24 October 1994 External T.I. 9421455 - INDIANS - TAXATION OF EMPLOYMENT 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether employment income received by Indians who work as crew members on a fishing boat is tax exempt?

Position TAKEN:

Question of fact.

Reasons FOR POSITION TAKEN:

Where the employment duties of an Indian are performed entirely off a reserve, the employment income earned is tax-exempt only if both the employer is resident on a reserve and the Indian lives on a reserve.

				5-942145

XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

October 24, 1994

Dear Sir:

Re: Taxation of Employment Income Received by Status Indians

We are writing in response to your letter of August 3, 1994 addressed to the Victoria District Office which was forwarded to us for reply.

You inquire as to the tax status of employment income received by status Indians, some of whom are employed as crew members and others as managers. You indicate that not all of the Indians live on a reserve. The employer, XXXXXXXXXX operates a fishing business. It maintains an office on the XXXXXXXXXX Reserve, where it receives all income from the sale of fish.

Our Comments

Following the Supreme Court of Canada decision in the Williams case, (92 DTC 6320), the Department developed guidelines to clarify which types of employment situations qualify for the Indian Act tax exemption. According to these guidelines, in this situation, where the employment duties of the crew members are performed entirely off a reserve, the employment income earned will be tax-exempt only if both the employer is resident on a reserve and the Indian crew members live on a reserve. As regards the managers, if at least 90% of their duties are performed on the reserve, their employment income will be tax-exempt. If such is not the case, their employment income may be exempt under either Guideline 2 or 3, depending on the facts. If, however, less than 90% of their duties are performed on the reserve and neither Guideline 2 nor 3 applies, the portion of their employment income related to the duties performed on the reserve may be exempt from taxation.

The Department considers that an Indian lives on a reserve if the Indian lives on the reserve in a domestic establishment which is his or her principal place of residence and the centre of his or her daily routine. However, the fact that an Indian is absent from a reserve for short periods of time because of either the type of employment duties being performed, the distance between the reserve and the location of those duties, or both, does not necessarily mean that the Indian has taken up residence off the reserve.

With respect to the residence of the employer, the Department considers that an employer is resident on a reserve if the reserve is the place where the central management and control over the employer organization is actually located. It is a question of fact where the central management and control is exercised. Although management and control is generally exercised at the principal place of business, it may be exercised in a place other than the principal administrative office of the organization. In our opinion, in the situation you have described, it is likely that the employer would be considered to be resident on a reserve.

However, our comments above should not be seen as a confirmation that the crew members are employees as opposed to self-employed. We cannot determine from the information you have provided whether the crew members you refer to are employees or self-employed. For your information, the Department generally considers a person to be a self-employed fisherperson if any of the following applies:

• the person owns or rents a fishing boat,
• the person is a captain of a fishing boat, or
• the person is a sharesperson who gets a share of the catch.

The Department has yet to identify the factors connecting self-employed business income earned by Indians to a reserve.

In your letter, you express the view that the Guidelines were prepared prematurely and request that they be withdrawn until all submissions made prior to June 30, 1994 can be properly considered. You also indicate that the Williams case has been misinterpreted and request that we consider the letters you attached which state that the Supreme Court's decision in the Williams case does not change or narrow the test for determining the location of an Indian's income that was laid out in the Nowegijick decision.

It is our opinion that the Williams decision did change the way the location of income for the purposes of the Indian Act tax exemption should be determined. In Williams, the Supreme Court said:

The proper approach to determining the situs of intangible personal property is for the court to evaluate the various connecting factors which tie the property to one location or another. Given the purpose of the exemption, the ultimate question is to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property on a reserve.

Therefore, to determine if an Indian's income is on a reserve, one has to look at the factors which connect the income to a reserve. The purpose of the Guidelines is to provide various examples of the types of factors that connect income to a reserve.

Although the Williams case concerned unemployment insurance benefits, the Court had to determine the location of the employment income in order to decide whether or not the benefits that were based on them was tax exempt. In so doing, it did establish parameters for determining the location of employment-related income.

You have also attached a June 30, 1993 letter written by the Right Honourable Jean Chrétien, while Leader of the Opposition, in which he expressed concerns about the previous Government's interpretation of the Supreme Court of Canada's decision in the Williams case and the lack of consultations with Aboriginal organizations in formulating guidelines based on that decision.

Over the course of the 1993 summer (after the June 30 letter), departmental officials did undertake an extensive series of meetings with Aboriginal political organizations and tribal councils, consultants and contractors, tax practitioners and other affected individuals. In addition, they received over 250 written submissions. Based on this input and a thorough analysis of the case, guidelines were drafted.

The Prime Minister is aware of the fact that these draft Guidelines were issued. He is now satisfied that significant work has been carried out by departmental officials and that the proposed guidelines apply the Williams decision in a fair and liberal manner consistent with the Supreme Court decision.

As mentioned in the letter which accompanied these Guidelines, we gave those who wished to comment up to the end of March 1994 to provide us with their input. All of the submissions were reviewed and analyzed and the Guidelines were finalized. The final version of the Guidelines is enclosed for your information.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch

cc. Rick Owen