Principal Issues: What is meant by "the lowest return airfare ordinarily available" used in paragraph 7304(2)(c) of the Regulations for the purposes of claiming the northern residents deduction for travel benefits under paragraph 110.7(1)(a) of the Act?
Position: Question of fact but would be the lowest return airfare ordinarily available for regularly scheduled commercial flights on the date that the trip was made, excluding promotions or discounts that were not ordinarily available that day, including any GST/PST/HST and airport taxes but excluding additional charges, such as flight cancellation insurance, meals, and baggage surcharges. This fare is not reduced by any early booking or other possible promotions or discounts that might have been available unless they were available on the day the trip was made.
Reasons: Consistent with the applicable legislation and the wording of the applicable provision.
May 25, 2011
Mabe Greenberg Tom Posadovsky, CMA
Validation Section IT Rulings Directorate
Individual Returns Directorate Ontario Corporate Tax
25 McArthur Road, Vanier Tower C, 5th Floor Division
Ottawa ON K1A OL5 (613) 952-8283
Attention: Mabe Greenberg 2011-040398Northern Residents Deduction
I am writing in response to your request for clarification of subsection 7304(1) of the Income Tax Regulations for purposes of the northern residents deduction available under section 110.7 of the Income Tax Act. Unless otherwise specified, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended, and the regulations thereunder are referred to as the "Regulations".
According to your email of April 19, 2011 and our subsequent conversation on May 16, 2011 (Posadovsky/Greenberg), the Winnipeg Tax Centre ("WTC") has asked for clarification on what is meant by the phrase "lowest return airfare ordinarily available" in paragraph 7304(2)(c) of the Regulations for the purposes of claiming the northern residents deduction for travel benefits under paragraph 110.7(1)(a) of the Act. You wish to have our views on this issue and specifically whether the "lowest return airfare" distinguishes between a refundable or non-refundable fare. You explained that staff at the WTC will use our views as guidance for this and similar claims.
In the fact situation provided, a local airline provided the WTC with separate statements describing two different rates:
1) Adult total discount fare from Winnipeg to Gillam return was $896.70
2) Adult total full economy fare from Gillam to Winnipeg return was $1,530.90
In response to the WTC's further queries, the airline explained that the discounted fare was non-refundable, non-transferable, and a 10 day advance purchase was required to obtain the discount. The higher rate was their highest economy return airfare providing all options, flexibility and was fully refundable; however, it was also their lowest return ordinary fare as discounted fares may not be available on the day of travel. The WTC disagreed with the higher rate provided by the airline as they believe the lowest return airfare should be the lowest non-refundable rate available for regularly scheduled commercial flights excluding promotions or discounts that are not ordinarily available, on the date that the travel began.
Our Comments
Section 110.7 of the Act provides for a special deduction in computing the taxable income of individuals residing in certain prescribed northern and isolated areas. If a taxpayer has received travel benefits from an employer that would qualify as extra income, the taxpayer may be able to claim travel expenses as a deduction. Travel expenses may include air, train, and bus fares; vehicle expenses; meals; hotel costs and camping fees; and other expenses, such as taxi fares and ferry tolls. Pursuant to Regulation 7304(2), the taxpayer may claim the least of the following three amounts:
- the travel benefit reported in box 32 of the taxpayer's T4 information slip;
- total travel expenses; and
- 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.
It is our view that the "lowest return airfare ordinarily available, at the time the trip was made" means the lowest return airfare ordinarily available for regularly scheduled commercial flights, excluding promotions or discounts that are not ordinarily available, on the date the trip was made. It is what the lowest return airfare would have been had the taxpayer booked a flight on that day including any GST/PST/HST and airport taxes. The lowest return airfare does not include what the taxpayer would have paid as a result of taking advantage of early booking or other possible promotions or discounts that might have been available, unless they were available on that day. Additional charges, such as flight cancellation insurance, meals, and baggage surcharges are not considered part of the lowest return airfare.
As an example, consider a taxpayer who travelled to the nearest designated city on June 12. If the taxpayer had booked and paid for the June 12 flight one month in advance, the fare would have been $500 because of an early booking discount. However, if the taxpayer booked and paid for the trip on June 12, two fares were available - a discounted, non-refundable return fare for $650 and another, refundable return fare of $850. The lowest return airfare ordinarily available under paragraph 7304(2)(c) of the Regulations in this case is $650 because it was the lowest return airfare ordinarily available on that day, at the time the trip was made.
Whether or not a particular fare is the lowest economy return fare available on a particular day is a question of fact. In the situation you described, the adult total discount fare from Winnipeg to Gillam return for $896.70 does not appear to be the lowest economy fare for that day, as a 10-day advance purchase was required to obtain that rate. If the only available fare on that day was the $1,530.90 fare with a refundable feature, then that fare would have been the "lowest return airfare ordinarily available, at the time the trip was made".
We trust that our comments will be of assistance to you.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch