1 June 2010 Ministerial Correspondence 2010-0364891M4 - Indians- Employment Income Scenarios

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: Taxpayer questioned the taxation of Indian's income in various employment scenarios

Position: General discussion of the taxation of employment income of Indians using the Guidelines as reference

June 1, 2010

XXXXXXXXXX

Dear XXXXXXXXXX :

I am writing in response to your correspondence addressed to my predecessor, the Honourable Jean-Pierre Blackburn, regarding the taxation of First Nations people in various employment scenarios. Please accept my apology for this delayed reply.

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 for that income.

Generally, Indians are taxable in Canada on the same basis and in the same manner as non-Indian individuals. However, an Indian's income may qualify for an exemption from income tax under paragraph 81(1)(a) of the Income Tax Act and paragraph 87(1)(b) of the Indian Act, if the income is determined to be situated on a reserve. The Supreme Court of Canada has directed that connecting factors must be considered 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 factor weighed.

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 and individuals as well as other government departments, developed the Indian Act Exemption for Employment Income Guidelines. These guidelines apply to common employment situations involving First Nations individuals. The guidelines are available on the CRA Web site at www.cra.gc.ca/brgnls/gdlns-eng.html, but I have enclosed a copy for your convenience.

Guidelines 1, 2, and 3 discuss employment situations where an Indian lives or works on a reserve. Generally, for the income to qualify for an exemption from tax under one of these guidelines, an Indian must:

• work on a reserve (all or some of the time),
• live on a reserve and have an employer located on a reserve, or
• work on a reserve more than 50% of the time and either live on a reserve or have his or her employer located on a reserve.

Whether an employer is located on a reserve is generally determined by where the central management and control of an organization is located. This determination is made on a case-by-case basis and must take into consideration all of the facts of the situation.

Guideline 4 has no requirement for an employee to live or work on a reserve; however, there are other, specific criteria that must be met, and this guideline will only apply in unusual situations. Among other things, the employer must be dedicated exclusively to the social, cultural, educational, or economic development of Indians who, for the most part, live on reserves, and the duties of the employment must be connected to the employer's non-commercial activities carried on exclusively for the benefit of Indians who, for the most part, live on a reserve.

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. There are situations in which none of the guidelines apply, yet the income is still determined to be exempt from tax; however, these situations are 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 concerns, and I trust that the information I have provided is helpful.

Yours sincerely,

Keith Ashfield

Enclosure

Pamela Burnley
613-957-2100
Income Tax Rulings #2010-036489