The short answer
An allowance for using your own car is tax-free when it is reasonable and based only on the number of business kilometres you drive. A flat amount (for example $500 a month, whatever you drive) is taxable, and your employer adds it to your T4 income.
Example: 6,000 business km
With a per-km allowance at the 2026 CRA rates:
- 5,000 km × $0.73 = $3,650
- 1,000 km × $0.67 = $670
- Total: $4,320 tax-free
With a flat $500 a month, you receive $6,000 — but all of it is taxable. If your marginal tax rate is around 30%, about $1,800 goes to tax, leaving roughly $4,200. Surprise: the smaller per-km payment can leave you with more money.
| Type of allowance | Taxable? | Can you deduct car expenses yourself? |
|---|---|---|
| Per-km only, at a reasonable rate (e.g. 73¢ / 67¢) | No | No |
| Flat monthly amount, not based on km | Yes, on your T4 | Yes, with a signed T2200 from your employer |
| Flat amount plus per-km for the same driving | Yes, all of it | Yes, with a T2200 |
| Per-km, but your employer also pays your gas or insurance | Usually yes | Yes, with a T2200 |
What counts as “reasonable”?
The 2026 rates — 73¢ for the first 5,000 km and 67¢ after that (77¢/71¢ in the territories) — are the amounts an employer can deduct, and CRA generally accepts allowances at or below them as reasonable. An allowance can also be unreasonably low. If it doesn’t cover your real costs, you can choose to treat it as taxable and claim your actual car expenses instead.
Claiming your own expenses
If your allowance is taxable (or you get nothing), you may deduct the business part of your car costs on form T777 — fuel, insurance, maintenance, interest on a car loan and capital cost allowance. You need a T2200 signed by your employer confirming you had to use your car for work, plus a log of business and total kilometres.
Kind advice before you negotiate
- Ask your employer whether a per-km allowance is possible. For many people it is worth more after tax.
- Use the calculator above to see your fuel cost per km. If it is very high (big truck, long winter drives), a taxable allowance with your own expense claim may be better.
- Whatever you choose, keep the log. It is the one document that helps in every case.
FAQ
Is a flat monthly car allowance taxable in Canada?
Yes. An allowance that is not based on the number of business kilometres driven is taxable and is included in your employment income on your T4.
How much tax-free allowance is 6,000 km in 2026?
$4,320 in the provinces: 5,000 km × 73¢ = $3,650 plus 1,000 km × 67¢ = $670.
Can I deduct car expenses if I receive a tax-free per-km allowance?
No. If the allowance is reasonable and not taxable, you can’t also claim car expenses. If you receive a taxable allowance or none at all, you can claim them on form T777 with a T2200 from your employer.
Sources (checked 5 November 2026): Department of Finance Canada, “Government announces the 2026 automobile deduction limits and expense benefit rates for businesses”, January 14, 2026 (canada.ca/en/department-finance/news/2026/01/…); CRA guide T4130, Employers’ Guide – Taxable Benefits and Allowances (standby charge and operating cost rules); Natural Resources Canada, 2026 Fuel Consumption Guide (combined ratings); Statistics Canada monthly average retail price of regular gasoline, Toronto, September 2026 (183.7¢/L, via ycharts).