The federal government's budget includes a long-awaited 10 per cent raise in the northern residents' tax deduction.

"To help offset the higher cost of living, we are increasing the daily amount of the northern residents' deduction by 10 per cent to $16.50," Flaherty told the House of Commons Tuesday afternoon.

That would bring the maximum annual amount of the residency deduction, which is currently $15 a day, to $6,022.50 from $5,475 for residents living in the Yukon, Northwest Territories, Nunavut and Labrador, as well as those living in far northern communities in B.C., Alberta, Saskatchewan, Manitoba, Ontario and Quebec.

Those living in the "intermediate zone," which comprises some northern communities in the provinces, would also see a higher deduction — $3,011.25 instead of $2,737.50.

According to the Canada Revenue Agency, residents can qualify for the northern deductions if they have lived in the North or in the intermediate zone for the last six consecutive months.

Should the budget pass through the House of Commons, the changes would be retroactive to Jan. 1.

The government expects the proposed changes to cost "a small amount" in the 2007-2008 fiscal year, then cost $10 million in each of the next two years.

Flaherty's budget stated that the increase in the deduction was made to "further assist in drawing skilled labour to northern and isolated communities."

"This is long overdue," Flaherty said to applause, noting that the deduction had not increased in two decades.

$720M for new Arctic icebreaker

Northern MPs have long called for an increase to the northern tax deduction, which was introduced in 1988 to help offset the high cost of living in northern and remote parts of Canada.

Flaherty's budget also touched on Arctic sovereignty, promising to replace the existing Canadian Coast Guard vessel Louis S. St.-Laurent in 2017 with a new $720-million "polar class icebreaker that has greater icebreaking capabilities."

It also committed $20 million over the next two years to conduct extensive mapping of the Arctic and Atlantic seabeds, as part of its application to the United Nations to claim areas of the continental shelf.

Nunavut fishery given $8M over 2 years

The budget also offered help to Nunavut's $50-million offshore shrimp and turbot fishery, proposing to spend $8 million over two years to build and run a commercial harbour in Pangnirtung.

"This initiative will augment the current limited capacity for the marine shipment of goods during open-water season and increase the safety of vessels offloading their catch," Flaherty's budget stated in part.

"It will also enable the community to further develop its economic potential, encourage the development of tourism in the region and create local employment."

Northern exposure in research funding

The budget promises $80 million more per year for Canada's research grant councils, with some of that money being earmarked for northern research.

The Canadian Institutes of Health Research would get $34 million annually for research into Canadian health priorities, including those affecting northerners.

As well, the Social Sciences and Humanities Research Council would receive $12 million per year for research on "the social and economic development needs of northern communities."

Mineral exploration tax credit extended

To help mining companies explore in the North and other parts of Canada, the budget proposed a one-year extension of its mineral exploration tax credit for investors who put money in "flow-through shares" that finance mineral exploration efforts.

The credit, which was supposed to end this year, would be extended until March 31, 2009, if the budget passes.

The budget also proposes $34 million over the next two years to help the Department of Natural Resources conduct geological mapping, which it says can with help mineral exploration efforts.