24 March 2010 Ministerial Correspondence 2009-0352661M4 - Indian Employment Income--Head Office on Reserve

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: If the head office of an employer is located on a reserve, will the employment income earned by Indian employees be exempt from tax?

Position: Maybe exempt.

Reasons: Guideline 4 may apply in this situation.

March 24, 2010

XXXXXXXXXX

Dear Colleague:

I am writing in response to your correspondence addressed to my predecessor, the Honourable Jean-Pierre Blackburn, in which you request information on behalf of your constituent regarding the taxation of employment income paid to an individual from a head office located in a First Nation community. In your correspondence , it seems as though you are referring to income received by an individual who is an Indian, as that term is used in the Indian Act, and who therefore could be entitled to a tax exemption with respect to that income. I apologize for the delay in replying.

Generally, Indians are taxable in Canada on the same basis and in the same manner as non-Indian individuals. However, the income of an Indian may qualify for an exemption from income tax under the Indian Act if the income is determined to be situated on a reserve. We have to consider connecting factors when making such a determination, meaning that factors connecting the income to a location either on or off a reserve must be identified, and the significance of each of the factors must be weighed. The Indian Act defines the term reserve as a specific, designated parcel of land; therefore, the tax exemption does not apply to income connected to all traditional land or lands occupied by First Nation communities.

To assist Indians in determining whether the Indian Act exemption applies to their employment income, the Canada Revenue Agency (CRA), in consultation with interested Indian groups as well as individuals and other government departments, developed the Indian Act Exemption for Employment Income Guidelines. These guidelines apply to common employment situations involving Indian individuals. The guidelines are available on the CRA Web site at www.cra.gc.ca/brgnls/gdlns-eng.html.

Generally, to qualify for an exemption from tax under guidelines 1, 2, or 3, an Indian must work on a reserve or live on a reserve and have an employer located on a reserve. You describe a situation in which only the employer is located on a reserve, and, therefore, guidelines 1, 2, and 3 do not appear to apply. However, guideline 4 may apply. Guideline 4 exempts employment income earned by an Indian who is an employee of an Indian band, tribal council, or an organization operated on behalf of an Indian band or bands, even though the duties of employment are performed off-reserve. There is no requirement for the employee to live on a reserve. Several conditions must be met in order for guideline 4 to apply:

• the employer must be resident on a reserve;
• the duties of employment must be in connection with the employer's
• non-commercial activities carried on exclusively for the social, cultural, educational, or economic development of Indians who for the most part live on reserves;
• the employer must be:
  • an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or
  • an Indian organization controlled by one or more such bands or tribal councils, and dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves.

Unless an Indian's income qualifies for an exemption under guideline 4, it is unlikely that having an employer located on a reserve, without other factors connecting the employment income to a reserve, will be sufficient for the income to qualify for the exemption from tax. It is possible to have a situation in which none of the guidelines apply, yet the income is still determined to be exempt from tax; however, these situations are quite rare. Generally, if the situation does not fall within one of the guidelines, the employment income will be taxable.

I appreciate the opportunity to respond to your constituent's concerns.

Yours sincerely,

Keith Ashfield

Lisa Zannese/ 613-957-2747/2009-035266