You pay an allowance to your employee as follows:

• a flat per-diem rate to offset the employee's fixed expenses for each day the vehicle is required
• a reasonable per-kilometre rate for each kilometre driven to offset the operating expenses

The flat per-diem rate compensates the employee for some of the same use on which the reasonable per-kilometre allowance is based. That is, the fixed expenses incurred by the employee to operate the vehicle.

The combined amount is considered one allowance and therefore taxable, since it is not based only on the number of kilometres the vehicle is used for employment purposes.

Example 2

You pay an allowance to your employee as follows:

• a flat-rate per month for travel inside the employment district
• a reasonable per-kilometre rate for employment-related travel outside the employment district

Since the flat-rate allowance does not cover any of the same use of the vehicle on which the reasonable per-kilometre allowance is based, the allowances are considered separately.

The reasonable per-kilometre allowance paid for travel outside the district is not included in income. The amount based on a flat-rate paid for travel inside the district is taxable, since it is not based only on the number of kilometres for which the vehicle is used in connection with the employment.

Only the total of the monthly flat-rate allowance has to be reported in box 14, "Employment income," and in the "Other Information" area under code 40 at the bottom of the employee's T4 slip. For more information, see T4 - Information for employers.