3 May 2010 External T.I. 2010-0361631E5 - Calculation of Indian exempt income

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: Are vacation days, sick days, statutory holidays, family related leave days and personal leave days included as days on a reserve in the calculation of exempt income that is prorated pursuant to Guideline 1 when the Indian employee lives on reserve and spends these days on reserve?

Position: No.

Reasons: Consistent with previous opinions. When employment income is exempt according to Guideline 1 or 3, the location at which employment duties are performed is key to obtaining the exemption. Days where the employee is sick or on vacation or on other similar leave either on or off reserve are not considered days where the employee is performing employment duties.

								2010-036163
XXXXXXXXXX 							P.  Burnley
								(613) 957-2100
May 3, 2010

Dear XXXXXXXXXX :

Re: Calculation of the Exempt Portion of Indian Employment Income

This is in response to your letter of March 24, 2010, enquiring as to whether vacation days, sick days, statutory holidays, family related leave days and personal days should be included as days worked on a reserve in calculating exempt income under the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") when the employee takes such leave on a reserve. You have also requested an example of such a calculation.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

You have indicated that the employees in question are Indians who live on a reserve, as those terms are defined in subsection 2(1) of the Indian Act, and that they generally spend their vacation days, sick days, statutory holidays, family related leave days and personal days on a reserve. You have also indicated that the employees work most of the time at a location that is not on a reserve, but their employment responsibilities require them to travel to and work on local reserves for some of the time.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") together with paragraph 87(1)(b) of the Indian Act exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation, and the courts have determined that income from employment is personal property for the purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 6320, concluded that the determination of whether income is situated on a reserve and thus exempt from tax under the Indian Act requires the evaluation of the various factors connecting the income to a reserve and the weighing of the significance of each factor.

To simplify applying these connecting factors to common employment situations, CRA, together with interested Indian organizations, developed the Guidelines. The Guidelines that may apply in the situation that you describe may be summarized as follows:

• Guideline 1 exempts all of the employment income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90%, but more than an incidental proportion, of the duties are performed on a reserve, and none of the other Guidelines apply, only the portion of the income related to the duties performed on a reserve is exempt from tax.
• Guideline 3 exempts all of the employment income of an Indian if more than 50% of the employment duties are performed on a reserve and either the employer is resident on a reserve or the Indian lives on a reserve.

You have indicated that the employees perform less than 50% of their employment duties on a reserve and, therefore, Guideline 3 would not apply. However, the proration rule in Guideline 1 may be relevant. The proration rule states that the exemption will apply to the portion of the income that is related to employment duties performed on a reserve.

Vacation days, sick days and statutory holidays are generally earned or accrued while an employee is working. Therefore, it is reasonable to determine any exemption applicable to income received while taking these types of leave in the same manner as the related employment income. However, since the employee is not actually working while taking this leave, these days should not be included in determining the days that employment duties are performed either on or off a reserve.

For example, during a year, an employee:

• works 176 days at a location off a reserve,
• works 44 days on a reserve, and
• takes 40 days off for vacation, sick leave, statutory holidays, family leave and personal days.

In this example, the employee works a total of 220 days (176 days off a reserve plus 44 days on a reserve). The 40 days that the employee takes off for leave are not included in the total number of working days because the employee was not working while on leave. Since this employee works 44 days on a reserve out of 220 days worked, 20% of the employment duties would be considered to be performed on a reserve (44 days divided by 220 days). Following the proration rule in Guideline 1, since 20% of the employment duties were performed on a reserve, 20% of the income is exempt from tax.

Since paid leave for vacation, sick days, statutory holidays, family and personal days is included as part of the employee's income, 20% of the paid leave will be exempt from tax. In this manner, the exemption is applied appropriately to the paid leave and it does not matter whether the leave was taken on or off a reserve.

As a final note, similar principles apply to stand-by time, that is, time during which an employee is required to be available for work, but is not requested to work, as well as time spent traveling to and from a reserve. Such time is not considered to be work time related to a specific location on or off a reserve and therefore should not be taken into consideration in establishing the percentage of employment duties performed on a reserve.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch