Tweaks welcome, but northern tax benefits could use an overhaul

While the Yukon government may still be grumbling over its recent loss of $6.5 million in federal transfer payments, local residents will end up with a little more money in their pocket come tax time next year.

While the Yukon government may still be grumbling over its recent loss of $6.5 million in federal transfer payments, local residents will end up with a little more money in their pocket come tax time next year.

Last week the Liberal government in Ottawa delivered on one of its election promises to northerners when it raised the Northern Residents Deduction in the budget. We will now be able to deduct $22 from our income for every day that we lived in one of the territories – an increase of $5.50 from 2015.

While the two policy decisions are unrelated, those who don’t think that the territorial government has a great track record of using its transfers responsibly or spreading the benefit evenly around the territory will be pleased that the federal government opted to do an end run around the local authority and give the money directly to us.

But there are some tweaks that could be made to the deduction to make it even better. For one, the deduction could be adjusted to provide more benefit for low-income northerners.

Tax deductions are by definition not a “progressive” policy tool and much more of their benefits end up in the hands of those with higher incomes.

For those of you who don’t do your own taxes it is important to understand the basic difference between a deduction and a credit. While the net benefit of a deduction will depend on your tax rate, the benefit of a tax credit is the same whether you make $40,000 or $100,000 or $200,000.

To calculate how much a tax credit will save you, simply take the amount of the credit and multiply it by the “lowest marginal rate” or the lowest combined federal and territorial tax rate. The fitness tax credit that the Liberals did away with last week, for instance, was a $1,000 credit. Since the lowest marginal rate in the Yukon is 21.4 per cent, everyone who spends $1,000 a year on their kids’ sports activities lost the same $214 when the credit was axed.

Deductions are done earlier in the tax calculation process. Rather than directly reducing the amount of tax you pay, deductions reduce how much of your income is counted when tax is calculated. Ultimately this has the same effect because less income means less tax, but since each of us pays tax at a different rate, deductions affect each of us differently.

If you can claim the full Northern Residents Deduction in 2016 you will be able to reduce your income by $8,052 – 366 days in this year (it’s a leap year remember) multiplied by $22. So what happens when you reduce your income by $8,052? Let’s do some crude calculations.

If you’re making $40,000 you will now calculate your taxes as if you made $31,948. For each dollar you make between those two amounts you would have paid 21.4 cents in tax, so the deduction saves you about $1,723.

If you were making $100,000 per year you calculate your taxes as if you made $91,948. As a result you will save about $2,971, because you were paying 36.9 cents in tax on the difference.

A $200,000 earner who was paying 41.8 cents on every dollar of income will save $3,365 – almost twice as much as a $40,000 income earner received.

(As an aside, for those who are curious, the increase announced last week will save our hypothetical tax filers about $430, $742 and $841 respectively.)

Obviously the solution to this inequity (if you think it is an inequity) isn’t to simply convert the deduction into a credit as that would just cost everyone except those in the lowest tax bracket a bunch of money.

We certainly don’t want that.

But one possible solution might be to make the deduction a credit and substantially increase its value so that every Yukoner gets the same amount.

Another tweak that could enhance the fairness of the deduction would be to extend the travel portion of the deduction to self-employed Yukoners.

The second (and more complicated) part of the Northern Residents Deduction allows Yukon employers to give their employees a “taxable travel benefit.” Subject to various arcane rules, employees can then deduct a portion of the amount that they spend on travel outside of the territory.

Contrary to popular belief, the travel portion of the Northern Residents Deduction need not be a separate lump sum payment given to the employee. All that is required is that the employer and employee agree (ideally in writing) that some portion of the employee’s pay is a “taxable travel benefit” and input that amount in the correct box on the employee’s T4. The misunderstanding that it must be separate payment is perpetuated by the fact that the Yukon government gives its staff the “Yukon bonus” once a year in one chunk and without withholding any tax.

There is no downside for the employer to make some portion of the employees pay a “taxable travel benefit” and it can mean hundreds of dollars in tax savings to the employee. Any employer who isn’t already doing so ought to take advantage. It is surprising how many aren’t.

But the travel portion of the Yukon benefit isn’t available to self-employed Yukoners and it is hard to envision a strong rationale for that. After all, people who work for themselves like to travel as well.

Perhaps the government ought to let self-employed northerners in the door by deeming some portion of their business income as being a “taxable travel benefit.”

Kyle Carruthers is a born-and-raised Yukoner who lives and practises law in Whitehorse.

Just Posted

XX
WYATT’S WORLD

Wyatt’s World for May 12, 2021.… Continue reading

Health Minister Tracy-Anne McPhee and Chief Medical Officer Dr. Brendan Hanley announced youth vaccination clinics planned for this summer. (Alistair Maitland/Yukon government file)
Vaccination campaign planned for Yukon youth age 12 and up

The Pfizer vaccine was approved for younger people on May 5.

Chief Medical Officer of Health Dr. Brendan Hanley announced two new cases of COVID-19 on May 11. (Crystal Schick/Yukon News file)
Two new cases of COVID-19 reported, one in the Yukon and one Outside

One person is self-isolating, the other will remain Outside until non-infectious

Courtesy/Yukon Protective Services Yukon Wildland Fire Management crews doing a prescribed burn at the Carcross Cut-Off in May 2020.
Prescribed burns planned near Whitehorse neighbourhoods to improve wildfire resistance

Manual fuel removal and the replacement of conifers with aspens is also ongoing.

Chloe Tatsumi dismounts the balance beam to cap her routine during the Yukon Championships at the Polarettes Gymnastics Club on May 1. (John Tonin/Yukon News)
Gymnasts vie in 2021 Yukon Championships

In a year without competition because of COVID-19, the Polarettes Gymnastics Club hosted its Yukon Championships.

Haley Ritchie/Yukon News file
File photo of the legislative assembly. The previous spring sitting began on March 4 but was interrupted due to the election.
Throne speech kicks off short spring legislature sitting

The government will now need to pass the budget.

The deceased man, found in Lake LaBerge in 2016, had on three layers of clothing, Dakato work boots, and had a sheathed knife on his belt. Photo courtesy Yukon RCMP
RCMP, Coroner’s Office seek public assistance in identifying a deceased man

The Yukon RCMP Historical Case Unit and the Yukon Coroner’s Office are looking for public help to identify a man who was found dead in Lake LaBerge in May 2016.

Yukon Zinc’s Wolverine minesite has created a mess left to taxpayers to clean up, Lewis Rifkind argues. This file shot shows the mine in 2009. (John Thompson/Yukon News file)
Editorial: The cost of the Wolverine minesite

Lewis Rifkind Special to the News The price of a decent wolverine… Continue reading

Letters to the editor.
Today’s mailbox: border opening and Yukon Party texts

Dear Premier Sandy Silver and Dr Hanley, Once again I’m disheartened and… Continue reading

Fire chief Jason Everett (Crystal Schick/Yukon News file)
City launches emergency alert system

The city is calling on residents and visitors to register for Whitehorse Alert

Two young orienteers reach their first checkpoint near Shipyards Park during a Yukon Orienteering Association sprint race May 5. (John Tonin/Yukon News)
Orienteers were back in action for the season’s first race

The Yukon Orienteering Association began its 2021 season with a sprint race beginning at Shipyards.

Whitehorse City Hall (Yukon News file)
City news, briefly

A look at issues discussed by Whitehorse city council at its May 3 meeting and the upcoming 20-minute makeover.

Deputy Prime Minister Chrystia Freeland met with MP Larry Bagnell and representatives from the Tourism Industry Association via Zoom on May 4. (Facebook)
Deputy Prime Minister Chrystia Freeland met with MP Larry Bagnell and representatives from the Tourism Industry Association via Zoom on May 4. (Facebook)
Deputy Prime Minister talks tourism in “virtual visit” to the Yukon

Tourism operators discussed the budget with Freeland

Most Read