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Andy Wong
Monday, March 10, 2008
You heard the good news. The Northern residency claim is going up by 10 per cent in 2008. If you are new to the North or you don't know about this deduction, you are probably wondering, "What's this all about?"
You qualify for the Northern residents deduction (NRD) if you live anywhere in Nunavut, the Northwest Territories, Yukon or Labrador or in select isolated communities in Northern parts of the provinces. Residents living in "intermediate zones", i.e., in the vast countryside between the populated cities in the south and the far north claim 50 per cent of the deduction.
The NRD consists of two separate claims: a residency deduction of up to $15 per day (up to $5,475 annually) and travel deduction if (and only if) you received travel benefits from your employer. More on the travel deduction in a future TaxBreak.
Before 1987, employers could provide tax-free housing and tax-free travel allowances to their employees working in locations north of the 60th parallel. These tax-free benefits compensated for the incredibly high cost of housing (if any could be found) and travel.
Because the benefits were not mandatory, this tax break created an uneven playing field between those employees who received these tax-free benefits and those who didn't. In 1987, Ottawa fixed this disparity by taxing all housing and travel benefits and introducing the Northern residents deduction. Accountants have been working overtime during tax season since.
To qualify for the residency deduction, you must live in the territories for six continuous months, beginning or ending in the year. For long-time Northerners, this deduction is straightforward - you claim for the 365 days in 2007.
If you moved here during 2007, there is some head scratching to figure out what you can claim. Say you moved from Saskatoon to Inuvik on Sept. 1, 2007, and are still living there. You only lived four months in Inuvik during 2007. Do you qualify for the residency claim in 2007?
The rules say that to qualify for the residency claim in 2007, you must live in Inuvik for six continuous months. If you think about it, you did live in Inuvik for six continuous months - precisely six months and 10 days, effective today. It doesn't say you have to live in Inuvik for six continuous months in 2007 to qualify to claim the deduction in 2007. You became "qualified" to claim the deduction as of Feb. 29, 2008 - at the end of the six months. Therefore you would claim for four months of residency during 2007 (122 days) on your 2007 return.
What if you moved to Inuvik on Oct. 1, 2007 instead? You don't qualify yet because you haven't met the six months test. But don't sweat it. Wait till March 31, 2008 and you'll qualify, assuming you are still living in the North. At that time, you can file your return and claim three months (92 days) of residency on your 2007 return.
If you moved north after Nov. 1, 2007, you do have to sweat it because you won't qualify until after the April 30 filing deadline (six months later). Go ahead and file on time - by April 30 - and omit the residency claim. Then ask for an adjustment after you qualify.
Next week: We continue to peel away at the layers of an onion to better understand the residency deduction. For more info: visit the CRA website.
Andy Wong is a tax consultant at MacKay LLP, Chartered Accountants in Yellowknife. He can be reached at andrew-wong@yel.mackayllp.ca.
