TAX BREAK: Your residency deduction

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Here is one from the history books. Have you ever wondered why the Northern residents deduction was created?

Here’s why. Before 1987, employers could provide tax-free housing and travel allowances to their employees working in locations North of the 60th parallel. These tax-free allowances were a great idea if you were on the receiving end.

This tax-free loophole created a glaring inequality between the have-and have-not classes of employees.

Beginning in 1987, the federal government leveled the playing field by taxing all housing and travel benefits. As a compromise, it handed us the Northern residents deduction.

This 30-year old deduction consists of two separate claims. You claim a residency deduction for living in a prescribed zone, which includes all three territories and a travel deduction, provided you receive a Box 32 travel benefit from your employer.

This rest of this article looks at two confounding aspects of the residency deduction.

You must live in the territories for 6 continuous months, beginning or ending in the year, to to claim the residency deduction. Note that the law does not say, 6 continuous months ‘in the year’. You will lose out if you figure out the difference between beginning or ending in the year and in the year.

Let’s look at James, an itinerant taxpayer who moved from Calgary, Alta., to live in Iqaluit, NU on August 1, 2017 and will move back to Calgary on April 30, 2018. James would not have lived in NU for 6 months during the 2017 or 2018 tax year. Can James claim any residency deduction on his 2017 or his 2018 tax return?

Absolutely. While James did not live in NU for 6 continuous months during 2017 or 2018, he did live in NU for 6 continuous month beginning in 2017 and by January 31, 2018. Therefore, as long as James files his 2017 tax return after January 31, 2018, he would qualify to claim 5 months of residency on his 2017 tax return.

Likewise, when James moves from NU on April 30, 2018, he also qualifies for the 2018 residency deduction because he would have lived 9 month, ending in 2018, in NU. James would claim for the 4 months of residency on his 2018 tax return.

If you moved permanently to the territories on, say, November 1, 2017, would you wait till May 1st, 2018 (after the 6 months period) to file and claim for the two months in 2017? Probably not, because of the April 30 filing deadline. You should file on time and ignore the residency claim. After you qualify on May 1, you can adjust your 2017 tax return to claim for the two months of residency.

The other confusing aspect of the residency deduction deals with the basic and the additional amount, two halves that makes up the full residency deduction.

You may claim the Basic amount of $11 per day for residing in the territories. If you share a residence, each occupant – regardless of relationship – has a right to claim this Basic amount of $11, regardless if there are two or 20 occupants in that residence.

Here is the tricky part – you may only claim the additional amount of $11 per day if you maintain the residence (you own or pay rent) and no one else is claiming the basic amount from that residence. For example, if you share your home with your working spouse and two adult working children, you can only claim the basic and the additional amounts if the rest agree to forego their basic amount.

In that instance, it may make sense for all four of you to claim the basic amount, which forces you to forego the additional amount. Collectively, the family may receive a larger refund by claiming four basic amounts.