22 June 2004 External T.I. 2004-0065811E5 - Proration of Indian employment related income

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: How should proration be determined for employment related benefits if the individual's related employment income has been subject to different percentages of proration?

Position: Question of fact

Reasons: If the benefit is determined by reference to a period of service then the taxation of the employment income during the relevant period of service should be taken into consideration in determining the proration applicable to the employment related benefit. If the benefit is determined without reference to a period of service, then it is reasonable to mirror the tax treatment of the employment income being received immediately prior to commencement of the employment related benefit.

XXXXXXXXXX 						2004-006581
	Renée Shields
(613) 948-5273
June 22, 2004

Dear XXXXXXXXXX:

Re: Taxation of benefits paid to a status Indian employee during a period of leave

This is in response to your electronic correspondence of March 5, 2004 inquiring about the appropriate method of determining the proration applicable to benefits paid to a status Indian employee during a period of leave.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs.

The Indian Act Exemption for Employment Income Guidelines (the "Guidelines") include what is called the "Proration Rule," which provides that where less than 90% of a status Indian employee's employment duties are performed on a reserve, and no other Guideline applies, then the exemption is to be prorated. In addition, employment-related income, such as employment insurance ("EI") benefits and pension plan payments, will usually be exempt when received if related to employment income that was tax exempt. If a portion of the employment income was exempt, then a similar portion of the employment-related income will be exempt.

In situations in which a status Indian has had different levels of prorated employment income either in a year or during his or her career, it may seem difficult to decide what percentage of proration to apply to the employment-related benefit. In situations in which there is a service element relevant to the determination of the benefit to be paid, it is reasonable to consider the taxation treatment of the employment income received during the appropriate service period.

So, for example, in determining what percentage of proration applies to EI benefits, the CRA generally establishes a ratio of total exempt earnings to total insurable earnings in the previous 52 weeks, which time frame represents the qualifying period for EI. This ratio will establish the percentage of EI benefits that will be tax exempt. Since EI generally funds maternity and parental leave, any employer top ups to the EI benefits for such periods would be taxed in the same manner. Similarly, to determine the taxation of pension plan payments, reference must be made to the taxability of employment income in each year of employment during which pension contributions were made or pension benefits accrued. This calculation can become complex but your local tax services office can be of assistance.

There will be situations in which there is no service element particularly relevant to the determination of the benefit to be paid. Consider, for example, a long-term disability plan that provides immediate coverage to employees upon being hired and which will pay a specified percentage of the employee's salary level in effect at the time the benefits commence. In such a case, it is our opinion that to determine the proration percentage, reference should be made to the employment in which the employee is engaged at the time the disability occurs. If at that time the employee's employment income is 40% exempt, then this percentage would also apply to the disability benefits.

It is our opinion that this approach will be reasonable in the majority of cases although it is acknowledged that there may be situations in which extenuating circumstances make it appropriate to consider a longer period of time in determining the applicable proration percentage.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch