26 May 2006 External T.I. 2006-0167041E5 - Employment income of status Indian

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: Would the employment income of certain status Indian individuals be sufficiently connected to a reserve to be tax-exempt?

Position: No

Reasons: None of the Guidelines is met. Furthermore, the extenuating circumstances that created additional connecting factors in certain other limited situations do not exist here.

 								2006-016704
XXXXXXXXXX 							Renée Shields
(613) 948-5273
May 26, 2006

Dear XXXXXXXXXX:

Re: Status Indian employees of XXXXXXXXXX

This is in response to your letter of January 9, 2006 inquiring about the taxation of employment income earned by status Indian employees of XXXXXXXXXX.

The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

A status Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In the case of Williams v. the Queen, the Supreme Court of Canada created the connecting factors test to assist in this determination. The test requires identification of various connecting factors that tie the property to a location either on or off a reserve and a weighing of the significance of each such factor. To simplify applying the connecting factors test to a status Indian's employment income, the Canada Revenue Agency developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The individuals referred to in your correspondence do not satisfy any of the Guidelines.

Because the Guidelines were developed as an administrative tool, they do not necessarily constitute a definitive test. It is acknowledged that occasionally there may be unique situations in which additional connecting factors are relevant and may be given significant emphasis. You have referred us to two previous Technical Interpretations, namely 2004-0072201I7 and 2004-007305 and assert that your clients meet the requirements described therein. Both Interpretations described a unique circumstance in which an exemption was provided notwithstanding that none of the Guidelines were satisfied. This circumstance included a connecting factor described as a historical connection between the reserve and the employer business. We went on to explain that a historical connection of sufficient significance would be one in which a business came into existence prior to or contemporaneously with the creation of the reserve. The situation you have described does not satisfy this factor and therefore does not fit within the circumstances described in the Interpretations.

The comments of the Federal Court of Appeal in two fairly recent cases are particularly relevant to your inquiry. These comments were summarized in the aforementioned Interpretation 2004-0072201I7:

As the Federal Court of Appeal said in the case of Akiwenzie v. the Queen (2004 DTC 6007), the fact that an employee's duties were beneficial to reserves cannot result in his income being situated on these reserves. The decision also cites the case of Monias v. the Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:

That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important.

Accordingly, in our view, the employment income of status Indian employees of XXXXXXXXXX is not exempted by any of the Guidelines nor by any connecting factors resulting from unique extenuating circumstances.

We trust that these comments will be of assistance.

Yours truly,

Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch