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: 1. Is the lowest return airfare computed in column 5 of Step 2 of Form T2222, based on the entire number of household members whether or not all members actually went on the trip for the purposes of paragraph 7304(2)(c) of the ITR?
2. How does CRA determine which is the nearest designated city for the purposes of paragraph 7304(2)(c) of the ITR?
Position: 1. No
2. Question of fact - determined on case-by-case basis
Reasons: 1. The lowest return airfare is determined for the purposes of 7304(2)(c) only for trips actually taken having regard for any other restrictions or limitations imposed under paragraph 110.7(1)(a) of the ITA . It does not matter what mode of transportation is actually used, but a trip must have been made by the individual household member for it to be included in the amount disclosed at column 5 of step 2 of Form T2222.
2. It is a question of fact, having regard for the circumstances as they existed at the time of the trip, which designated city is the nearest designated city for the purposes of paragraph 7304(2)(c) of the ITR.
2005-013606
XXXXXXXXXX Tim Fitzgerald
(519) 973-7999 ext. 6509
August 2, 2005
Dear XXXXXXXXXX:
Re: Northern Resident's Deduction - Travel Expenses -
Paragraph 110.7(1)(a) - Income Tax Act (ITA)
This is further to your letter of June 8, 2005 addressed to Canada Revenue Agency (CRA), Income Tax Rulings Directorate (ITRD) and your letter of March 18, 2005, addressed to CRA Processing Review Section of St. John's Tax Services Office (TSO).
We understand that all of the issues raised in your letter of March 18, 2005 were addressed by St. John's TSO with the exception of your question pertaining to the determination of the "nearest designated city" as it relates to the northern travel deduction at paragraph 7304(2)(c) of the Income Tax Regulations (ITR), for its role in the determination of the "prescribed amount" under clause 110.7(1)(i)(A) of the Income Tax Act (ITA).
Some of the issues raised in your letter of March 18, 2005, relate to federal tax policy, such as your suggestion to revise the ITR to include prescribed maximum airfare amounts to add clarity for the purposes of filling out Form T2222. The CRA's role is to administer current tax laws and to provide information about how current tax laws are interpreted and applied. The Department of Finance Canada is responsible for federal tax policy and legislation. The Minister of Finance and Parliament decide on tax amounts and how to calculate them.
The questions raised in your letters that we shall address, are as follows:
1. Is the value in Column 5 (Lowest return airfare), of Step 2 (List your trips) of CRA Form T2222 (Northern Residents Deductions) based on the entire family or is it limited to the number of household members who actually traveled on a given trip?
2. How does CRA determine the "nearest designated city" for the purposes of administering paragraph 7304(2)(c) of the ITR and clause 110.7(1)(i)(A) of the ITA?
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.
As indicated in CRA's 2004 Guide T4039, all places in Labrador, including Belle Isle, are in the prescribed northern zone.
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.
The deduction is only allowed to the extent that the amount received from the arm's length employer (such as an allowance and/or lump sum reimbursement of travel expenses) or the value of the benefit from the arm's length employer (such as the cost of an airline ticket), as the case may be, does not exceed a prescribed amount in respect of the taxpayer for the period in the year in which the taxpayer resided in the particular area (that being a prescribed northern zone or intermediate zone), and only to the extent that the amount is included and not otherwise deducted in computing the taxpayer's income for the year, or any other taxation year, and to the extent that the amount is not included in determining an amount deducted under subsection 118.2(1) (medical expense credit) for the year, or any other taxation year.
The prescribed amount for the purposes of the northern travel deduction is determined under Section 7304 of the ITR and it reads as follows:
7304 ITR:
(1) In this section, "member of the taxpayer's household" includes the taxpayer;
"designated city" means St. John's, Halifax, Moncton, Quebec City, Montreal, Ottawa, Toronto, North Bay, Winnipeg, Saskatoon, Calgary, Edmonton and Vancouver.
(2) For the purposes of this section, the trip cost to a taxpayer in respect of a trip made by an individual who, at the time the trip was made, was a member of the taxpayer's household is the least of:
(a) the aggregate of
(i) the value of travel assistance, if any, provided by the taxpayer's employer in respect of travelling expenses for the trip, and
(ii) the amount, if any, received by the taxpayer from his employer in respect of travelling expenses for the trip,
(b) the aggregate of
(i) the value of travel assistance, if any, provided by the taxpayer's employer in respect of travelling expenses for the trip, and
(ii) travelling expenses incurred by the taxpayer for the trip, and
(c) the lowest return airfare ordinarily available, at the time the trip was made, to the individual for flights between the place in which the individual resided immediately before the trip, or the airport nearest thereto, and the designated city that is nearest to that place.
(3) For the purposes of subsection (4), the "period travel cost" to a taxpayer for a period in a taxation year, in respect of an individual who was a member of the taxpayer's household at any time during the period, is the total of the trip costs to the taxpayer in respect of all trips that were made by the individual at a time when the individual was a member of the taxpayer's household where the trips may reasonably be considered to relate to the period.
(4) For the purposes of clause 110.7(1)(a)(i)(A) of the Act, the prescribed amount in respect of a taxpayer for a period in a taxation year is the lesser of
(a) the total of
(i) the value of travel assistance, if any, provided in the period by the taxpayer's employer in respect of travelling expenses for trips, each of which was made by an individual who, at the time the trip was made, was a member of the taxpayer's household, where the trips may reasonably be considered to relate to the period; and
(ii) the amount, if any, received in the period by the taxpayer from the taxpayer's employer in respect of travelling expenses for trips, each of which was made by an individual who, at the time the trip was made, was a member of the taxpayer's household, where the trips may reasonably be considered to relate to the period; and
(b) the total of all the period travel costs to the taxpayer for the period in respect of all individuals who were members of the taxpayer's household at any time in the period.
Your first question pertains to the "lowest return airfare" amount to be included in column 5 of Step 2 -List Your Trips, of Form T2222, which is determined in accordance with paragraph 7304(2)(c) of the ITR, which in conjunction with paragraphs (a), and (b) of subsection 7304(2) is used to determine the trip cost. In dealing with this determination one is guided with the understanding that a claim for deduction under 110.7(1)(a) of the ITA can only be made to offset amounts included in the employee's income as taxable travel benefits if those amounts were used to pay for, or represented the value of, actual travel expenses incurred by the employee or the employer. In other words, there can be no deduction if there are no travel expenses. While this may appear to be self-evident, it is a necessary condition to be met before the deduction can be claimed. Therefore, in determining the value to be placed in Column 5, of Step 2 of
Form T2222, the amount computed should be based on actual trips taken by each household member during the taxation year, having regard to any other restrictions or limitations imposed under paragraph 110.7(1)(a) of the ITA.
Now that your first question regarding what trips to include in the determination to be made under paragraph 7304(2)(c) of the ITR has been addressed, we move on to your second question dealing with the measurement of distance between two points and the use of the term "nearest designated city" in that paragraph of the Regulations as it relates to the determination of the "lowest return airfare". The total amount to be determined for Column 5, Step 2 of Form T2222 is the sum of the lowest return airfare to the nearest designated city for each eligible trip. The objective is to determine a quantum measure using the lowest return airfare ordinarily available at the time the trip was made, to the nearest designated city as a benchmark for each traveller taking the trip. The household member may have taken a different mode of transportation for their trip, but the amount determined at subparagraph 7304(2)(c) is still be based on the lowest return airfare to the nearest designated airport.
In your letter of March 18, 2005 you explain that there are principally 3 municipal airports available in Labrador, which you identify as being situated in Goose Bay (local airport G), Churchill Falls (local airport C) and Wabush (local airport W). You indicate in your letter that the only direct flight from local airport C to a "designated city" (as identified in subsection 7304(2) of the ITR) is Quebec City (designated city Q). Departing G, the only direct flights destined to designated cities are those flights to St. John's (designated city J) and Halifax (designated city H). You also indicate that there are no direct flights to any designated city departing from local airport C. Therefore, as we understand the current situation, a traveller departing from local airport C destined to designated airports J or H would first have to fly to local airport G. An individual departing local airport C to reach designated city Q would first have to fly to local airport W. As we understand it, there are no direct flights departing any airport in Labrador that fly direct to Moncton, New Brunswick (designated city M).
From our perspective one must first determine which local airport is nearest the place where the individual household member resided immediately before the trip. In your situation, this airport would be W, C or G. Once this local airport has been identified, it must then be determined which designated city is nearest that local airport.
In making these determinations we are guided by Federal Court of Appeal decision - 95 DTC 5477 (FCA) Giannakopoulos v The Queen. The facts in that case were such that the taxpayer had been employed at one location but had accepted a new position with her employer that required her to work at a different location. In order to be closer to her new work location, she moved. Using the odometer in her car, the taxpayer calculated that her new residence was 44 kilometres closer to her new work location. She claimed a deduction for moving expenses under subsection 62(1) of the ITA. The deduction was disallowed on the basis that, measured in a straight line (as the crow flies), her new residence was only 36 km (i.e. less than 40 km) closer to her new workplace than was her former residence. The Tax Court confirmed the reassessment but ultimately, the Federal Court of Appeal reversed the Tax Court's decision. In his closing remarks Federal Court of Appeal judge Marceau said:
"[I]n my introductory remarks, I spoke of a general problem regarding interpretation of the word "distance" in legislative enactments. In common parlance, the word itself, or its equivalent in French, has to be interpreted in relation to the context in which it is used. The "distance" between two steeples in a city or between Ottawa and Paris could not be understood as meaning the same thing as the "distance" between two runners in a marathon. I am of the view that there is no reason to do otherwise when the word is used in the body of a legislative enactment. In my opinion, by applying the straight line rule to the calculation of the distance referred to in subsection 62(1) of the Act, the Tax Court of Canada has interpreted the word without regard to the context and, in so doing, has committed an error of law which must be reversed."
In our view, the airport nearest the place were an individual resides immediately before the trip is taken, would be that one reachable by means of public travel such as roads, highways, railways, ferries, etc. using the most reasonably direct route. At any given time, the nearest airport can change if circumstances change, such as a forest fire that causes the closing of an airport or a road to the otherwise nearest airport.
Once the nearest airport is determined it must then be determined which designated city is closest to that airport. Suppose that immediately before the trip is taken, the airport nearest the place where an individual resides is local airport C. Suppose further that at the time there are no flights offered at any hour, which are direct from C to any designated city. Suppose also that Airport G offers flights direct to designated cities H and J. To determine which designated city, H or J is nearest to C, for the purposes of subsection 7304(2)(c) of the ITR, it would be necessary to include the flight distance from local airport C to G plus the flight distance from G to designated city J or designated city H. In other words, if at the time of the trip, there are no flights available that fly direct from C to H or direct from C to J, there stands no reason to make such comparison since neither of these routes existed or were realistically available to the traveller. However, if an airline were to begin offering flights direct from C to H, this would impact on the comparison in determining which designated city is ultimately nearest C. The point is that the analysis must be made having regard for the circumstances as they existed at the time of the trip.
Having no regard to circumstances as they existed at the time the trip was made can yield absurd results. For example, you indicated in your letter that the only direct flight out of local airport W is to designated city Q. If this is so, then we understand that W has no direct flight to M; another designated city. If M were actually nearer to W as-the-crow-flies than designated city Q, it would be absurd to conclude that the nearest designated city from W is M, for the purposes of applying subsection 7304(2)(c) if no such flight existed or were available to the traveller at that time. The reason, of course is that in order to get to M by air, one would first have to fly to designated city Q. There may be instances where flexibility is warranted but these examples illustrate why the determination of the "nearest designated city" is a question of fact that can only be determined on a case-by-case basis, after a review of all the relevant facts.
We trust these comments are helpful. If you require further assistance, please contact the Client Assistance Division of the St. John's Tax Services Office.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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