Blog · July 2, 2026

Employee allowance or self-employed deduction: the two Canadian regimes

A T2200 employee and a T2125 sole proprietor account for the same driving in different ways. The two systems side by side, with one worked example.

Two people drive the same 12,000 work kilometres in a year. One is an employee of a landscaping company. The other runs her own landscaping business. Their logbooks can look identical. Their tax treatment does not. Here are the two Canadian regimes side by side.

Regime one: the employee

An employee who uses a personal car for work has two possible outcomes.

A reasonable allowance. The employer pays a per-kilometre amount based on kilometres actually driven for work, at or below the CRA’s published rate (73¢ for the first 5,000 km and 67¢ after, in 2026). That allowance is not taxable. It does not appear as income, and the employee does not deduct anything. The employee’s log exists to justify the kilometres claimed from the employer, and the employer keeps it in case the CRA asks whether the allowance was reasonable.

No allowance, or an unreasonable one. If the employer pays nothing, pays a flat amount unrelated to kilometres, or pays a rate the CRA would not consider reasonable, the employee may be able to deduct vehicle expenses. The conditions are that the employee was normally required to work away from the employer’s place of business, was required to pay their own vehicle costs, and has a signed T2200 from the employer saying so. The deduction is then the work-use share of actual expenses, the same method the self-employed use, claimed on line 22900 of the personal return. The allowance rate never enters it.

For most employees the first case applies, and the per-kilometre rate is the whole story.

Regime two: the self-employed

A sole proprietor does not receive an allowance from anyone. She reports business income on form T2125 and deducts the costs of earning it, including the business-use share of her vehicle.

The method is: add up the actual costs of running the vehicle for the year, work out the business-use percentage from the logbook and the odometer, and multiply. The CRA’s list of eligible costs includes fuel, insurance, licence and registration, maintenance and repairs, interest on a loan to buy the vehicle, leasing costs, and capital cost allowance (depreciation) if she owns it. Parking for business trips and supplementary business insurance are deductible in full, not prorated.

The per-kilometre rate does not enter the calculation. It is not a deduction for the self-employed. It may be a useful benchmark, and some people use it to estimate, but the line on T2125 is built from receipts and a percentage.

The worked example

Both drivers log 12,000 work kilometres in 2026. The self-employed driver’s odometer shows 30,000 km for the year, so her business use is 40%.

The employee. Her employer reimburses at the CRA rate.

5,000 km × 0.73 = $3,650
7,000 km × 0.67 = $4,690
Allowance received: $8,340, tax-free

No deduction, no T2200, no receipts beyond the log. If the employer paid 60¢ flat instead, she would receive $7,200, still tax-free because it is below the published rate, and she could not deduct the difference.

The sole proprietor. Her actual vehicle costs for the year:

Fuel: $3,600
Insurance: $1,500
Maintenance and repairs: $900
Licence and registration: $150
Loan interest: $1,200
Capital cost allowance: $2,400
Subtotal: $9,750

Business-use share: $9,750 × 40% = $3,900. Add $300 of parking at client sites, deductible in full. Her vehicle deduction is $4,200.

The two figures, $8,340 and $4,200, are not comparable as “better” or “worse.” The allowance is cash the employee receives. The deduction reduces the income on which the proprietor pays tax; at a 35% marginal rate it saves her about $1,470. Different things, from the same log.

What each regime demands from the log

The employee needs business kilometres, by date and destination, with a purpose. The employer may also want the odometer readings, but the business-use percentage is not the point; the count of kilometres is.

The sole proprietor needs the same trip records plus the total kilometres for the year, because without the total there is no percentage. That makes the January 1 and December 31 odometer readings essential rather than nice to have. She also needs every vehicle receipt for the year, since the deduction is a share of those receipts. Both keep the log and receipts for six years from the end of the tax year.

Common mistakes

Employees sometimes try to deduct vehicle expenses on top of a reasonable allowance. They cannot. The allowance is the compensation.

Self-employed people sometimes multiply kilometres by the CRA rate and put that on T2125. That is not the method, and it can be higher or lower than the actual-expense figure. An accountant will redo it.

Both groups sometimes treat the drive from home to a regular workplace as business. It is commuting, and it is personal. Trips between workplaces, or from home to a client when home is the place of business, are the ones that count.

If you are both

Plenty of people are an employee by day and a sole proprietor on the side, using the same car. The log has to separate employment driving from business driving from personal driving, because the first goes to the employer and the second goes on T2125. A client or project tag on each work trip, or separate purpose categories, keeps the two from blurring.

Odie lets each work trip carry a client or project tag and reports per-client totals in the year PDF and CSV. It also offers a business-use percentage method, computed from logged kilometres against odometer readings or set by hand, so the same log can show an allowance estimate or a share of actual expenses depending on which regime applies.

Sources

Written by the Odie team. Not tax advice; your accountant knows your situation.