allowance. The Canada Revenue Agency generally treats an allowance at or below them as reasonable, which is why they work in practice as the reference rates.

What makes an allowance non taxable

The CRA sets out three conditions, and all three have to be met for the allowance to stay out of the employee's income:

1. It is based only on business kilometres driven.
2. The per kilometre rate is reasonable.
3. The employer has not also reimbursed the employee for expenses relating to the same use of the vehicle.

The first condition is the one that sinks most car allowances. A flat amount, say $600 a month whatever the driving, is not based on kilometres, so it is taxable as employment income. The UK reaches the same answer by a different route: a car allowance is not mileage there either.

The third condition matters when an employer tries to combine two methods. A per kilometre allowance plus a monthly flat top up for the same vehicle is treated as one allowance, and because part of it is not distance based, the whole amount becomes taxable. The CRA does allow separate reimbursement of supplementary business insurance, tolls and ferry charges, provided the per kilometre rate was set without them in mind.

When the employer pays nothing, or too little

An employee who normally has to work away from the employer's premises, and has to pay their own vehicle costs under their contract, can deduct those costs on their own return if they did not receive a non-taxable allowance. They need a Form T2200 completed by the employer, and the claim goes through Form T777 on actual costs in proportion to business use, not at the 73 cent rate.

If the employer does pay a non-taxable allowance but it falls short of the real cost, the employee can choose to include the allowance in income and claim actual expenses instead, provided they can show the expenses exceed it. Either way there is no Canadian equivalent of a simple per kilometre claim for the employee, which is a real difference from the UK's Mileage Allowance Relief.

The self employed use actual costs

Self employed people in Canada do not get a flat per kilometre rate either. The CRA's approach is to add up actual running costs (fuel, insurance, licence and registration, maintenance, interest, leasing and, for an electric vehicle, electricity) and deduct the business share. Its own example: 27,000 business kilometres out of 30,000 in total, on $7,000 of expenses, gives a $6,300 deduction. Capital cost allowance on the vehicle is claimed separately.

Driving between home and a regular place of business is personal, as it is in the UK and Australia.

What the logbook has to show

Whichever route applies, the CRA expects a record of each business trip with the date, destination, purpose and kilometres driven, plus the odometer reading at the start and end of the year.

There is one concession worth knowing. Once you have kept a full logbook for a year (the base year), you can keep a three month sample logbook in later years and use it to estimate business use for the whole year, as long as the result stays within 10% of the base year. If it moves by more than that, the sample only covers the three months it was kept, and the rest of the year needs a proper record. In practice that rewards anyone whose driving pattern is steady and penalises anyone whose role has changed.

How it compares with the UK

The shape is similar. HMRC's approved mileage rate is 55p a mile for the first 10,000 business miles in the tax year and 25p a mile after that, since 6 April 2026. The UK threshold is far higher (10,000 miles is about 16,000 kilometres, against Canada's 5,000) and the UK drop is steeper. The bigger difference is who can use the rate: in the UK an employee who is underpaid, and a self employed person using simplified expenses, can both claim at the flat rate. In Canada the flat figure is really an employer's tool, and everyone else works from actual costs and a logbook.

For more countries side by side, see Australia's cents per kilometre method and UK vs US mileage rates.

Sources

• Government announces the 2026 automobile deduction limits and expense benefit rates for businesses (Department of Finance Canada)
• Automobile and motor vehicle allowances (CRA)
• Employment Expenses, guide T4044 (CRA)
• Motor vehicle expenses for the self employed (CRA)
• Motor vehicle records (CRA)
• Increasing mileage rates (HMRC policy paper), for the British comparison

General information, not legal or tax advice. Canadian vehicle expense rules have conditions this article does not cover: check the CRA guidance or take advice on your own situation.