Employee Mileage Reimbursement Policy: A CRA + IRS Compliant Template for 2026
If your team has people driving their own cars for work on both sides of the border — or you're a US company hiring in Canada, or a Canadian company with US-based staff — one mileage reimbursement policy has to satisfy two different tax authorities with two different rate schedules, two different retention periods, and two different mechanisms for keeping the reimbursement non-taxable. Get either one wrong and a "reimbursement" quietly turns into taxable wages, with payroll tax and penalty exposure attached.
Here's what CRA requires, what IRS requires, where they genuinely diverge, and how to write one policy that clears both.
What CRA requires for a non-taxable reimbursement
CRA's mechanism is the reasonable per-kilometre allowance: an allowance is non-taxable to the employee if it's based solely on business kilometres actually driven, at or below the prescribed rate, with no other basis (like a flat monthly amount) mixed in.
The 2026 CRA rate, announced by the Department of Finance on January 14, 2026:
Distance | Rate |
First 5,000 km | $0.73/km |
Each km after 5,000 | $0.67/km |
Northwest Territories, Yukon, Nunavut | +$0.04/km on both tiers |
To support the allowance, the underlying logbook needs the date, destination, purpose, and kilometres for each trip, plus odometer readings at the start and end of the year. CRA expects those records kept for six years from the date the return they support is filed.
What IRS requires for a non-taxable reimbursement
IRS uses a different mechanism entirely: the accountable plan. For a mileage reimbursement to stay off an employee's W-2 as taxable wages, the plan has to meet three conditions:
Business connection — the plan only reimburses actual business driving, not personal use
Substantiation within a reasonable time — typically a mileage log with date, destination, purpose, and miles; expense reports submitted within 60 days of the expense are treated as automatically timely
Return of excess — if the reimbursement paid out exceeds the substantiated business miles, the employee has to return the difference within a reasonable period
Get any of the three wrong and the entire reimbursement can be reclassified as wages on audit — triggering income tax, employer and employee payroll tax, and penalties, not just a disallowed deduction.
The 2026 IRS standard mileage rate changed mid-year, which is easy to miss if your policy was written in January:
Period | Rate |
January 1 – June 30, 2026 | 72.5¢/mile |
July 1 – December 31, 2026 | 76¢/mile |
IRS record retention is three years from the filing date — half of CRA's six.
Where CRA and IRS diverge (side by side)
CRA (Canada) | IRS (US) | |
Non-taxable mechanism | Reasonable per-km allowance, based solely on business km at/below the prescribed rate | Accountable plan: business connection + timely substantiation + return of excess |
2026 rate | $0.73/km first 5,000 km, $0.67/km after | 72.5¢/mile (Jan–Jun), 76¢/mile (Jul–Dec) — split rate this year |
Required log fields | Date, destination, purpose, km, year-start/end odometer | Date, purpose, destination, miles (or odometer), year-start/end odometer |
"Timely" standard | No named contemporaneous rule, but the log must support the claimed % | Weekly logging accepted as timely; 60-day submission is a safe harbor |
Record retention | 6 years from filing | 3 years from filing |
Shortcut method | 3-month sample logbook after one full 12-month base year (within 10% of base-year usage) | No equivalent shortcut for the standard mileage method in Publication 463 |
The practical trap: a policy written to satisfy one framework's minimum (say, IRS's 3-year retention) will under-comply if a Canadian employee or CRA review is ever in scope, since CRA wants twice as long. The safer default is to build to the stricter of the two on every line — 6-year retention, the fuller CRA field set, and IRS's accountable-plan documentation — and apply it everywhere, rather than maintaining two policy documents that inevitably drift out of sync.
Employee Mileage Reimbursement Policy: One policy that clears both
Set the log to the superset of required fields — date, destination, purpose, kilometres/miles, and running odometer, captured for every trip regardless of which country the employee is in
Apply the correct rate by location and date, including IRS's mid-year split — a policy that hardcodes one flat annual rate will misfire for any US mileage claimed after June 30, 2026
Retain records for 6 years everywhere, so you're never short for a CRA-side employee or review
Build in return-of-excess handling for the US side specifically — CRA's allowance model doesn't have this concept, but a policy covering both countries needs it to keep the IRS side accountable-plan compliant
Use one system of record, not per-employee spreadsheets — the more the log format varies person to person, the harder it is to show a consistent, enforced policy if either tax authority asks
Where manual policies break down
Reimbursement calculators like Motus and Cardata handle the CPM/FAVR math well, but they don't actively enforce the policy day to day — they don't flag a missing odometer reading, an expired license, or a log that's gone quiet for three weeks. That gap is where most reimbursement policies fail in practice: not the written policy, but the absence of anything checking that employees are actually following it. A hardware-free system that verifies against each employee's real odometer (rather than trusting a self-reported number) closes that gap without asking anyone to install fleet telematics hardware on a personal vehicle.
See how one policy, one app, and one dashboard cover both frameworks. Talk to Fuelshine about setting up CRA + IRS compliant mileage tracking for your team.
FAQ
Can one mileage reimbursement policy cover both Canadian and US employees?
Yes, as long as it's built to the stricter standard on each requirement — CRA's 6-year retention, CRA's full log-field set, and IRS's accountable-plan substantiation and return-of-excess rules — rather than picking whichever country's minimum is easiest to administer.
Is mileage reimbursement taxable?
Under CRA, a reasonable allowance based solely on business kilometres at or below the prescribed rate is generally non-taxable. Under IRS rules, reimbursement is non-taxable only if paid under a compliant accountable plan; reimbursements that fail the business-connection, substantiation, or return-of-excess tests can be reclassified as taxable wages. Confirm your specific setup with a tax professional.
What happens if our reimbursement plan isn't accountable-plan compliant under IRS rules?
The reimbursement can be reclassified as wages during an audit, which triggers income tax plus employer and employee payroll tax, along with potential penalties and interest — not just a lost deduction.
Do CRA and IRS use the same mileage rate?
No. For 2026, CRA is $0.73/km for the first 5,000 km and $0.67/km after (Canadian dollars, per kilometre). IRS is 72.5¢/mile for the first half of 2026 and 76¢/mile for the second half (US dollars, per mile) — different currencies, different units, and IRS changed rates mid-year.
This post is informational and not tax or legal advice — confirm your specific policy with a tax professional or employment counsel in each jurisdiction.
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