If you use your personal vehicle for work, you might receive a car or mileage allowance from your employer. Here's the difference between a car allowance vs. mileage allowance.
A car allowance, also known as a flat-rate vehicle allowance, is money you receive from your employer on a regular basis. You should use this amount to purchase and maintain a personal vehicle. It will be added to your salary. It's taxed as regular income. A mileage allowance is money that you get from your employer after a business trip. If you do a lot of car-related travel for work, you may need to submit weekly or monthly mileage logs. Unlike a car allowance, the mileage allowance is not taxable.
If you receive a car allowance, it's because your employer expects you to use your personal vehicle for work-related travel. Most flat-rate vehicle allowances are added to your paycheck. You may be able to purchase a car of your choice and apply the allowance to your monthly car payment. Some employers have specific requirements you need to respect when choosing your vehicle. Already own a vehicle and don't feel the need to upgrade? You might be able to use the car allowance simply to perform routine maintenance on your existing car. You'll also be responsible for covering registration fees, insurance and any other related expenses.
Your car allowance is considered part of your income and could bring you into a higher tax bracket. For instance, if your salary is $40K per year, but you get a $700/month car allowance, you will be taxed on $48,400. Crunch your own numbers to figure out what's worth it for you. Example: [table id=17 /]
[table id=14 /]
A mileage allowance is money you receive from your employer to cover the cost of using your personal vehicle for work-related travel. This amount may also compensate you for wear and tear on your vehicle. Some employees may receive a mileage allowance in addition to a car allowance. It really depends on your employer. Vehicle allowances are usually based on a per-kilometre rate. In this case, the mileage allowance is non-taxable. That being said, most employers will require a record of kilometres travelled in order to calculate the mileage allowance. This is also known as a logbook
Self-employed individuals who drive a lot for work can also claim a tax deduction. Self-employed workers need to track their business miles, personal miles and the overall vehicle expenses. You'll then apply a formula to arrive at your tax deduction for the year. The CRA recommends keeping a record of every kilometre you drive, including personal and business-related drives. This will protect you in the event of an audit.
Each time you travel for business, keep a record of the date and reason for the trip, where you are going, and the number of kilometres driven. It's also a good idea to record the number on your odometer at the beginning and end of each tax year.
If you get a new car during the year, make a note of your old car's odometer reading in your logbook. Record the odometer reading for your new car, and proceed as usual! If you think car and mileage allowances are overwhelming, you may want to try MileIQ. The app automatically tracks your drives so you don't need to. This can help you save hundreds if not thousands of dollars come tax time.