13 January 2000 Internal T.I. 9926817 - 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.

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 an Indian's employment income is taxable. The particular individual lives on a reserve. Although the employer's objective is to serve the needs of aboriginals, it also serves the needs of non-aboriginals, and its location is off reserve.

Position: Likely taxable.

Reasons: In order for Guideline 2 of the "Indian Act Exemption for Employment Income Guidelines" to apply, the employee must live on a reserve and the employer must be resident on a reserve. The condition that the employer is resident on a reserve means that the reserve is the place where the central management and control over the employer organization is actually located.

		January 13, 2000

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
	Client Services Division	J. Gibbons
(613) 957-2135
	Attention: XXXXXXXXXX
		7-992681

XXXXXXXXXX (the "taxpayer")

We are replying to your facsimile of September 30, 1999, in which you requested our views on whether the taxpayer's employment income is taxable. The relevant facts, as we understand them, are as follows:

1. The taxpayer is a status Indian who resides on the XXXXXXXXXX Reserve.

2. The taxpayer is employed by the XXXXXXXXXX (the "Hostel").

3. The main office of the employer is located off reserve at XXXXXXXXXX.

4. The work is performed on the Hospital's premises, XXXXXXXXXX.

5. The Hostel's mandate is to meet not only the needs of the XXXXXXXXXX First Nations, but all First Nations peoples and non-aboriginals within the XXXXXXXXXX and surrounding area, who require its services.

6. There is a Hostel Management Committee that oversees the operation of the Hostel and is co-chaired by a XXXXXXXXXX First Nations representative and the CEO of the XXXXXXXXXX Hospital. The Committee membership is made up of representatives from other First Nations' communities and Hospital staff.

7. As part of the co-management agreement, the Hospital processes the payroll, attends to any maintenance issues, and oversees the daily staffing needs of the Hostel. All employee issues, policy setting, budget development, and long-term planning are attended through the Hostel Management Committee.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for an Indian's personal property situated on a reserve. In this regard, the courts have ruled that the reference to personal property in section 87 of the Indian Act includes income. In determining whether the income earned by an Indian is situated on reserve, and thus exempt from taxation, the approach taken by the Supreme Court of Canada in the 1992 case of Glenn Williams v. Her Majesty the Queen (92 DTC 6320) is followed. This approach requires the examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Supreme Court also indicated that the ultimate question is to determine 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 situated on a reserve. One general direction provided in Williams was that "an overly rigid test which identified one or two factors as having controlling force ... would be open to manipulation and abuse."

Based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals, the Agency 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 Agency 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. We have enclosed a copy of the 1994 Guidelines for your files.

It is apparent that Guidelines 1 and 3 will not apply since none of the duties of employment are performed on a reserve, and Guideline 4 will not apply since the Hostel's activities are not carried on exclusively for the benefit of Indians who for the most part live on reserves.

In order for Guideline 2 to apply, the employee must live on a reserve and the employer must be resident on a reserve. The condition that the employer is resident on a reserve means that the reserve is the place where the central management and control over the employer organization is actually located. The central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. However, it may be that the real management and control of an organization is exercised by some other person or group of persons. Generally, management and control are exercised at the principal place of business, but it is recognized that this function may be legitimately exercised at a place other than the principal administrative office of the organization. In the taxpayer's situation, it is the Hostel Management Committee that manages and controls the operation of the Hostel. Thus, unless the Committee holds its meetings on a reserve, it seems certain that the employer is resident off reserve and accordingly the taxpayer's income is taxable.

In regard to the taxpayer's reliance on the Shilling case, the Agency has appealed this case. Accordingly, our position with respect to employment income earned by a status Indian remains unchanged.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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