2 March 2000 Ministerial Letter 1999-0004638 - PENSIONS PAID TO INDIANS

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.

March 2, 2000

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your letter concerning tax deductions being made to pension payments received by status Indians living on reserve, and income tax being paid by status Indians on U.S. social security payments. The Honourable Paul Martin sent a copy of your letter to Mr. Cauchon, which was received September 3,1999. As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide the principal Indian exemption from taxation, which means that personal property including income of an Indian situated on a reserve is exempt from taxation. In Mitchell V. Peguis Indian Band, the Supreme Court of Canada described the purpose of the Indian Act as to preserve the entitlements of Indians to their reserve lands and to prevent their erosion through taxation, but not to confer a general economic benefit upon Indians. In this respect, La Forest, 3. stated that:

"...one must guard against ascribing an overly broad purpose to ss.87 and 89 [of the Indian Act]. These provisions are not intended to confer privileges on Indians in respect of any property they may acquire and possess, wherever situated. Rather, their purpose is simply to insulate the property interests of Indians in their reserve lands from the intrusions and interference of the larger society so as to ensure that Indians are not dispossessed of their entitlements."

In determining whether the income earned by an Indian is situated on a reserve and thus exempt from taxation, the approach taken by the Supreme Court of Canada, in Williams V. The Queen, must be followed. This approach requires that all factors connecting income to a reserve be examined to determine if the income is located on the reserve. In CCRA's view, this approach leads to the conclusion that residency on a reserve, as a sole factor, is not sufficient to connect an individual's income to it. In Williams, the Supreme Court ruled that the proper approach to determining the situs of intangible personal property is to evaluate the various connecting factors which tie the property to one location or another. The 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.

In CCRA's view, the Williams decision requires that income which is ancillary to employment income, such as pension income, including Canada Pension Plan benefits, be treated the same as the employment income itself. In other words, if the employment income was exempt under the Indian Act, so too would be the ancillary income. This position is also reflected in the Indian Act Exemption for Employment Income Guidelines. Individuals who believe the guidelines have been incorrectly applied to their pension income should contact their local tax services office with the facts concerning their previous employment. It should be noted that Old Age Security pension and supplement benefits are neither related to income nor earned on the reserve and fall outside the section 87 exemption and are taxable.

In your letter, you are concerned that some of your members have been informed that they must pay income tax on social security they receive from the United States. It is your position that this income earned by status Indians living on reserve is personal property of the individual and is not taxable.

A recent amendment to the Canada - U.S. tax treaty, which came into force on December 16, 1997, means that U.S. social security benefits paid to

Canadian residents will be taxable only in Canada. This change is effective as of January 1, 1996. The new rule provides that only the country where the recipient lives can tax a benefit, which means the United States will stop withholding tax.

In addition, only 85% of the U.S. social security benefits will be subject to tax.

Since the treaty maintains Canada's right to tax U.S. social security benefits received by a Canadian resident, in determining whether the U.S. social security benefits are situated on a reserve, the factors connecting them to a reserve must be considered. In our view, these benefits would not be exempt from tax, since they are likely paid as a result of the recipient's prior employment or residency in the United States and there would be insufficient factors connecting the income to a reserve.

I appreciate the opportunity to address your concerns.

		Yours sincerely,

		Bill McCloskey
		Assistant Commissioner
		Policy and Legislation Branch