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Maximizing the Northern Residents Deduction

17/02/2011


For Canadians residing in the North in either a “prescribed Northern zone” or a “prescribed intermediate zone”, there is a special deduction to be claimed when filing their personal income tax returns for certain travel benefits and living costs. There are two parts to this deduction – the basic amount is available to all residents who have lived in prescribed zones for a six month period either beginning or ending in the calendar year, but there is an ability to increase this deduction if the employer provides assistance with travel to certain designated cities in Canada.

All residents of either a “prescribed Northern zone” or a “prescribed intermediate zone” can claim a deduction if they have lived in the zone for a period of at least six months beginning or ending in the calendar year.

This deduction is available for all members in the household.

Who can claim the travel component of the Northern Residents Deduction?

When an employer provides a travel allowance to their employees to help defray the costs of travel from their Northern home to their closest designated city, the amount is included in the employees income for the year. The employee can claim a deduction against this employment benefit.

However, to gain access to this deduction, the employee and the employer cannot be related. Therefore, shareholders and others related to the shareholder cannot deduct this additional travel component, even if they receive the travel allowance from their employer.

How much can the employee deduct as the travel component?

The employee can deduct the least of the following amounts:

  1. The value of the allowance received from their employer
  2. The amount of the trip
  3. The lowest return airfare available at the time the trip was made from your home airport to the nearest designated city

We have found that the CRA has a standard amount as the lowest return airfare, and will often dispute the amount claimed. In order to substantiate the deduction, it is suggested to determine the actual airfare for the period of travel, and keep a copy in the event that the CRA disputes the deduction.

How can an employer pay the travel allowance?

The employer would pay the employee a salary PLUS the travel allowance. The employer can pay the employee a reimbursement after the trip, or a set allowance (i.e. – a set amount per hour or a specific annual amount), provided this is detailed in the employment contract. The CRA does not accept that a portion of the salary is the travel allowance, it must be paid on top of the salary.

What are the designated cities?

The designated cities are St. John’s, Halifax, Moncton, Quebec, Montreal, Ottawa, Toronto, North Bay, Winnipeg, Saskatoon, Calgary, Edmonton, and Vancouver

If you have questions on how to maximize the Northern Residents Deduction, please consult your local MNP Tax advisor or contact me and we would be happy to assist you.