Principal Issues: 1. Can a portion of an employee's existing wage be declared as a northern travel allowance? 2. Can benefits defined in a collective agreement have retroactive application?
Position: Where an employer does not pay additional compensation but simply re-characterizes or designates an amount of existing salary or wages, and where the facts do not support that a portion of the existing salary or wages was originally intended to be in respect of travel expenses, the amount is not paid in respect of travel expenses for purposes of the deduction in subsection 110.7(1) of the Act. This also applies to the backdating or revision in an employment contract. Without evidence to show that additional wages are paid to compensate the employees for travel expenses, any re-classification of pre-existing amounts will not be accepted for purposes of the Northern Residents Travel Deduction.
Reasons: In order for paragraph 110.7(1)(a) of the Act to apply, there must be a connection between the actual travelling expenses incurred by a taxpayer or a member of the taxpayer's household and the amounts paid by a taxpayer's employer to defray those costs.
XXXXXXXXXX 2010-037342 P. Waugh August 31, 2010
Dear XXXXXXXXXX :
Re: Northern Residents Travel Deduction in the Collective Agreement
I am writing in response to your letter of February 16, 2010 which was forwarded to us on July 7, 2010 concerning a Northern Residents Travel Deduction qualification to be added to a re-negotiated Collective Agreement ("CA"). More specifically, you have enquired whether specific wording is required in the CA in order for an individual to qualify for the Northern Residents Travel Deduction and whether a retroactive benefit would qualify when a new CA is finalized.
In the situation you described, the union is requesting that you allow $1,000 from an employee's existing normal hourly wage to be declared as a Northern Travel Allowance. The CA will contain wording declaring it as a travel allowance. The CA expired last year so once finalized, benefits will have retroactive application.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
In computing an individual's taxable income for a taxation year, section 110.7 of the Income Tax Act (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 six consecutive months commencing or ending in the year, in a "prescribed northern zone" or a "prescribed intermediate zone" as defined in section 7303.1 of the Income Tax Regulations. Generally, the deduction in respect of employee travel benefits 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.
Paragraph 110.7(1)(a) of the Act refers, in part, to "...an amount received, or the value of a benefit received or enjoyed, in the year by the taxpayer...in respect of travel expenses incurred by the taxpayer..." In our view, for purposes of paragraph 110.7(1)(a) of the Act, there must be a connection between the actual traveling expenses incurred by a taxpayer or a member of the taxpayer's household and the amounts paid by the taxpayer's employer to defray those costs, in order for the amounts to be "...in respect of travel expenses incurred by the taxpayer..." Generally such amounts are paid by an employer by reimbursement after the trip. However, the CRA has accepted that an employer can pay a reasonable travel allowance before a trip, such as a reasonable "per hour" or "annual premium" provided the details of such an employee benefit are specified in an employment contract.
Where an employer does not pay additional compensation but simply re-characterizes or designates an amount of existing salary or wages, and where the facts do not support that a portion of the existing salary or wages was originally intended to be in respect of travel expenses, in our view, the amount is not paid in respect of travel expenses for purposes of the deduction in subsection 110.7(1) of the Act. This also applies to the backdating or revision in an employment contract. Without evidence to show that additional wages are paid to compensate the employees for travel expenses, any re-classification of pre-existing amounts will not be accepted for purposes of the Northern Residents Travel Deduction.
It is a question of fact whether an amount is received in respect of travel expenses incurred. While the wording in a CA does not have to specifically use the words "Northern Allowance" or "Travel in a Prescribed Zone", the facts must support that an amount paid by the employer, regardless of the method or form of such compensation or assistance, is intended to be with respect to employees' travel expenses and not a re-characterization of existing salary and wages. Based on the limited information provided, the changes you are proposing to your employment contract appear to be a re-characterization of existing salary or wages.
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 T222, Northern Residents Deduction, when calculating their respective deduction. This form also contains additional information on the Northern Residents Deduction.
We trust these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch