17 March 2008 External T.I. 2007-0239391E5 - Northern Travel 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.

Principal Issues: How does CRA determine which is the nearest designated city for the purposes of paragraph 7304(2)(c) of the Act?

Position: Explanation provided. However, it is a question of fact, having regard for the circumstances as they existed at the particular time of the trip, which designated city is the nearest designated city for the purposes of paragraph 7304(2)(c) of the Regulations.

Reasons: The law.

XXXXXXXXXX                                            Michael Cooke
                                                      2007-023939
March 17, 2008

Dear XXXXXXXXXX :

Re: Travel Expenses - Northern Resident's Deduction

This is further to your electronic correspondence of June 5, 2007 wherein you inquired about the determination of the "nearest designated city" as it relates to your deduction for travel expenses under subsection 110.7(1) of the Income Tax Act (the "Act"). You were living and working in Churchill Falls, Labrador at the relevant time.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following comments.

In computing an individual's taxable income for a taxation year, section 110.7 of the Act provides 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". Section 7303.1 of the Income Tax Regulations (the "Regulations") defines these zones, but as indicated in the Canada Revenue Agency's ("CRA") Guide T4039, all places in Labrador are in the prescribed northern zone.

Generally, the deduction in respect of employee travel expenses 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 subject to certain limitations. One of those limitations is that the cost of an otherwise deductible trip cannot exceed a "prescribed amount".

The "prescribed amount" for these purposes is determined under subsection 7304(2) of the Regulations and is the least of three amounts, the third of which requires the determination of the nearest "designated city" (as defined in subsection 7304(1) of the Regulations) and reads as follows:

"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".

The lowest return airfare ordinarily available at the time of the trip means the lowest return airfare for a regularly scheduled commercial flight on the date that the travel began from the airport closest to the individual's place of residence in the prescribed northern zone or prescribed intermediate zone, as the case may be, to the nearest designated city (even if the individual did not actually travel by air or to that particular designated city).

In order to determine which designated city is used for the calculation one must first determine which local airport is nearest to the individual's place of residence in the prescribed northern zone or prescribed intermediate zone, as the case may be, immediately before the trip. In our view, the nearest airport would be the one that is 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 a road to the otherwise nearest airport or the particular airport.

You have asked whether Moncton or St. John's (each being a designated city) would be the nearest designated city to Churchill Falls at the particular relevant time. You indicated that in order for you to travel to Moncton at the particular relevant time you had to fly from Churchill Falls to Goose Bay, from Goose Bay to Halifax and then from Halifax to Moncton. For you to travel to St. John's, you would have had to fly from Churchill Falls to Goose Bay, from Goose Bay to Deer Lake and then from Deer Lake to St. John's.

While Moncton is closer to Churchill Falls (as-the-crow-flies) than St. John's, one cannot automatically conclude that Moncton is the nearest designated city to Churchill Falls at the particular time the trip was made. If no direct flights were available from Churchill Falls to any designated city at the particular time, it would be necessary to include the flight distance from Churchill Falls plus the flight distance to any other airport to ultimately arrive at the closest designated city.

While the determination of the nearest designated city remains a question of fact, based on the flight information you have provided to us, the total flight distance from Churchill Falls to St. John's (via Goose Bay and Deer Lake) appears to be less than the total flight distance from Churchill Falls to Moncton (via Goose Bay and Halifax) or even from Churchill Falls to Halifax (via Goose Bay).

If you require further assistance on this matter, you should contact the Client Assistance Division of the St. John's Tax Services Office by letter, providing them with the specific details of your particular situation including the dates you (or your family members) actually travelled.

We trust that these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch