Business, labour, Inuit orgs want revamped northern tax deduction

As the old year comes to a close, a diverse group of northern-based lobby groups hope the new year will bring a new fix for northern Canada's unbearable cost of living: tax relief from the federal government.

They're taking aim at the 21-year-old Northern Residents Tax Deduction, a well-known benefit that's aimed at helping northern wage earners cope with the high cost of living.

It's an issue that's created unanimity among groups who don't normally see eye-to-eye on anything: business groups such as the Canadian Chamber of Commerce, labour unions such as the Public Service Alliance of Canada, and Inuit organizations such as Inuit Tapiriit Kanatami, Nunavut Tunngavik Inc., and the Makivik Corp. now speak with one voice on the need to fix the northern tax system.

If they're successful, northern wage-earners could get more money in their pockets through bigger income tax refunds.

Glenn Cousins, the executive director of the Nunavut Economic Forum, says studies done by his organization show the northern tax deduction system is long overdue for an overhaul.

"If it's supposed to address a cost-of-living deficit, it fails to do that," said Cousins, who appeared via teleconference before the House of Commons standing committee on finance late last month to present MPs with a discussion paper that sets out the weaknesses of the current northern tax deduction.

The NEF, which represents a long list of government, quasi-government and Inuit organizations in Nunavut, says the value of the deduction has not kept up with the cost of living, provides little benefit to low-income wage-earners, and does little to promote economic development.

Right now, the northern residents tax deduction works like this:

• If you live in self-contained dwelling unit, you may claim up to $15 a day for a total of $5,475 per year, or 20 per cent of your net income, whichever is less;

• If you get vacation travel assistance from your employer, you may claim the cost of a vacation, including the cost of air fares, accommodation, meals and certain other expenses.

It's not a tax credit – it's a deduction from taxable income, reducing the amount of income that you pay tax on. For most wage-earners, this produces a bigger income tax refund than they would otherwise get.

The federal finance department estimates the northern tax deduction – which is available to wage earners in all three territories, the northern regions of provinces, and some other isolated areas – costs the federal government about $125 million a year in foregone income tax.

The idea of a northern tax deduction arose in the early 1980s, when Revenue Canada discovered that many northern employers, including governments, gave tax-free northern allowances and other benefits to their workers.

After a long, fractious debate, Revenue Canada decided in 1986 to tax those northern benefits as income. To take the sting out of it, they also created the Northern Residents Tax Deduction, which has existed in its current form since 1987.

But Cousins says this once-valuable tax deduction has not kept up with inflation.

The NEF's discussion paper says that if inflation alone is taken into account, the residency deduction alone should be increased by 64 per cent – to $24.50 a day, or $8,943 a year.

For their part, the Public Service Alliance of Canada, backed by Dennis Bevington, the New Democratic Party MP for Western Arctic, says the residency benefit should be increased by at least 50 per cent.

To that end, Bevington tabled a petition in the House of Commons last week bearing 615 signatures gathered across the Arctic by PSAC activists.

And for the future, various lobby groups agree the size of the northern tax deduction should be indexed to the rate of inflation.

But Cousins says it's not just the residency portion of the deduction that's now obsolete.

The NEF says the vacation travel deduction is unfair – because it's available only to workers who received vacation travel assistance from their employer.

This benefits higher-income employees who work for government and other large employers. It discriminates against lower-income people who do not get a VTA from their employers – denying them a tax deduction worth up to several thousands of dollars a year.

To fix this, the NEF says the residency deduction should be increased even more for lower income people who don't qualify for the travel deduction. They suggest raising the residency portion of the deduction as high as $14,412 a year to accomplish this.

This, in turn, would help reduce their taxable income to a level where they would qualify for the GST tax credit, the NEF says.

Right now, a Nunavut family with a taxable income of more than $44,430 does not qualify for a GST credit.

But the NEF says that, based on the federal government's own figures on Nunavut's cost of living, anyone earning up to $67,090 in Nunavut should qualify for a GST credit.

Last, the NEF says the northern tax deduction system is not only a vital social benefit. The organization also says that improving it would help employers recruit and retain workers.

"The Northern Residents Tax Deduction should be viewed as one of the tools available to help facilitate the development of Nunavut's labour force which will benefit the overall economy of the territory and Canada," the NEF says.

It's not clear if Jim Flaherty, the federal finance minister, will respond to the lobby effort and change the Northern Residents Tax Deduction in the next federal budget, which will likely be unveiled in February or March.

But it's likely that the Commons standing committee on finance, after hearing from a long list of northern groups, will make a recommendation to him in an upcoming report on tax fairness in Canada.