Regulations Amending the Income Tax Regulations (Northern Residents Deductions): SOR/2025-97
Canada Gazette, Part II, Volume 159, Number 7
Registration
SOR/2025-97 March 12, 2025
INCOME TAX ACT
P.C. 2025-400 March 12, 2025
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, under section 221footnote a of the Income Tax Act footnote b, makes the annexed Regulations Amending the Income Tax Regulations (Northern Residents Deductions).
Regulations Amending the Income Tax Regulations (Northern Residents Deductions)
Amendments
1 (1) Subsection 7303.1(1) of the Income Tax Regulations footnote 1 is amended by striking out “or” at the end of paragraph (e), by adding “or” at the end of paragraph (f) and by adding the following after paragraph (f):
- (g) Haida Gwaii.
(2) The portion of subsection 7303.1(2) of the Regulations before paragraph (a) is replaced by the following:
(2) An area is a prescribed intermediate zone for a taxation year for the purposes of section 110.7 of the Act where it is Anticosti Island, the Magdalen Islands or Sable Island, or where it is not part of a prescribed northern zone referred to in subsection (1) for the year and is
Application
2 Section 1 applies to the 2025 and subsequent taxation years.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Issues
Haida Gwaii is considered part of the Intermediate Zone for the purposes of the Northern Residents Deductions, which means that residents are eligible for up to half the maximum value of the deductions.
The communities on the islands of Haida Gwaii are small and remote. About 4 000 people live on the islands in total, and many services are not available locally. Residents must either fly or travel by ferry for at least 7 hours to reach mainland British Columbia.
In the 2024 Fall Economic Statement on December 16, 2024, the government announced its intention to reclassify Haida Gwaii from the Intermediate Zone to the Northern Zone for the purposes of the Northern Residents Deductions. Amendments to the Income Tax Regulations are necessary to implement this commitment.
Background
Individuals who live in prescribed areas of Canada for at least six consecutive months beginning or ending in a taxation year may claim the Northern Residents Deductions in computing their taxable income for that year. Individuals with income too low to pay tax or whose income is considered tax exempt do not benefit from the Deductions, including people with status under the Indian Act whose income is sufficiently connected to a reserve.
The Northern Residents Deductions comprise a residency deduction and a deduction for travel expenses. The Income Tax Regulations prescribe the geographic areas (known as the “Northern Zone” and the “Intermediate Zone”) that are eligible for the Northern Residents Deductions. Residents of the Northern Zone are eligible for up to the maximum value of the deductions, while residents of the Intermediate Zone are eligible for up to half the maximum value of the deductions.
The residency component of the deduction is calculated based on the number of days an individual lives in a prescribed zone. The basic residency deduction is $11 per day for the Northern Zone and $5.50 per day for the Intermediate Zone. Up to one taxpayer per household may also claim an additional residency amount of $11 per day for the Northern Zone or $5.50 per day for the Intermediate Zone. However, the additional residency amount can only be claimed by a taxpayer if no other person who lives in the same household is claiming the basic residency amount.
Under the travel portion, Northern Zone and Intermediate Zone residents may claim the cost of up to two vacation trips per year and the cost of an unlimited number of medical trips, subject to certain limits. The amount of the travel deduction is reduced by half for residents of the Intermediate Zone. A taxpayer can choose to claim travel costs on behalf of other members of their household.
Taxpayers claim the Northern Residents Deductions by filling out form T2222 and entering the resulting deduction amount on their tax return (or by providing the necessary information when prompted by tax software). Taxpayers must indicate whether they are a resident of the Northern Zone or the Intermediate Zone, which determines whether they are eligible for the maximum amount or for half the maximum amount.
The current zonal system of eligibility was established following a review by the 1989 Task Force on Tax Benefits for Northern and Isolated Areas. The Task Force held consultations across the country and recommended that only communities within a “Northern Zone” would qualify for tax benefits in order to ensure that eligible communities had similar characteristics. The Task Force used objective criteria to compare communities on the basis of isolation, nordicity, community characteristics, and environmental factors. The Task Force chose not to directly consider cost of living, but did take into account factors associated with access to services and remoteness, including local population and distance to the nearest urban centre.
Following further consultations, the Government decided to create an “Intermediate Zone” to bridge the gap between the Northern Zone and the less isolated areas of the country. The Intermediate Zone was developed by the Government of the day using a methodology similar to that employed by the Task Force in developing the Northern Zone. The current system took effect starting in 1991.
Objective
The amendments will ensure that residents of Haida Gwaii are eligible for up to the maximum value of the Deductions.
Description
The amendments will modify subsection 7303.1(1) of the Income Tax Regulations to provide that Haida Gwaii is included in the definition of the Northern Zone for the purposes of the Northern Residents Deductions.
The amendments will also modify subsection 7301.1(2) of the Income Tax Regulations to remove Haida Gwaii from the definition of the Intermediate Zone for the purposes of the Northern Residents Deductions.
Regulatory development
Consultation
The Government has heard from residents and representatives of Haida Gwaii in favour of reclassifying Haida Gwaii from the Intermediate Zone to the Northern Zone, including a petition presented to the House of Commons in 2021 and correspondence sent to the Minister of Finance in 2023 from a Haida Gwaii resident. The Member of Parliament representing Haida Gwaii, Mr. Taylor Bachrach, has expressed support for reclassifying Haida Gwaii and in 2021 sponsored a Private Member’s Bill to this effect. Generally speaking, proponents of the change have cited the islands’ high cost of living due to its remote geography and the need to travel a long distance to mainland British Columbia to access specialized services.
The Government concluded that it would be appropriate to classify Haida Gwaii as part of the Northern Zone rather than the Intermediate Zone for the purposes of the Northern Residents Deductions, and the proposal was announced in the 2024 Fall Economic Statement on December 16, 2024. No comments have been received to date, and media reaction to the announcement has been positive.
The Amendments were exempted from pre-publication in the Canada Gazette, Part I, as the public was already aware of the proposal and it is not expected that further consultations would result in any feedback or modifications.
Modern treaty obligations and Indigenous engagement and consultation
Indigenous residents of Haida Gwaii with sufficient taxable income will benefit from a reduction in tax liability as they will be eligible to claim a larger amount under the Northern Residents Deductions. The amendments are not expected to impact treaties with Aboriginal peoples of Canada. The Department of Finance conducted an initial assessment that examined the geographical scope and subject matter of the initiative in relation to modern treaties in effect and did not identify any potential modern treaty impacts.
Instrument choice
No other options were considered as the only option to implement the government’s commitment is to amend the Income Tax Regulations.
Regulatory analysis
Benefits and costs
There are minimal costs associated with the amendments, and accordingly a full cost-benefit analysis has not been completed. Residents of Haida Gwaii will continue to claim the Northern Residents Deductions when they file their tax returns, except that they will indicate that they are residents of the Northern Zone instead of the Intermediate Zone.
The amendments require that the Canada Revenue Agency update its website to inform Haida Gwaii residents that they may claim the Northern Residents Deductions as residents of the Northern Zone instead of the Intermediate Zone. The proposal may also require publishers of tax software to update their instructions to indicate that Haida Gwaii is part of the Northern Zone. Costs associated with updates to the relevant Canada Revenue Agency webpage and to tax software instructions have not been monetized but are expected to be minimal. No changes to tax processing systems or tax forms are required.
The amendments will directly benefit residents of Haida Gwaii who owe tax by increasing their after-tax income. The amendments may also lead to a modest increase in economic activity in Haida Gwaii communities.
Small business lens
Analysis under the small business lens concluded that the amendments would have no direct impacts on Canadian small businesses. The amendments may benefit small businesses to the extent that the increased Northern Residents Deductions available to Haida Gwaii residents leads to an increase in economic activity on the islands.
One-for-one rule
The one-for-one rule does not apply, as the amendments would not result in a change in the administrative burden imposed on businesses.
Regulatory cooperation and alignment
There is no regulatory cooperation component associated with the amendments.
Effects on the environment
In accordance with the Cabinet Directive on Strategic Environmental and Economic Assessment (SEEA Directive), a comprehensive SEEA has been conducted. Regulatory proposals subject to the Cabinet Directive on Regulation are exempted from the economic analysis elements of the SEEA Directive.
The amendment will not have any direct climate impacts, either positive or negative. However, the amendment may have an impact on Canada’s resilience to climate change. The amendment may slightly decrease resilience to the extent that it could encourage more people to relocate to the islands of Haida Gwaii, which face a relatively high risk of climate impacts due to coastal erosion and flooding. The amendment may slightly increase resilience to the extent that it would increase after-tax incomes of residents of Haida Gwaii, which may put residents in a better position to respond and adapt to the effects of climate change.
Gender-based analysis plus
Men and women have equal access to the Northern Residents Deductions. However, taxpayers can effectively choose to claim the residency deduction and travel deduction on behalf of other members of their household, and it is generally advantageous for the highest-income member of the household to claim on behalf of lower-income household members. Since men in general tend to have higher earnings than women, and as a result tend to be subject to a higher marginal tax rate than women, men tend to benefit relatively more than women in terms of the tax relief provided by the Deductions.
As about 40% of the residents of Haida Gwaii are Indigenous, it is expected that beneficiaries of the amendments are more likely to be Indigenous than the Canadian population. However, some Indigenous residents of Haida Gwaii may not benefit if they have insufficient taxable income, for instance if most or all their income is sufficiently connected to a reserve and is tax exempt under section 87 of the Indian Act.
Implementation, compliance and enforcement, and service standards
Implementation
The reclassification of Haida Gwaii from the Intermediate Zone to the Northern Zone will apply to the 2025 and subsequent taxation years. The policy change will be implemented by the Canada Revenue Agency before the beginning of tax filing for the 2025 taxation year by updating their guidance concerning the communities that are included in the Northern Zone and the Intermediate Zone for the purposes of the Northern Residents Deductions.
Contact
Mark Maxson
Senior Director
Personal Income Tax Division
Department of Finance Canada
Email: mark.maxson@fin.gc.ca