Download guide A guide to corporate mileage reimbursement policies
- Corporate mileage reimbursement enables taxpayers to claim back money when using personal vehicles, but the system is complex. Here we explain how it works for both employees and business owners.
- Each country has its own standard mileage rate. We look at how the CRA calculates these benchmark figures.
- This article provides specific instructions on what employees and independent contractors must do to claim mileage reimbursement.
We’re hitting the road more than ever before. In Canada, each motorist drives an average of 15,200 km per year, and 11.5 million people commute to work, according to a survey conducted by National Resources Canada. As we slowly return to normality after the coronavirus pandemic and begin holding meetings and client visits again, it’s crucial that employers have a sound company mileage reimbursement policy in place.
Mileage reimbursement can benefit both employees and business owners. For employees, it provides compensation when they put their personal vehicle to business use. At the same time, it provides companies with tax-deductible benefits.
However, the rules on mileage reimbursement can be more complicated than other forms of business travel, which merely require employees to provide a receipt when filing their moving expenses. The sheer number of articles on the internet shows how challenging this topic can be.
In this guide, we will provide a definitive overview of what the system entails, so employers know exactly how to reimburse employees for mileage and their employees know how to claim properly when using their own vehicles for business driving.
Ok, so how does mileage reimbursement work?
In Canada, business expenses are usually tax-deductible. When taxpayers travel by plane, train or taxi, they can claim the money back and their employer can claim tax relief.
Corporate mileage reimbursement schemes extend this benefit to personal vehicles. When employees use their personal car, van or bike for day-to-day business activities, they can claim back the cost without paying income tax.
An important point to note here is that mileage reimbursement isn’t designed to cover commuting to and from work. It is designed to cover the journeys that employees make during work, specifically those with a business purpose (you can’t claim travel expenses for going to the gym or picking up food at lunchtime!)
The Internal Revenue Service (IRS), which regulates mileage reimbursement in the U.S., states that to qualify as a business journey, a trip must be 1) necessary and 2) for the purpose of doing business, meaning the travel carried out was for the company.
These can include a variety of trips, including:
- To go and see a client
- To attend a meeting
- To go and see another employee or manager
- To go and collect business supplies
- To run an errand on behalf of the company
The mileage reimbursement regulations also state that the majority of the journey has to be work-related. So if you stop off to pick up some office equipment on the way back from visiting your parents, that doesn’t count.
It’s important to stress the importance of good record-keeping at this point. In Canada, the CRA expects employees to maintain a mileage log, with four details:
- The date of each journey.
- The kilometres driven The destination fThe purpose.
The mileage log can be written down with pen or paper, or on a computer. The important thing is that they are written down.
Does an employer have to pay mileage?
In most instances…no. Most countries have refrained from making mileage reimbursement a formal requirement. The same goes in Canada: there are no official laws, but it is common practice to do so.
The majority of employers will pay mileage even though they don’t have to. If they choose not to reimburse an employee for using their private vehicle, or indeed for any business expenses, they risk losing staff and damaging their brand.
How is mileage reimbursement calculated?
When paying mileage reimbursements at the end of the year, an employer doesn’t need to work out the value of each journey or the amount the employee has spent. They can simply multiply each employee’s total number of kilometres by their country’s approved corporate mileage rate, which is also known as the business rate and most commonly as the standard mileage rate.
The standard mileage rate is set by the CRA in Canada. It provides an approved benchmark for tax-deductible reimbursement: in other words, a maximum amount that employers can pay out tax-free.
Employers can set their own figure if they so choose. But if they exceed the standard mileage rate, the reimbursement will count as regular wages and employees will lose their tax benefits (if they go below the rate, employees in many countries can deduct their difference when filing their tax return).
In Canada, the CRA business mileage rate for 2022 is as follows:
- 61 cents for every business kilometre driven for the first 5,000km and 55 cents per kilometre for every kilometre driven afterwards
Here are some examples of the optional standard mileage rates in other countries:
- US $0.56 per mile
- UK £0.45 per mile
- Germany €0.30 per km
- Belgium €0.35 per km
- Spain €0.19 per km
Some countries have a more complicated version of the standard mileage rate, which depends on the type of car and the distance travelled.
You may have noticed that the mileage reimbursement rate is generally higher than the cost of fuel (in Canada., motorists pay an average of around 0,07 cents a kilometre for their gas, less than an 8th of the CRA mileage rate). In fact, the rate is designed to include the total cost of maintaining a vehicle.
When an employee uses their car, they don’t simply pay for fuel. They’re also paying tax, insurance and other upkeep costs. Each trip they make accelerates the car’s wear and tear and accelerates the depreciation of its value.
When calculating the standard mileage rate, the revenue agencies take all these factors into account.
Does mileage reimbursement need to go through payroll?
If the mileage reimbursement falls within the approved rate then no, it does not need to pass payroll. If the reimbursement exceeds the standard mileage rate, however, then it is regarded as remuneration and the element of ‘profit’ comes into play.
What is the mileage rate for independent contractors?
With more and more people going freelance during the pandemic, this question is more relevant than ever. And the good news is that, in Canada, self-employed people can claim the same rate as payrolled staff.
As a contractor (or indeed subcontractor) you can claim for a variety of journeys providing they qualify as ordinary and necessary moving expenses. Examples include:
- Driving from your workplace to a job site
- Travel between two work sites
- Meeting clients and attending conferences
- Attending meetings away from your usual workplace
- Running errands for your business
- Purchasing supplies your business needs to operate
- Visiting customers.
Self-employed taxpayers can claim their mileage expenses on their tax return by working out the amount they’ve spent on gas, maintenance and repairs over the whole year, or by calculating how much of their overall driving is for work.
Ok, that’s all! We hope we’ve answered all your questions about mileage reimbursement and its many mysteries. Happy driving… and happy earning!
