21 October 2004 External T.I. 2004-0089071E5 - Northern Residents Deduction-Travel Benefit

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.

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

Position: Likely no, based on the limited facts provided.

Reasons: Where the employer does not pay additional compensation but simply re-characterizes or designates an amount of existing salary or wages, where the facts do not support that a portion of the existing salary or wages was originally intended to be in respect of travel expenses, the amount is not paid in respect of travel expenses for purposes of the deduction in subsection 110.7(1) of the Act.

2004-008907
XXXXXXXXXX Karen Power, CA
(613) 957-8953
October 21, 2004

Dear XXXXXXXXXX:

Re: Northern Residents Deduction - Travel Benefit

We are writing in reply to your letter of July 13, 2004, requesting our views regarding a proposal to provide employees with travel benefits through an offsetting reduction in salary. Specifically, you enquire whether such changes to employee contracts would be accepted by the Canada Revenue Agency "CRA" as resulting in travel benefits for purposes of claiming the northern residents deduction pursuant to section 110.7 of the Income Tax Act (the "Act").

Our Comments

Assurance as to the tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R5 dated May 17, 2002. We can, however, provide the following general comments.

Section 110.7 of 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 a 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 CRA 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 an amount of existing salary or wages, where the facts do not support that a portion of the existing salary or wages was originally intended to be in respect of travel expenses, in our view, the amount is not paid in respect of travel expenses for purposes of the deduction in subsection 110.7(1) of the Act. Based on the limited information provided, the changes you are proposing to your employment contracts appear to be a re-characterization of existing salary or wages.

Copies of Information Circulars are available from your local tax services office or on the Internet at the following site - http://www.cra-arc.gc.ca/formspubs/type/menu-e.html.

We trust that our comments are of assistance to you.

Yours truly,

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