Employee Expense Reimbursement in Canada: Allowance vs Reimbursement

An allowance and a reimbursement are not the same thing in Canadian tax law. An allowance is included in the employee's income by default under paragraph 6(1)(b), with only narrow exceptions. A reimbursement of a substantiated business expense generally is not income at all. Most expense policies use the two words interchangeably, and that is where the trouble starts.

The 60-second version

Allowance: a predetermined sum paid without requiring the employee to account for how it was spent. Taxable under paragraph 6(1)(b) unless it fits a listed exception.[1]
Reimbursement: repayment of a specific amount the employee actually spent and substantiated. Not a benefit, so no exception is needed.
The travel allowance exception has a geography test. It applies only to travel away from the municipality and metropolitan area of the establishment where the employee ordinarily worked or reported.[1]
You recover GST/HST differently for each. Section 175 of the Excise Tax Act covers reimbursements; section 174 covers allowances and imposes its own conditions.[2][3]
Code the expense when you reimburse it, not at year end - meals need the 50% treatment and equipment needs a capital cost allowance class.

The distinction that drives everything else

An allowance is a predetermined amount paid for a purpose, where the recipient does not have to account for how it was actually spent and keeps any excess. A reimbursement is a repayment of a specific outlay the employee made and supported with documentation.

Paragraph 6(1)(b) requires an employee to include in income all amounts received in the year as an allowance for personal or living expenses or as an allowance for any other purpose, subject to a closed list of exceptions.[1] "Any other purpose" is deliberately broad. The default is inclusion.

A reimbursement does not need an exception, because reimbursing an employee for money they laid out on the employer's behalf does not confer anything on them. They are square, not better off.

This is why the same $500 can be tax-free or fully taxable depending only on how the policy is written.

The exceptions that actually matter

Of the list in paragraph 6(1)(b), three are relevant to an ordinary business.

Subparagraph 6(1)(b)(v) exempts reasonable allowances for travel expenses received by an employee employed in connection with the selling of property or negotiating of contracts for the employer.[1] A sales role gets wider latitude, and notably is not subject to the geography restriction below.

Subparagraph 6(1)(b)(vii) exempts reasonable allowances for travel expenses - other than allowances for the use of a motor vehicle - received by a non-selling employee for travelling away from (A) the municipality where the employer's establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located, and (B) the metropolitan area, if there is one, where that establishment was located.[1]

Read that carefully, because it is the trap. The exception requires the employee to be travelling away from both the municipality and the metropolitan area of their base. A daily meal allowance paid to an employee working across town does not qualify. It is an allowance for personal or living expenses, and paragraph 6(1)(b) puts it in income.

Subparagraph 6(1)(b)(vii.1) exempts reasonable allowances for the use of a motor vehicle received by a non-selling employee for travelling in the performance of their duties.[1] Note it has no geography test - local driving is fine - but "reasonable" for this purpose means based solely on kilometres driven. The mechanics, the prescribed rate, and why a flat monthly car allowance ruins the treatment are covered in our piece on vehicle expenses and the CRA mileage log.[5]

Recovering the GST/HST, which is two different provisions

Both routes let a registrant recover tax, and neither is automatic.

Reimbursements - section 175. Where an employee acquires property or a service for consumption or use in relation to the employer's activities, pays the tax, and is reimbursed, the employer is deemed to have received the supply and to have paid tax equal to A x B. A is the tax the employee paid. B is the lesser of the percentage of the employee's cost that is reimbursed and the extent to which the property or service was acquired for use in the employer's activities.[3]

The "lesser of" matters. Reimburse 50% of a cost that was 100% business and you recover half the tax. Reimburse 100% of something that was 60% business and you recover 60%.

Allowances - section 174. The conditions are stricter. The allowance must be for supplies all or substantially all of which are taxable supplies, other than zero-rated supplies, of property or services acquired in Canada, or for the use in Canada of a motor vehicle. The amount must be deductible to the payer for income tax purposes. And where subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) would apply, the payer must have considered, at the time the allowance was paid, that it would be a reasonable allowance - and it must be reasonable for the payer to have so considered.[2]

That last condition is a two-part test, subjective and objective. Believing your allowance was reasonable is not enough if no reasonable person in your position would have. It is also the reason to document how a rate was set, at the time you set it.

The "acquired in Canada" requirement is easy to overlook: an allowance covering meals and hotels on a US trip does not support an input tax credit under section 174, because no Canadian tax was paid on those supplies.

What an expense policy should actually contain

Most small business expense policies are one paragraph and a shrug. A workable one is about a page, and covers ten things.

Which method applies to what. State explicitly where you pay allowances and where you reimburse. Do not use the words loosely.
Pre-approval thresholds. A dollar figure above which approval is required before the spend, not after.
The per-kilometre rate and a note that it is based solely on distance, with a reference to the source you take it from and how often you review it.
Receipt requirements. Itemised receipt, not just the card slip - the card slip proves payment, the itemised receipt proves what was bought, and the 50% meals coding depends on knowing which it was.
A submission deadline. Something like 30 days. Late claims are the main cause of a fiscal year closing on unrecorded expenses.
Coding at submission. Meals to a meals account, equipment to its capital cost allowance class, travel to travel. Coding at year end from a pile of receipts is how Class 50 computer hardware ends up in Class 8 at 20%.
What is never reimbursed - traffic fines, personal entertainment, spouse travel absent a business role.
Foreign currency. Which rate, from which source, on which date. Pick one and keep it.
Personal credit cards. For a shareholder-employee this interacts with the shareholder loan account. For everyone else it is an ordinary reimbursement.
Retention. Where submitted documentation is stored and for how long, consistent with your six-year record-keeping obligations.

The owner-manager, who is also an employee

If you own the corporation and work in it, you are an employee of it, and these rules apply to you exactly as they apply to anyone on payroll. That is counterintuitive to most owners, who experience their own expense claims as moving their own money around.

Pay yourself a flat $600 a month "car allowance" and it is employment income, on your T4, whatever you call it internally. Pay yourself a per-kilometre allowance supported by a logbook, and it is not. The paperwork is the entire difference.

The same applies to travel allowances: an owner-manager based at the company's only establishment who pays themselves a daily meal allowance for working in that same city is receiving taxable income, because subparagraph 6(1)(b)(vii) requires travel away from that municipality and metropolitan area.[1]

The five failures that show up in review

Calling a reimbursement an allowance. If the employee substantiates the amount and is repaid exactly that, it is a reimbursement - and describing it as an allowance in your records invites the paragraph 6(1)(b) analysis you did not need.
Local travel allowances. Untaxed, because nobody read the geography condition in (vii).
Mixed car allowances. A per-kilometre rate topped up with a flat monthly amount, which spoils the treatment of both.[5]
Full ITCs on meal reimbursements. The section 67.1 restriction flows through to GST/HST, so half comes back. See our article on business travel expenses.
No contemporaneous rate-setting record. Section 174 requires that it was reasonable for you to have considered the allowance reasonable. A memo written when the rate was set answers that. A recollection three years later does not.[2]

Frequently asked questions

What is the difference between an allowance and a reimbursement?

An allowance is a predetermined amount paid without requiring the employee to account for how it was spent, and the employee keeps any excess. A reimbursement repays a specific amount the employee actually spent and substantiated. Allowances are included in income under paragraph 6(1)(b) unless a listed exception applies; reimbursements of business expenses generally are not income at all.

Is a meal allowance to an employee taxable in Canada?

It depends on where they were. Subparagraph 6(1)(b)(vii) exempts reasonable non-vehicle travel allowances only where the employee was travelling away from both the municipality and the metropolitan area of the establishment where they ordinarily worked or reported. A meal allowance for working locally does not meet that condition and is taxable.

Can I claim the GST/HST on expenses I reimburse to employees?

Yes, under section 175 of the Excise Tax Act. The employer is deemed to have received the supply and paid tax equal to the tax the employee paid multiplied by the lesser of the percentage of the cost reimbursed and the extent to which it was acquired for use in the employer's activities.

What conditions apply to claiming GST/HST on an allowance?

Section 174 requires that the allowance be for supplies all or substantially all of which are taxable, other than zero-rated, and acquired in Canada, or for the use in Canada of a motor vehicle; that the amount be deductible for income tax purposes; and that the payer both considered the allowance reasonable when it was paid and that it was reasonable for them to have so considered.

Do these rules apply to me if I own the company?

Yes. An owner who works in their corporation is an employee of it, and paragraph 6(1)(b) applies identically. A flat monthly car allowance paid to yourself is employment income reportable on your T4; a per-kilometre allowance supported by a logbook is not.

How long do employees have to submit expense claims?

There is no statutory deadline, so it is a policy choice - 30 days is a common and workable one. The practical reason to set one is that late claims are the main cause of a fiscal year closing with unrecorded expenses, which understates deductions and complicates the GST/HST recovery for that period.

Sources cited in this article

Income Tax Act - section 6
Paragraph 6(1)(b) and its exceptions, including subparagraph (v) for selling employees, (vii) for non-vehicle travel allowances with the municipality and metropolitan area condition, and (vii.1) for motor vehicle allowances.
https://laws-lois.justice.gc.ca/eng/acts/i-3.3/section-6.html
Excise Tax Act - section 174
The deemed-supply rule for allowances, including the all-or-substantially-all taxable supplies test, the acquired-in-Canada requirement, and the two-part reasonableness condition.
https://laws-lois.justice.gc.ca/eng/acts/e-15/section-174.html
Excise Tax Act - section 175
The deemed-supply rule for reimbursements and the A x B formula, where B is the lesser of the percentage reimbursed and the extent of use in the employer's activities.
https://laws-lois.justice.gc.ca/eng/acts/e-15/section-175.html
CRA - T4130, Employers' Guide, Taxable Benefits and Allowances
CRA's administrative guidance on which allowances and reimbursements are taxable and how they are reported on a T4.
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130.html
CRA - Automobile and motor vehicle allowances
When a motor vehicle allowance is reasonable, why it must be based solely on kilometres driven, and the treatment of combined flat and per-kilometre allowances.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-motor-vehicle-allowances.html
CRA - Benefits and allowances chart
CRA's summary chart of whether a given benefit or allowance is taxable, subject to CPP and EI, and where it is reported.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/benefits-allowances-chart.html
CRA - RC4022, General Information for GST/HST Registrants
Input tax credit rules generally, including documentary requirements for claiming credits on employee expenses.
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022.html
CRA - What are records, who has to keep them, and why it is important
What counts as supporting documentation for an expense claim, and the obligation to keep it.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/keeping-records/what-records-who-keep-them.html

All sources verified 2026-08-13. Spotted a link that has moved? Email support@mapleexpense.com and we will correct it.