3. How the rate is calculated
Once you’ve set out the general terms of your mileage reimbursement scheme, it’s important to tell your employees how their compensation will be calculated.
Most companies use an approved per-kilometre rate from their national revenue agency, which takes into account all the costs involved in running a car – both fixed and variable. This is often called the standard mileage rate. In Canada, for example, the CRA rate is currently 61 cents per kilometre for the first 5,000 kilometres.
In the U.S. you can use what is known as the Fixed and Variable Rate Allowance (
Favr
), which provides a core monthly allowance supplemented by variable payments which are tailored to the actual costs in the driver’s local area (the price of fuel, the cost of repairs etc). Canada doesn’t have this clause in their tax laws, however, so you can’t offer this to your employees.
As an added bonus for your employees, you may wish to include sample calculations in your policy document. If you’re based in Canada, an example would be:
If you travel 1,000 kilometres in the (financial) year, multiply 1,000 by $0.61
So the total claim is $610
Remember: you can set your own mileage reimbursement rate if you wish. However if you decide to exceed the standard mileage rate, you should let your employees know that the payments will be classified as taxable income and thus will no longer be deductible. If you go below the approved rate, your employees may be able to claim the difference in their personal tax return. Your policy should provide instructions on how to do this.
Top Tip: If you’re using the standard mileage rate, think about those related expenses which aren’t included, such as parking tickets and the proposed congestion charges that will be rolled out in Vancouver in 2025. Give your employees clear and specific information on whether these costs are reimbursable and, if so, how to file the expenses.