Principal Issues: What is the history of the Northern residents and what conditions should be met by the residents of Iles de la Madeleine to get the full deduction?
Position: General comments
Reasons: The Act
XXXXXXXXXX 2016-065904 Danny Gagnon 613-670-9030 August 2, 2016
Subject: Deductions for people living in remote areas – Magdalen Islands
Dear Sir,
This is in response to your letter of April 27, 2016, requesting information regarding the history of deductions for residents in remote areas. Under the Income Tax Act ("Act"), these are deductions for residents of zones prescribed by Regulation. These deductions include both a deduction for residence and a deduction for certain travel benefits. Specifically, you are concerned that the Magdalen Islands are part of a prescribed "intermediate zone" and not a prescribed "northern zone". Consequently, the percentage applicable to deductions, in particular the deduction for a residence, is fixed at 50% instead of 100%.
Unless otherwise indicated, all statutory references herein are references to the provisions of the Income Tax Act or Regulations (the "Regulations"). We invite you to consult the website of the Department of Justice Canada for the full text of the Acts and Regulations: http://laws-lois.justice.gc.ca/eng/ImportantNote/
The Canada Revenue Agency is responsible for administering and enforcing, among other things, the Act and Regulations. This technical interpretation therefore provides general comments on the provisions of the Act and Regulation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.
Section 110.7 of the Act, applicable to the 1987 and subsequent taxation years (footnote 1), applies to deductions for residents of zones prescribed by Regulation. In short, section 110.7 allows individuals, subject to certain conditions, to make a special deduction in computing their taxable income for the year for travel and accommodation expenses. Since the time section 110.7 came into force, in order for an individual to claim these deductions, the requirements of subsection 110.7(1) must be met. One of the conditions is that the individual must have resided for a period of at least six consecutive months in a "prescribed zone" as provided for in section 7303 of the Regulations.
Section 7303 of the Regulations, applicable to the 1987 and subsequent taxation years (footnote 2), specifies a number of criteria that a region must meet to be considered a "prescribed zone". These criteria include, inter alia, the geographic location of the region as to being to the north or to the south of 55° or 60° latitude, the number of inhabitants, whether it is served by an all-season road and/or regular air, rail or ferry service, and its distance from the nearest urban center of a certain population density. The question of whether the Magdalen Islands is a "prescribed zone" is a question of fact which can only be resolved by examining all the facts of the situation.
Under new section 7303.1 (footnote 3) of the Regulations, certain regions that were "prescribed zones" based on the criteria set out in former section 7303 (footnote 4) of the Regulations have become "northern zones" or "intermediate zones". Therefore, for the 1988 and subsequent taxation years, subsection 7303.1(2) specifically provides that the Magdalen Islands are, for the purposes of section 110.7 of the Act, an "intermediate zone".
In addition, amendments were made to section 110.7 of the Act for the 1988 and subsequent taxation years (footnote 5). One such amendment provided that the requirement that an individual reside in a "prescribed zone" under subsection 110.7(1) be replaced by the requirement that an individual reside in a "northern zone" or an "intermediate zone".
In addition, for the 1988 and subsequent taxation years, subsection 110.7(2) (footnote 6) of the Act has been amended to establish the "specified percentage" that is used in determining the deductions under subsection 110.7(1). This "specified percentage" varies by the region in which the individual resides. For taxation years after 1994, if a region is an "intermediate zone", under paragraph 110.7(2)(b), the percentage applicable to deductions for prescribed zone residents under subsection 110.7(1) is set at 50%.
The Act also provides transitional rules, applicable for the 1988 to 1994 taxation years (footnote 7), specifying, among other things, the "specified percentage" referred to in subsection 110.7(2). These transitional rules would have applied to an individual who resided in the Magdalen Islands and who met all the conditions for the application of section 110.7 for the taxation years 1988 to 1994. For example:
1- As the Magdalen Islands were a "prescribed zone" for the taxation years 1988 to 1994;
2- If the individual met all the conditions for the application of section 110.7; and
3- Since the Magdalen Islands have been an "intermediate zone" since the 1988 taxation year;
the "specified percentage" for deductions for residents of prescribed zones is:
- 100% for taxation years between 1988 and 1992;
- 66 2/3 % for the 1993 taxation year; and
- 50% for the 1994 and subsequent taxation years.
Therefore, in order to increase the percentage applicable to deductions for residents of prescribed zones for residents of the Magdalen Islands, including the deduction for residence, this would require the region to qualify as a "northern zone", which implies an amendment to the provisions of the Regulations. In this regard, any proposal to change tax policy or to amend legislation must be reviewed by the Department of Finance Canada.
We trust our comments will be of assistance.
Danny Gagnon, CPA, CA, M. Fisc.
Interim Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy Branch
And Regulatory Affairs
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 Section 110.7 of the Act was added by 1986, c. 55, sec. 33(1).
2 Section 7303 of the Regulations was added to the Act by Order in Council P.C .1988-1105.
3 Section 7303.1 of the Regulation was added by Order in Council P. C. 1993-1688 and is applicable to the 1988 and subsequent taxation years.
4 Repealed by Order in Council P.C. 199-1688 on August 26, 1993 in respect of the 1993 and subsequent taxation years.
5 Section 110.7 of the Act was amended by 1991, c. 49, sec. 82(1) and enacted in 1994.
6 Subsection 110.7(2) of the Act was amended by 1991, c. 49, sec. 82(1).