15 May 1996 Internal T.I. 9609447 - INDIAN EXEMPTION GUIDELINES AND "SITUS" OF THE CROWN

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:

1.Whether the comments made by the Court in Williams, that there are "conceptual difficulties in establishing the situs of a Crown agency" and that the "Crown is present throughout Canada", can be argued as implying that the Crown (as an employer) is present on reserves and that, for purposes of the Indian Act exemption, the Crown is located on a reserve.

2.Is the full amount of the employment income of XXXXXXXXXX a status Indian, exempt from taxation?

Position TAKEN:

1.No.

2.No.

Reasons FOR POSITION TAKEN:

1.The comments made by the Court in Williams, with respect to the presence of the Federal Crown, do not in any manner establish that the "situs" of the Crown is on a reserve, but that its situs may be irrelevant for purposes of the conflict of laws. These comments were made in the context of noting that the Federal Crown may by sued in any jurisdiction across Canada; not in determining the actual location of the Crown. The purpose of these comments was to establish that "the residence of the debtor is a connecting factor of limited weight in the context of unemployment insurance benefits", without, in fact, establishing the situs of the Crown. The Court did, however, also specify that "This does not necessarily mean that the physical location of the Crown is irrelevant to the purposes underlying the exemption from taxation provided by the Indian Act".

The Crown is not resident on a reserve, as concluded in the Horn case (89 DTC 147) and subsequently adopted in the Kirkness et al. case (91 DTC 905). Furthermore, as

XXXXXXXXXX

in our view, the debtor cannot be said to be located on a reserve.

2.Guidelines 2, 3 and 4 cannot apply to exempt XXXXXXXXXX employment income from taxation, since she does not live on a reserve (she lives in XXXXXXXXXX) and her employer (XXXXXXXXXX) is not resident on a reserve. Also, she does not meet the requirement of Guideline 3 that more than 50% of her employment duties are performed on a reserve (XXXXXXXXXX% of her duties are performed on reserves) and her employer is not a person described in Guideline 4.

Guideline 1 cannot apply to exempt all of XXXXXXXXXX employment income from taxation, as she does not perform at least 90 per cent of her employment duties on a reserve. However, the Proration Rule to Guideline 1 can apply to exempt the portion of her employment income that relates to her employment duties performed on a reserve.

								May 15, 1996

	XXXXXXXXXX Centre Tax Services	HEADQUARTERS
	Audit Support Group				M. Azzi
								957-8953
	Attention:  XXXXXXXXXX
								7-960944

Indian Act Exemption for Employment Income

This is in reply to your memo of March 14, 1996, wherein you requested our views on whether the employment income of XXXXXXXXXX a status Indian, is exempt from taxation for the 1991 to 1994 taxation years. In particular, you requested our views on the situs of XXXXXXXXXX employer in light of a legal opinion which she provided.

We understand that XXXXXXXXXX and, during the years in question, was employed in XXXXXXXXXX Her employment duties were performed both on and off reserves. You indicated that for the 1991 to 1993 taxation years, she had requested and was granted exemption for approximately XXXXXXXXXX% of her employment income, based on the number of days she had actually worked on reserves. For 1994, however, we understand that she requested and was allowed exemption for the full amount of her employment income by Initial Assessing; although her situation was unchanged. She is now requesting the same treatment for 1991 to 1993.

The legal opinion provided by XXXXXXXXXX legal counsel indicates that, in Williams (92 DTC 6320), the Court concluded that the Crown in right of the Government of Canada is present throughout Canada. As a result, her legal counsel feels that the Crown in right of Ontario must be considered to be present throughout Ontario, including reserves, and that, for purposes of the Indian Act exemption, an argument can be made that the debtor, the Provincial Crown, is located on a reserve.

Our Comments

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 Williams, 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 factors 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.

Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Department identified a number of connecting factors that can be used to determine whether employment income is situated on a reserve. With a view to assisting the Indian community, the Department developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. You may wish to send a copy of the Guidelines to XXXXXXXXXX for her information.

The Guidelines are relevant for taxation years after 1991; however, 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 originally applied to 1992 and 1993, but was subsequently extended to December 31, 1994 for arrangements already in place at December 31, 1993). As indicated above, prior to Williams, that is for years prior to 1992, the views provided in Nowegijick applied. However, remission orders also applied from 1983 to 1992 to remit income tax in respect of employment income of an Indian that was attributable to the Indian's duties performed on a reserve.

As a general rule, the Department does not normally reassess on the basis of a court decision, since this would require a retroactive application of the court decision. It appears, however, that XXXXXXXXXX legal counsel wishes to apply both the Williams and Nowegijick interpretations simultaneously, in that he has identified comments made in Williams to conclude that the "debtor", i.e., the Provincial Crown, is located on a reserve, so that payments it made to XXXXXXXXXX would be exempt under the Nowegijick interpretation.

Notwithstanding the above, in our view, the comments made by the Court in Williams, with respect to the presence of the Federal Crown, do not in any manner establish that the "situs" of the Crown is on a reserve, but that its situs may be irrelevant for purposes of the conflict of laws. These comments were made in the context of noting that the Federal Crown may by sued in any jurisdiction across Canada; not in determining the actual location of the Crown. The purpose of these comments was to establish that "the residence of the debtor is a connecting factor of limited weight in the context of unemployment insurance benefits", without, in fact, establishing the situs of the Crown. The Court did, however, also specify that "This does not necessarily mean that the physical location of the Crown is irrelevant to the purposes underlying the exemption from taxation provided by the Indian Act".

In our view, the Crown is not resident on a reserve, as concluded in the Horn case (89 DTC 147) and subsequently adopted in the Kirkness et al. case (91 DTC 905). Furthermore, as XXXXXXXXXX in our view, the debtor cannot be said to be located on a reserve.

As the debtor is not located on a reserve, in our view, XXXXXXXXXX was correctly assessed with respect to her 1991 employment income, in that the portion of her employment income that related to duties performed on reserves was treated as exempt pursuant to the above-noted remission orders. With respect to the 1992 and subsequent taxation years, the Guidelines will apply to XXXXXXXXXX as they do not negatively affect her (i.e., the above-noted transition period does not apply).

Based on the information provided, Guidelines 2, 3 and 4 cannot apply to exempt XXXXXXXXXX employment income from taxation, since she does not live on a reserve and her employer is not resident on a reserve. Also, she does not meet the requirement of Guideline 3 that more than 50% of her employment duties are performed on a reserve and her employer is not a person described in Guideline 4.

As for Guideline 1, it cannot apply to exempt all of XXXXXXXXXX employment income from taxation, as she does not perform at least 90 per cent of her employment duties on a reserve. However, the Proration Rule to Guideline 1 can apply to exempt the portion of her employment income that relates to her employment duties performed on a reserve.

Based on your memo, it appears that XXXXXXXXXX was assessed in accordance with the Proration Rule for 1992 and 1993, and therefore these assessments appear to be correct. We do note, however, that your memo indicates that she originally claimed that approximately XXXXXXXXXX% of her income was exempt based on the number of days actually worked on reserves, whereas the documents attached to your memo indicate that she now claims that the actual time which related to her "physical attendance on reserve" amounted to XXXXXXXXXX% per year. It is unclear whether the "physical attendance" refers strictly to time spent performing employment duties. In this respect, it should also be noted that, in calculating the time spent performing employment duties on a reserve, travel time to and from the reserve is not included.

Finally, as XXXXXXXXXX situation did not change in 1994, in our view, the full amount of her 1994 employment income should not have been exempt. That is, the Proration Rule should have applied to exempt the portion of her employment income that relates to her employment duties performed on a reserve.

We trust that these comments will be of assistance.

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch