14 December 2023 Internal T.I. 2023-0966971I7 - Subparagraph 110(1)(f)(v) 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: Whether a deduction under paragraph 110(1)(f)(v) would be available to a Canadian Forces member in various scenarios.

Position: See analysis.

Reasons: The law.

										December 14, 2023

XXXXXXXXXX									HEADQUARTERS
										Income Tax Rulings Directorate
										Judy Ho

										2023-096697	

Subject – Deduction under paragraph 110(1)(f)(v) by the Canadian Armed Forces (“CAF”)

This is in reply to your memorandum of March 10, 2023 regarding the application of paragraph 110(1)(f)(v) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), to various scenarios.

Unless otherwise stated, all references to a statute are to the Act, and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.

You asked us to clarify the meaning of the words “employment income earned” in paragraph 110(1)(f)(v). Specifically, when is the income considered “earned”? You also noted that the RC4120, Employers Guide to Filing the T4 Slip and Summary for code 43 states: “…Canadian Armed Forces personnel and police officers deployed outside Canada can claim a deduction from net income for the amount of employment earnings they receive while serving on international operational missions as determined by the Minister of National Defence or by a person designated by that Minister” [Emphasis Added]. You would like to clarify whether only the earnings received while on the international operational mission should be included.

Subparagraph 110(1)(f)(v) provides a deduction in the computation of taxable income for employment income earned by members of the Canadian Forces and police officers serving on a deployed international operational mission as determined by the Minister of National Defence or that Minister's designate up to a maximum amount for the 2017 and subsequent taxation years.

Employment income should be considered earned when the employment services are performed, regardless of when the income is received. Although employment income is earned when the services are performed, subsection 5(1) of the Act provides that it is included in the taxpayer’s income for the year in the year that it is received. The deduction under subparagraph 110(1)(f)(v) is available to the extent that it is included in computing the taxpayer’s income for the year. In the taxation year that the income is received, the taxpayer may take a deduction in respect of employment income earned while serving on a deployed international operation mission. The amount of the deduction is limited to the amount that would have been earned at the maximum rate of pay that applied to a Lieutenant-Colonel of the Canadian Forces during the international operational mission.

The Employers Guide to Filing the T4 Slip and Summary (RC4120) will be updated to reflect our views as discussed above.

That principle informs the response to the questions asked in your request.

Question 1: Military members sometimes have retroactive pay increases that can go back multiple years. For example, a member was on an international operational mission for the entire month of August 2018 and then in August 2020, a retroactive general pay increase encompassing August 2018 is approved by Treasury Board and processed. Was the retroactive income considered earned in August 2020 when the pay increase was approved and processed or was the retroactive income earned in August 2018 when the member actually performed the duty? If the latter, should the retroactive income that would be subject to tax relief be reported as an amendment to code 43 of the original 2018 T4 or should the retroactive income that would be subject to tax relief be reported under code 43 for 2020, the taxation year in which the retroactive income was approved and processed?

Answer: The employment income is earned when the employment services are performed. The retroactive pay increase is included in income in the year that it is received, pursuant to subsection 5(1). A deduction can be taken in the year it is received pursuant to subparagraph 110(1)(f)(v). However, the combined deductions claimed in the year the services were performed and in the year the retroactive payment was received cannot exceed the maximum deduction allowed (the aggregate deduction cannot exceed the maximum rate of pay that applied during the mission to a Lieutenant-Colonel of the Canadian Forces).

Question 2: Does a pay increase to the maximum rate of pay applicable to a Lieutenant-Colonel retroactive to a prior period in which there was an international operation cause an increase to the tax relief ceiling amount benefiting all members who were entitled to tax relief in respect of that prior period?

Answer: The amount of the tax relief ceiling amount in respect of international operation missions of the prior year when the mission took place is not affected by a subsequent retroactive pay increase for since the maximum rate of pay that applied “from time to time during” the mission is the amount based on the maximum rate of pay that was applicable to a Lieutenant-Colonel at the time the employee claiming the deduction earned the income that qualifies for the deduction.

Question 3: A member is entitled to a recruitment allowance to be paid out in two payments: half when the employment starts and the other half a year later. If that year later happens to be a day when the member is serving on an international operational mission, is that income considered earned with regards to calculating the tax relief amount for code 43?

Answer: The determination of the portion of the recruitment allowance that is earned while deployed on a qualifying mission requires an examination of the terms and conditions of the recruitment allowance. Where the recruitment allowance can reasonably be viewed as accruing daily over a certain period of time, one way to compute the portion of it that is earned while on the qualifying mission could be prorating the second instalment based on the amount of time the member served on the qualifying mission. For example, if the non-commissioned officer in the first example above served on a qualifying mission for 6 months during the 12-month period of service required to be eligible for the second instalment of $10,000, then $5,000 should be considered to be earned while on a qualifying mission.

Question 4: A member serves on an international operational mission in taxation year 2020 being paid at one rank and after returning to Canada grieves (and wins) that they should have been paid at a higher rank. Should the portion of the credit for the time served on the international operational mission be included under code 43? If yes, how should a retroactive credit processed after taxation year 2020 be handled? Should the original 2020 T4 be amended or is the income reported under code 43 for the taxation year in which the entitlement credit was processed?

Answer: The retroactive credit should be treated in the same manner as the retroactive general pay increase. The credit should be included in the T4 for the year in which the payment is received and a deduction under subparagraph 110(1)(f)(v) subject to the limitation as previously discussed.

Question 5: A member becomes entitled to tax relief in November 2020 but the tax relief entry doesn’t occur until February 2021 of the following year. Should this result in an amendment to code 43 of the T4 for the tax year 2020 or should the tax relief the member would have received in 2020 be reported under code 43 of the T4 for the tax year in which the entitlement was processed (2021)?

Answer: This is a reporting issue that might have to be resolved on a case by case basis. Everything else being equal, it might be preferable to enter the tax relief in the T4 of the year the income earned on the mission was paid.

Question 6: An international operation is stood up in 2020 but the decision to assign mission status for the purpose of tax relief does not occur until 2021. If a member was serving on the operation in 2020 should this result in an amended T4 under code 43 for the year the member served (2020) or should the amount of tax relief the member would have received while serving on the international operational mission be reported on the T4 under code 43 for the tax year in which the mission status was approved (2021)?

“Stood up” in this example stands for the initial activation of the operation in theatre also referred to as “Roto 0”.  During this period, the level of Risk and Hardship has not been determined and therefore is not being paid out.  These initial submissions can be lengthy to process depending on the operation (6 months to 2 years).  Once the level has been approved, they are processed accordingly against the members CCPS account and generate a credit to the member.

Answer: The amount qualifying for the deduction should be reported on the T4 under code 43 for the tax year in which the payment is received, which would be 2020 in this example. This situation would likely require an amended T4.

Question 7: The tax relief ceiling is equal to the maximum rate of pay applicable to a Lieutenant-Colonel. A member starts entitlement to tax relief on the 16th day of the month, would the ceiling be prorated to half a month, or would the ceiling remain the full monthly rate of the Lieutenant-Colonel for the part- month? In other words, should the ceiling be prorated based on the start date of the tax relief status?

Answer: In order to compute the “employment income that would have been so earned by the taxpayer…” the ceiling should be prorated to match the period of time that the member was serving on an international operational mission. In this example, the tax relief ceiling would be the amount that the member would have earned from the 16th day of the month, if they had been paid at the rate of pay for a Lieutenant-Colonel.

Question 8: A member is serving on an international operational mission and receives a retroactive payment covering a period of earnings prior to the effective date of the tax relief. Is the entire payment subject to tax relief because the member received the payment during a period of tax relief or should tax relief only apply to the portion that is encompassed within the date span of the time served on the international operational mission? For example, a member is serving on an international operational mission in 2021 and receives a retroactive pay increase effective 2018, 2019, 2020 and 2021. Is the whole payment considered for tax relief or only the 2021 portion of the payment that is applicable to the dates the member was serving on the international operational mission?

Answer: The retroactive pay increase should be sourced to the period in which the employment services were performed. Only the portion of the payment that is sourced to the period of time the member was serving on an international operational mission (i.e. 2021) would be eligible for the deduction under subparagraph 110(1)(f)(v).

Question 9: A member is serving on an international operational mission and receives a cash-out of leave covering a period of leave earned prior to the effective date of the tax relief. Is the entire cash-out of leave payment subject to tax relief because the member received the payment during a period of tax relief or should tax relief only apply to the portion that is encompassed within the date span of the time served on the international operational mission? For example, a member is serving on an international operational mission in 2020 and receives a cash-out of leave for leave earned in 2018. Is the whole cash-out payment considered for tax relief? Conversely, if a member earns leave while on an international operational mission but does not take the leave and later, post mission, is granted a cash-out of leave for leave earned while serving on an international operational mission is the cash-out of leave considered to be earnings that are subject to tax relief? If yes, should these earnings be reported under code 43 for the tax year in which the earnings were paid or should code 43 be amended on the original T4 (2020).

Answer: The cash-out of leave payment should be sourced to the period in which it was earned. A payment of cash-out of leave will only be deductible if it was earned while the member was serving on an international operation mission. For example, a deduction under subparagraph 110(1)(f)(v) is not permitted in respect of a payment of cash-out of leave for leave earned in 2018 even if it is received when the member is serving on a qualifying mission. Conversely, a payment of cash-out of leave for leave earned while the member is serving on a qualifying mission would be eligible for a deduction under subparagraph 110(1)(f)(v) even if the payment is received after the mission.

Question 10: Currently when a member is serving on an international operational mission that is subject to tax relief all taxable income processed during the time served is considered for tax relief regardless of the effective date of the earning. Is this correct, or should only earnings encompassing the effective dates of the time served on the international operational mission be considered for tax relief regardless of when the earnings transaction is processed?

Answer: Not all taxable income processed (paid) during the time that a member is serving on a qualifying mission will automatically qualify for the deduction under subparagraph 110(1)(f)(v).

We trust our comments will be of assistance.

Yours truly,

John Meek
Section Chief, Income Tax Rulings (Acting)
International Section 36
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Cc: XXXXXXXXXX