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:
An individual, who is a status Indian and a resident of Canada, was employed on the U.S. side of the XXXXXXXXXX reserve by an employer situated on the U.S. side of the reserve. Does the U.S. side of XXXXXXXXXX qualify as a "reserve" for purposes of the tax exemption provided under section 87 of the Indian Act?
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
The term "on a reserve", as used in the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), is defined to mean "on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act)." According to subsection 2(1) of the Indian Act, "reserve", for purposes of the Indian Act, means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. "Designated lands" is defined in subsection 2(1) of the Indian Act as "a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests."
As the legal title to the U.S. side of XXXXXXXXXX is not vested in Her Majesty, it does not qualify as a reserve for purposes of the Indian Act. Furthermore, the U.S. side of XXXXXXXXXX is not deemed to be a reserve for purposes of the Indian Settlements Remission Order or given similar treatment under any Canadian federal legislation. Accordingly, the U.S. side of XXXXXXXXXX does not qualify as a reserve for purposes of the Guidelines.
Pursuant to Article XV of the Canada-U.S. Income Tax Convention, employment income derived by a resident of Canada, in respect of employment exercised in the U.S., is taxable in Canada. Such income is taxable in Canada regardless of whether it may be exempt in the U.S. (i.e., there are no provisions in the Convention to exempt such income in Canada if it is exempt in the U.S.).
January 3, 1996
Ottawa Tax Services HEADQUARTERS
Client Assistance M. Azzi
957-8953
Attention: G. Obert
7-952864
Definition of "Reserve" for Purposes of the Indian Act Tax Exemption
This is in reply to your request of October 30, 1995 for our views as to whether a U.S. Indian reserve qualifies as a "reserve" for purposes of the tax exemption provided under section 87 of the Indian Act.
We understand that an individual, who is a status Indian and a resident of Canada, was employed in 1994 on the U.S. side of the XXXXXXXXXX reserve by an employer situated on the U.S. side of the reserve. In the individual's view, the employment income is tax-exempt, as the individual was a status Indian earning employment income from an employer located on a reserve.
Section 87 of the Indian Act exempts from taxation the personal property of an Indian situated on a reserve. The Courts have determined that, for the purposes of section 87 of the Indian Act, employment income is personal property. Consequently, in the case of employment income earned by an Indian, what must be determined is whether the employment income is situated on a reserve.
In determining where the employment income of status Indian is "situated", prior to the Williams case (92 DTC 6320), direction was provided by the Nowegijick case (83 DTC 5041), when it found that the situs of the debtor determined whether income was situated on a reserve and, therefore, exempt from taxation. In Williams, however, the Supreme Court of Canada rejected the situs of the debtor test as the sole test for determining whether personal property of an Indian was situated on a reserve, indicating that "an overly rigid test which identified one or two facts as having controlling force...would be open to manipulation and abuse." The approach adopted in Williams requires the examination of all factors connecting income to a reserve to determine if the income is situated on the reserve. The Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), issued by the Department in June 1994, incorporates various connecting factors that describe the employment situations covered by the Indian Act.
The term "on a reserve", as used in the Guidelines, is defined on page 10 of the Guidelines to mean "on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act)." According to subsection 2(1) of the Indian Act, "reserve", for purposes of the Indian Act, means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. "Designated lands" is defined in subsection 2(1) of the Indian Act as "a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests."
As the legal title to the U.S. side of XXXXXXXXXX is not vested in Her Majesty, it does not qualify as a reserve for purposes of the Indian Act. Furthermore, the U.S. side of XXXXXXXXXX is not deemed to be a reserve for purposes of the Indian Settlements Remission Order or given similar treatment under any Canadian federal legislation. Accordingly, the U.S. side of XXXXXXXXXX does not qualify as a reserve for purposes of the Guidelines.
Based on the information you have provided, and assuming that all of the employment duties were performed on the U.S. side of XXXXXXXXXX (i.e., none of the duties were performed on a Canadian Indian reserve), none of the Guidelines would apply to exempt the above-noted individual's employment income from taxation.
Finally, it should also be noted that, when the Guidelines were issued, the Department provided a transition period to December 31, 1994, to allow those who were negatively affected sufficient time to become aware of the implications of the Guidelines and to rearrange their affairs if necessary (this transition period only applied to arrangements already in place on December 31, 1993). Since, in this particular case, the employer (i.e., the debtor) was not situated on a reserve as defined above, the above-noted individual cannot rely on the pre-Williams interpretation to claim the exemption under section 87 of the Indian Act.
We trust that these comments will be of assistance.
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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