Last week, the 6th Digital Transformation Trade Show took place at the Palais des congrès de Montréal.

We had the opportunity to discuss with the main actors of this change aimed at improving the productivity of organizations. At this fair, consultants and advisers in digital transformation were present as well as representatives of medium and large companies, organizations of the municipal sector, the health sector, etc…

We discussed Advataxes as a digital employee and volunteer expense reporting solution designed for the Canadian tax landscape:

GST/HST/QST Features

• Built to handle the exact method
• Automate GST/HST/QST recoverable on meal expenses excluding tips
• Automate GST/HST/QST recoverable on allowances
• Send an alert when 5000 KM has been reached
• NPOs & FIs: Store both GST/HST/QST payable & recoverable
• NPOs: automate different HST recovery rates for each province
• No tax code; no requirements for employees to be tax practitioners

Online Expense Report Tools

• IOS/Android App
• Distance calculator
• OCR
• Digital image attached to each expense
• Credit card transactions upload
• Up to 2 levels of approval
• Automatically covert 8 foreign currencies
• Department code, work order, cost center & project numbers can be added
• Accounting integration – CSV output to configure
• Encrypted transmission
• Data stored in a Canadian data center
• French or English at the employee level

The per-kilometer rate that is considered reasonable in 2023 is set to 68 cents in a province for the first 5,000 kilometer. This is a 11% increase in comparison to the rate set for the previous year which was 61 cents that has been implemented by both the Canada Revenue Agency and Revenu Quebec. This is a substantial increase from the KM rate of the year 2022 when we compare with other annual increases. For amounts after 5,000 kilometers driven, the rate is set to 62 cents. This rule is applicable both for GST/HST/QST purposes and for income tax purposes.

1- Example

So, lets take as an example a company where it is projected that on average their employees will be reimbursed the maximum rate in 2023 and these employees will drive 16,000 kilometers in relation to activities of that company.

The amount to be reimbursed to each employee would be $10,220 and is detailed as follows:

	KM projected in relation to employer activities	Reimbursement rate	Amount paid
First 5,000 KM	5,000 KM	68 cents	$ 3,400
After 5,000 KM	11,000 KM	62 cents	$ 6,820
Total	16,000 KM		$10,220

Assuming that this company incurred expenses exclusively in the course of commercial activities, and has one employee in British Columbia, one in Ontario and another one in Nova Scotia, the projected input tax credits on kilometer allowances in 2023 to these 3 employees would be about $3K or roughly 10% of all kilometer allowances paid.

	Employee A in BC	Employee B in ON	Employee C in NS	Total
Projected KM in 2023	16,000	16,000	16,000	48,000
Projected Allowance	$10,220	$10,220	$10,220	$30,660
Tax fraction	5/105	13/113	15/115
Input tax credits	$486.67	$1,175.75	$1,333.04	$2,995.46

2- The Territories

These rates are higher in the three territories (Yukon, Northwest Territories and Nunavut). The first 5,000 KM is set to a maximum of 72 cents and the rate for over 5,000 KM driven is set to a maximum of 66 cents.

3- What to do and what not to do

All daily trips should be recorded in support of kilometer allowances paid, so information to keep on record would be the date of the trip, the origin and the destination. You cannot reimburse the employee for expenses relating to the use of that vehicle. For instance, that company is not entitled to reimburse to these 3 employees gas or repair expenses for the use of their vehicles (there is however a very specific exception for insurance premium). If the company would also reimburse expenses for the use of their vehicles, it is expected that all ITCs claimed would be denied during the course of a tax audit, as all allowances and vehicle expenses would be deemed not reasonable.

Yet, if for instance, the employee in BC has to go to a meeting in Phoenix Arizona, gets on a plane and once at the Phoenix airport rents a car and incurs gas expenses, the reimbursement of these expenses will not deny the input tax credit claimed on business kilometer allowance in BC since these are not expenses relating to the use of that employee’s vehicle.

4- How to make employees’ life easier in complying with tax rules on KM allowances

There are ways to alleviate the burden that employees have inherited in managing the kilometer allowance provision of the Income Tax Act, the Québec Taxation Act, the Excise Tax Act and an Act respecting the Québec sales tax.

4.1 Distance calculator

Provide employees with a distance calculator, (see our distance calculator webpage) calculating the number of kilometers driven between the origin and the destination. The distance calculator can be used by entering two addresses. It can also be used by entering points of interest. For instance, an employee can write “Starbucks Abbotsford” and a selection of Starbucks in Abbotsford will appear for that employee to select. That employee can also write “hospital Surrey” and the address of the Surrey Memorial Hospital will appear. So, the days where the employee had to religiously write, before the start of any day trip, the kilometers shown on his dashboard and do the same at the end of his day trip, in order to get the total kilometers driven for business purposes, there are now alternative methods to it. The distance calculator will assist each employee in calculating the number of kilometers driven each day. The distance calculator is accessible both with the expense report software Advataxes web URL and the App.

4.2 Comment box

Another useful item, is to provide a comment box for all kilometer allowance expenses, so each employee can add, as the case may be, any comments regarding business day trips.

4.3 No tax codes

Making sure that employees don’t have to select a tax code, is another major way of making it easier to fill out expense reports. Employees who are by and large salesman, technicians and professionals are not sales tax practitioners, thus any requirements that they apply proper tax rules is a risky tax management structure. Advataxes is instead based on a matrix approach to calculate both GST/HST/QST paid and GST/HST/QST recoverable (see our page GST/HST/QST Parameters).

4.4 Fixed kilometer rate

To avoid clerical errors by selecting an erroneous kilometer rate, a drop down with a fixed kilometer rate for each employee where only the one that is applicable to that employee at a given point in the year is the one that is available.

5- Safeguard for not reimbursing 68 cents per kilometer for those exceeding the 5,000 km threshold

It is essential not to exceed the applicable threshold since these amounts will be deemed non reasonable. For instance, if no one is keeping track of how many kilometers an employee has incurred in a year where the employee still gets reimbursed 68 cents even though that employee exceeded 5,000 km of travel in 2023 in the course of an employment is problematic. It is expected that during an audit, tax claims will be denied.

In order to comply with the threshold rule, a warning informing that the 5,000 KM threshold for a given employee has been reached is sent by Advataxes, in order that the lower rate be chosen for a given employee.

6- Safeguard for controlling that no expenses regarding the use of an employee vehicle are reimbursed

As mentioned before, a company paying kilometer allowances to its employees can’t reimburse these same employees for expenses relating to their vehicle. In that respect the “search” and the “sort” tools can be used to investigate if ever vehicle expenses where also reimbursed to employees and if it is the case, rectify erroneous behaviors.

7- Conclusion

Both the Canada Revenue Agency and Revenu Quebec are granting, in 2023, a much higher kilometer allowance where input can be claimed.

Although this measure is a better financial opportunity it bears a greater financial risk in case of non compliance. So, organizations who are fully taking advantage of these 2023 KM rates should ascertain the following controls exist:

1) All business trips are substantiated (i.e. date, origin, destination…)

2) Expenses relating to the use of that vehicle are not reimbursed

3) To lower the rate per kilometer paid to each employee in a province from 68 cents to 62 cents once the 5,000 kilometers threshold has been reached in 2023 (from 72 cents to 66 cents in a territory).