Based on where your client lives, they might be able to get an additional tax break. The northern residents deduction credit is meant to help your clients living in certain areas that incur a higher cost of living, experience environmental hardships, and have limited access to services. There’s two components to the northern residents deduction: the residency deduction and the travel benefits deduction. These two are completely independent; your client can claim one but not the other. To claim the credits, your client has to file Form T2222.
How to Land the Residency Deduction
Your client, and all the members of their household, can claim the living costs portion of the credit if they’ve lived in a certain area continuously for at least six months. It’s fine if your client moved into or left the location during the tax year. The key to getting this portion of the credit is making sure your client maintained and lived in a dwelling. The Government of Canada defines a dwelling as an establishment that generally has a kitchen, bathroom, area to sleep, and private-access area. There’s guidance on Form T2222 to determine if your client is living in a dwelling.
Certain areas are designated as northern zones. If your client lives in these zones, they get $11 for each day they lived there. Other areas, designated as intermediate zones, give a credit of $5.50 per day.
How to Land the Travel Benefits Deduction
The other part of the northern residents deduction is for travel assistance. Your client gets an extra deduction if they got some money from their employer for travel assistance and ended up incurring personal expenses. The trip must have been for vacation, medical reasons, or family reasons that started from a prescribed zone. If the travel was required for work or related to their job, the trip’s expenses aren’t eligible. To get the benefit, your client can’t be related to their employer. Your client also has to include the travel benefit received from the employer as income received within the prescribed zone where the travel occurred.
Your client’s maximum deduction is the lowest of three amounts.
- First, determine your client’s total benefit received from their employer.
- Second, determine what your client actually spent on the trip.
- Third, find out the lowest return airfare between your client’s house and a designated city’s airport.
The lowest dollar amount of these three options is what your client can deduct.
Taking Care of Administrative Aspects
The Government of Canada has outlined the northern zones and the intermediate zones. There are zones in every province. After claiming the deduction, your client has to hang onto their backup documents for at least six years. Documentation could include a travel itinerary or receipts. The Canada Revenue Agency can reach out to your client asking for more information, and if your client needs extra time to gather that information, they can always request an extension.
As you help your clients with their tax returns, consider if they’re eligible for the northern residents deduction. Don’t forget there are two parts to the benefit: the living cost aspect and the travel benefit aspect.