7 October 2003 External T.I. 2003-0034225 - northern residents deduction

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Is a prospective re-characterization of an existing salary an acceptable method to calculate the amount of northern travel benefit reported on employee T4 slips for purposes of claiming the northern residents deduction?

Position: It depends.

Reasons: Acceptable where the facts support that part of an employee's hourly wage or a specified percentage of salary was originally intended to be compensation in respect of travel expenses (e.g. where the employment contract provides that a portion of the hourly wage/salary is compensation in respect of travel expenses).

		2003-003422
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
October 7, 2003

Dear XXXXXXXXXX:

Re: Northern Residents Deduction - Travel Benefit

We are writing in reply to your letter of August 6, 2003, requesting our comments on whether the method the XXXXXXXXXX has chosen to calculate the amount of northern travel benefit reported on employee T4 slips is acceptable to the Canada Customs and Revenue Agency ("CCRA").

Our Comments

Section 110.7 of the Income Tax Act (the "Act") provides, in computing an individual's taxable income for a taxation year, a special deduction in respect of certain travel benefits and living costs where the individual resides, throughout a period of at least 6 consecutive months commencing or ending in the year, in a "prescribed northern zone" or a "prescribed intermediate zone" as defined in section 7303.1 of the Income Tax Regulations. Generally, the deduction in respect of employee travel benefits provided in paragraph 110.7(1)(a) of the Act, offsets the income inclusion in respect of benefits provided by an employer to an employee or the employee's family with respect to trips made for the purpose of obtaining necessary medical services not available locally or with respect to traveling expenses in connection with not more than two other trips per year.

Paragraph 110.7(1)(a) of the Act refers, in part, to "an amount received, or the value of the benefit received or enjoyed, in the year by the taxpayer... in respect of travel expenses incurred by the taxpayer..." In our view, for purposes of paragraph 110.7(1)(a) of the Act, there must be a connection between the actual traveling expenses incurred by a taxpayer or a member of the taxpayer's household and the amounts paid by the taxpayer's employer to defray those costs, in order for the amounts to be "...in respect of travel expenses incurred by the taxpayer...". Generally such amounts are paid by an employer by reimbursement after the trip, however, the CCRA has accepted that an employer can pay a reasonable travel allowance before a trip, such as a reasonable per hour or annual premium provided the details of such an employee benefit are specified in an employment contract. However, where the employer does not pay additional compensation but simply re-characterizes or designates existing wages or salary, where the facts do not support that a portion of the existing wages or salary was originally intended to be in respect of travel expenses, in our view, the amount is not paid in respect of travel expenses and consequently should not be entered under code 32 in the other information area of an employee's T4 slip.

We trust our comments will be of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 2 -