An employee drives to a client site, buys a client lunch, picks up supplies at the hardware store, and submits a stack of receipts at month-end. How you pay them back matters. A properly documented reimbursement is generally not taxable to the employee, and the business can deduct the cost and often claim GST/HST input tax credits. A loosely handled allowance can turn into taxable income that should have gone through payroll.
This guide explains the difference between reimbursements and allowances, CRA's rules for reasonable vehicle allowances, how to claim ITCs on employee expenses under the Excise Tax Act, and how to set up an expense policy and record expense reports. It's based on CRA's pages on allowances and reimbursements, automobile and motor vehicle allowances, the 2026 automobile deduction limits, and CRA's GST/HST guidance on employee reimbursements. It includes worked examples, an expense report template and common mistakes.
| Feature | Reimbursement | Allowance |
|---|---|---|
| What it is | Repayment of actual costs, supported by receipts | A set amount paid without having to account for actual costs |
| Receipts required? | Yes | Not necessarily |
| Taxable to employee? | Generally no, if for business expenses | Generally yes, unless a specific exception applies (such as a reasonable per-kilometre vehicle allowance) |
| Through payroll? | No (paid separately) | Yes, if taxable |
CRA says that when you reimburse an employee for expenses they incurred while carrying out the duties of their employment, generally there is no taxable benefit, as long as the expenses are for your business and supported by receipts. Reimbursing personal expenses is a taxable benefit.
Vehicle allowances are the most common source of errors. A per-kilometre allowance is generally not taxable to the employee if it's reasonable and based only on the number of business kilometres driven. A flat monthly allowance (for example, $500 a month regardless of driving) is generally taxable and goes through payroll.
For 2026, CRA's reasonable per-kilometre rates (the maximum the employer can deduct) are:
| Region | First 5,000 km | Each km after |
|---|---|---|
| Provinces | 73¢ | 67¢ |
| Territories | 77¢ | 71¢ |
An allowance that combines a flat amount with a per-km rate for the same use is generally fully taxable. Employees should keep a logbook of business trips.
Example numbers for illustration only.
An employee in Manitoba drives 6,000 business km in 2026.
| Calculation | Amount |
|---|---|
| First 5,000 km × $0.73 | $3,650 |
| Next 1,000 km × $0.67 | $670 |
| Total allowance, non-taxable and deductible | $4,320 |
If the employer paid $0.80/km instead, CRA's rate is the employer's deduction limit; whether the higher rate is still considered reasonable depends on the facts. Paying at or below CRA's rate keeps it simple.
| Allowance | General treatment |
|---|---|
| Reasonable per-km vehicle allowance | Non-taxable |
| Flat vehicle allowance | Taxable |
| Reasonable travel allowance for meals and lodging when travelling out of town | Generally non-taxable, if reasonable |
| Flat monthly phone allowance | Generally taxable |
| Uniform or tool allowance | Depends on the facts; often taxable |
| Overtime meal allowance | May be non-taxable if reasonable and occasional; check CRA's conditions |
CRA's pages on each type have specific conditions, so check them before setting up an allowance.
If your business is registered for GST/HST, you can generally claim ITCs on employee expenses.
If the employee is reimbursed for a meal, the ITC is generally limited to 50%, matching the income tax limit.
Example numbers for illustration only. Ontario employer, HST 13%.
| Expense | Total paid | HST included | Expense amount |
|---|---|---|---|
| Hardware supplies | $113.00 | $13.00 | $100.00 |
| Parking | $22.60 | $2.60 | $20.00 |
| Client lunch | $90.40 | $10.40 | $80.00 |
| Total reimbursed | $226.00 | $26.00 | $200.00 |
| Account | Debit | Credit |
|---|---|---|
| Supplies | $100.00 | |
| Parking | $20.00 | |
| Meals & entertainment | $80.00 | |
| HST recoverable (ITC) | $26.00 | |
| Bank (paid to employee) | $226.00 |
At year-end, 50% of the $80 meal is non-deductible for income tax, and the ITC on the meal is generally limited to 50% of $10.40, so $5.20 of the $26.00 is recaptured. Your bookkeeper or accountant handles this adjustment.
Many businesses avoid reimbursements by issuing company credit cards. The rules are the same: business purchases are deductible with receipts, and personal purchases are a taxable benefit or must be repaid. Card statements alone aren't receipts for ITC purposes; collect the vendor receipt for each purchase.
| Method | Pros | Cons |
|---|---|---|
| Employee reimbursement | Employee controls spending; simple for small teams | Employees float the cost; delays |
| Company credit card | No out-of-pocket for staff; spending visible daily | Needs limits and a receipt process |
| Per-km allowance | Simple for vehicle use | Needs a logbook |
A short written policy prevents most problems. Include:
| Policy item | Example |
|---|---|
| What's reimbursable | Supplies, travel, client meals, parking |
| What isn't | Personal items, fines, commuting from home to the regular workplace |
| Receipts | Itemized receipt required for every expense |
| Deadlines | Submit within 30 days |
| Approvals | Manager approval before payment |
| Mileage | Per-km at or below CRA's rate, with a logbook |
| Meals | Who attended and the business purpose |
| Payment | Reimbursed on the next pay run, separately from wages |
| Date | Vendor | Description | Business purpose | Amount | GST/HST | Receipt? |
|---|---|---|---|---|---|---|
| 2026-10-03 | Hardware store | Fasteners | Client job #214 | $113.00 | $13.00 | Yes |
| 2026-10-07 | City parking | Parking | Client meeting | $22.60 | $2.60 | Yes |
| 2026-10-15 | Restaurant | Lunch with client | Contract review | $90.40 | $10.40 | Yes |
Many payroll systems let you add a non-taxable reimbursement line to a pay run. That's convenient, but code it as non-taxable so no deductions are taken and it doesn't appear in box 14 of the T4. Taxable allowances, by contrast, go in as taxable earnings with the usual source deductions and are reported on the T4.
Example numbers for illustration only.
| Option | Annual amount | Taxable to employee? |
|---|---|---|
| Flat $400/month vehicle allowance | $4,800 | Yes, through payroll |
| Per-km, 6,000 km at CRA rates | $4,320 | No |
The flat allowance costs the employer more and leaves the employee with less after tax. The per-km allowance requires a logbook but is cleaner.
Some employers give staff an advance before a trip instead of making them pay out of pocket. An advance isn't an expense when paid; it's an amount the employee owes back until they submit receipts.
Example numbers for illustration only.
| Step | Account | Debit | Credit |
|---|---|---|---|
| $500 advance paid | Employee advances (asset) | $500 | |
| Bank | $500 | ||
| Employee submits $420 of receipts ($400 + $20 GST) and returns $80 | Travel expense | $400 | |
| GST recoverable | $20 | ||
| Bank | $80 | ||
| Employee advances | $500 |
The $420 of receipts ($400 of expense plus $20 of GST at 5%) and the $80 returned add up to $500, which clears the advance. Debits total $500 and match the $500 credit to employee advances. Unreturned and unsupported advances can become a taxable benefit, so clear them within your policy deadline.
Employers sometimes reimburse employees who work from home for equipment such as a monitor or chair. CRA generally treats reimbursement of computer or home office equipment, supported by receipts, as non-taxable if the equipment is mainly for the employer's benefit. CRA's position has changed over time, so check its current guidance on home office equipment before setting a policy.
Keep expense reports, receipts, approvals and mileage logs for at least six years from the end of the tax year they relate to, the general CRA retention period. Digital copies are acceptable if they're legible and complete.
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Generally not, if they're for business expenses and supported by receipts.
A reasonable per-km allowance based only on business kilometres is generally not taxable. A flat allowance generally is.
73¢ for the first 5,000 km and 67¢ after that in the provinces; 77¢ and 71¢ in the territories.
Generally yes, on reimbursed business expenses with proper receipts, and possibly a notional ITC on reasonable allowances.
Non-taxable reimbursements don't. Taxable allowances do.
Reimbursements and allowances are easy to get right with a policy, receipts and the correct payroll coding. Reimburse actual business costs, pay vehicle allowances per km at reasonable rates, claim the ITCs you're entitled to, and run anything taxable through payroll. For monthly books and payroll support, start with Accelo Bookkeeping.