10 August 1999 External T.I. 9919385 - 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 fime of issue, may not represent the current posifion of the Department.

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

Principal Issues:

Clarification of our interpretation of paragraph 110.7(1)(a) of the Act as it relates particularly to "an amount received, or the value of a benefit received or enjoyed... in respect of the taxpayer's employment in a particular area..... in respect of travel expenses incurred by the taxpayer".

Position TAKEN:

A reasonable agreed per hour amount or annual premium (i.e. as per an employment contract) paid in advance toward trips is an acceptable manner of providing travel assistance for employees.

Reasons FOR POSITION TAKEN:

Prior opinion

									5-991938
      D. Miller

August 10, 1999

Dear XXXXXXXXXX:

Re: Residing in Prescribed Zone - Section 110.7

This is in reply to your letter of July 14, 1999, wherein you requested clarification of paragraph 110.7(1)(a) of the Income Tax Act ("the Act") as it relates to employees of XXXXXXXXXX (the "Company") employed in prescribed zones.

The Company has over XXXXXXXXXX employees working in prescribed zones as described in section 7303.1 of the Income Tax Regulations. Employees in these zones receive a northern allowance premium of up to 15% of their base salary to cover the additional costs of travel and goods and services in the remote location. It was determined that the reimbursement of specific costs to each employee would impose an administrative burden on the Company so it was decided that all employees would qualify for this northern allowance premium. Prior to 1996 no portion of the northern allowance premium had been identified as being paid to employees solely in respect of travel expenses. At the request of employees steps were taken to quantify this portion. After reviewing its records and completing additional due diligence it was determined that the portion of the northern allowance premium that relates to additional estimated travel costs that an employee may incur was $XXXXXXXXXX per year. In 1996 the union contract was amended to ensure that a portion of the northern allowance premium was designated in respect of travel costs and that such portion was properly included on each employee's T4 slip in box 32.

It is your view that this qualifies as being an amount received "in respect of travel expenses incurred by the taxpayer" for purposes of paragraph 110.7(1 )(a) of the Act.

Our Comments

The situation described in your letter involves actual completed transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, as in this case, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

For the purposes of paragraph 110.7(l)(a) of the Act, it is the Department's position that there must be a connection between the actual travel expenses incurred by the taxpayer or a member of the taxpayer's household and the amounts paid by the taxpayer's employer to defray those costs. Since an employee generally can only receive a deduction under paragraph 110.7(l)(a) of the Act if, among other criteria, actual travel costs have been incurred by the employee or a member of his household (see clause 110.7(1)(a)(i)(A) of the Act and paragraph 7304(4)(b) of the Regulations), we are of the view that a reasonable agreed "per hour amount" or "annual premium" specified in an employment contract paid as an advance towards the trips (whether there is a requirement or not to take those trips) is a reasonable manner of providing travel assistance for employees residing in a prescribed zone and would generally constitute a sufficient "connection", as discussed above, to enable the employee to be eligible for the paragraph 11O.7(1)(a) deduction.

The above comments are consistent with our guide titled Employers' Guide to Housing and Travel Assistance Benefits Paid in Prescribed Zones, which discusses various ways by which travel assistance benefits can be paid by an employer in respect of travel taken or to be taken by an employee. Chapter 3 of the guide allows a corporation to pay employees a travel allowance before the trip, such as a certain amount per hour, or on some other periodic basis, as well as by making lump-sum payments before or after the trip is taken.

It should be noted that there are a number of restrictions imposed when calculating the travel portion of the Northern Residents Deduction. Employees should be familiar with, and use Form T2222, Northern Residents Deduction (copy attached), when calculating their respective deduction.

As discussed in paragraph 22 of Information Circular 7O-6R3, the above comments are not binding on the Department.

We trust you will find the above comments to your satisfaction.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch