2021-0917041E5 Northern residents travel deduction

Principal Issues: Whether a travel allowance provided for in an amended employment contract would qualify as an amount received in respect of travel expenses incurred by the employee for purposes of paragraph 110.7(1)(a) of the Act.

Position: Question of fact and law.

Reasons: See below.

Author: Leung, Brenna
Section: 110.7(1)(a)

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                                                                                                                B. Leung

April 13 2023

Dear XXXXXXXXXX,

Re: Travel allowances

We are writing in response to your email dated November 4, 2021, in which you requested our comments on whether a prospective amendment to an existing employment contract can be made to designate an amount as a travel allowance without legally terminating the contract. More specifically, you enquire whether such an amendment would result in an employer-provided travel benefit for purposes of section 110.7 of the Income Tax Act (the “Act”). We apologize for the delay in responding.

In the situation you describe, a newly ratified collective agreement for unionized employees includes both an hourly wage amount and an hourly travel allowance amount. The employer would like to provide its non-union employees with the same hourly travel allowance amount (i.e., that provided to unionized employees under their new collective agreement). We understand that this would be done by prospectively amending the employment contracts for non-unionized employees to reflect an hourly travel allowance amount and reducing their hourly wage by a corresponding amount. That is, the total hourly compensation paid to non-union employees would be the same both before and after the proposed amendment.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Section 110.7 of the Act provides, in computing an individual’s taxable income, a deduction in respect of certain trip costs (“travel deduction”) and living costs where the individual resides, throughout a period of at least 6 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.

Your question concerns the travel deduction component of the northern residents deduction. In this regard, you have referred to technical interpretation 2014-0528201E5, wherein the Canada Revenue Agency (“CRA”) confirmed its longstanding position that there must be a connection between the actual travel expenses incurred and the amounts paid by the taxpayer’s employer to defray those costs, in order for the amounts to be deductible for purposes of section 110.7 of the Act. In technical interpretation 2014-0528201E5, the CRA also provided interpretative guidance concerning the prospective amendment of employment contracts and outlined the following factors which support the deductibility of a travel allowance provided for in such circumstances:

• the old contract has legally ended;

• the legal rights and obligations under the new contract designate (on a prospective basis) a portion of an employee’s hourly compensation as a travel allowance;

• the employer and employee are dealing at arm’s length;

• the travel allowance is accounted for separately in the payroll system and on the employee’s pay stub; and

• the terms of the new contract are reflected in the collective agreement (where the employee is represented by a union).

While we note that the above factors were intended to apply to all employees, irrespective of whether they are covered by a collective agreement, you have requested clarification as to how these factors would apply to non-unionized employees. More specifically, you have suggested that for non-unionized employees, an employment contract may be prospectively amended to identify an amount as a travel benefit without bringing an end to that contract.

Upon entering a contract of employment, an employee has a legal entitlement to an agreed amount of salary or wages for the duration of the contract. Once that contract expires, or is otherwise legally ended, the employer’s right to maintain the level of salary is open to negotiation. Where legal rights or entitlements (to a reduced level of salary and increased compensation in respect of travel expenses) are then established under the new contract, the facts lend support to part of an employee’s hourly compensation being intended to be in respect of travel expenses at that time and from that moment forward.

However, where an employee has an existing legal entitlement to a certain level of salary or wages pursuant to the terms of a valid employment contract, unless there are facts to support that a portion of the existing salary or wages was originally intended to be in respect of travel expenses, it is our view that designating an amount of existing salary or wages as a travel allowance would not be considered an amount paid in respect of travel expenses. Similarly, any forfeiture of an employee’s existing salary or wage entitlement in exchange for a travel allowance is not considered to be an amount paid in respect of travel expenses.

In the situation you describe, it is unclear whether the employment contracts of non-unionized employees are of a fixed term or indefinite duration. Where such contracts are of a fixed term, the renegotiation of employment terms and conditions (including remuneration) on expiry would have the same effect as those renegotiated on the expiry of a collective agreement provided that the travel allowance is provided on a prospective basis. Where an employment contract is of indefinite duration, it is a question of law and fact whether a valid renegotiated employment agreement is in place and if a travel allowance provided for would be considered to be paid in respect of travel expenses for purposes of section 110.7 of the Act.

If an employment contract is of indefinite duration with no clear expiry date, it may be an employer’s regular practice to review the terms and conditions of the employment contract at predetermined intervals. Where new legal entitlements (to a reduced level of salary and increased compensation in respect of travel expenses) are established during a valid renegotiation of the employment contract as a whole, this in our view would lend greater factual support of a new allowance being provided for in respect of travel expenses. By contrast, a single amendment to a valid and existing contract made outside of these predetermined intervals, without the renegotiating of employment terms or remuneration other than an hourly rate change in designation from salary to travel allowance, would likely not be sufficient to demonstrate that a portion of the existing salary or wages was originally intended and considered to be paid in respect of travel expenses for purposes of section 110.7 of the Act.

It is important to recognize that the travel deduction component of the northern residents deductions was recently expanded to be available to all eligible northern residents who take a trip even if they did not receive taxable travel benefits from employment. Effective for 2021 and subsequent tax years, and subject to certain restrictions, eligible northern residents now have the option to claim a standard amount in respect of personal trips taken themselves or by eligible family members. Accordingly, the non-unionized employees in the situation you describe would have access to the travel deduction irrespective of whether the travel allowance provided is considered to be paid in respect of travel expenses for purposes of section 110.7 of the Act.

We trust these comments will be helpful.

Yours truly,

Tom Baltkois, CPA, CGA

Acting Manager

Business and Employment Income Section

Business and Employment Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

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