20 March 2000 External T.I. 1999-0004815 - INDIANS-TAX 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.

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:

Are the benefits under the Employment Insurance Act received by a status Indian, whose previous employment income was as an accounting officer from the XXXXXXXXXX , exempt from income taxation?

Position:

Question of fact - based on whether employment income was exempt under the Indian Act Exemption for Employment Income Guidelines.

Reasons:

EI benefits received by a status Indian are tax exempt if the insured employment income from which the EI benefits arise was tax exempt to the Indian. Guideline 2 or 4 may apply to exempt employment income from the College.

Human Resources Development Canada
340 - Third Avenue North
Saskatoon SK S7K 0A8 1999-000481
S. Parnanzone
Attention: Karen Clarke

March 20, 2000

Dear Sir/Madam:

Re : XXXXXXXXXX
Entitlement to the Status Indian Exemption

This is in reply to your memorandum of August 18, 1999, enquiring whether XXXXXXXXXX (the " Employee"), a status Indian, is exempt from income taxation on her benefits under the Employment Insurance Act.

As we understand them, the facts are as follows:

The Employee lives on a reserve. She was employed as an accounting officer by the XXXXXXXXXX (the "College") located in XXXXXXXXXX from XXXXXXXXXX. All her duties were performed at the College. The College is located off a reserve and is fully funded by the First Nations. The College claims to be a tax-exempt entity. At the end of her employment with the College, the Employee applied for EI benefits.

The Employee has applied for exemption from income tax on her EI benefits.

Our Comments

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 reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another.

Based on the guidance provided by Williams and after receiving representations from interested Indian groups and individuals, the Canada Customs and Revenue Agency ("CCRA") identified a number of connecting factors that can be used to determine whether employment income is situated on reserve. With a view to assisting the Indian community, the CCRA 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.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other guidelines apply, only the portion that is performed on a reserve is exempt from tax (the proration rule).

Guideline 2 would apply to exempt the employment income of employees who live on reserve provided that the employer is resident on reserve.

Guideline 3 would apply to exempt all of the income of an Indian if more than 50% of the employment duties are performed on a reserve and the employer is resident on a reserve or the Indian lives on reserve.

Guideline 4 requires that the employer is resident on a reserve. It also requires that the employer is 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, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves, and that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indian who for the most part live on reserve. These elements must all be satisfied in order for Guideline 4 to apply.

The Guidelines define the expression "Employer is resident on a reserve" as meaning that the reserve is the place where the central management and control over the employer organization is actually located. The Guidelines provide the following explanation of central management and control:

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. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised in a place other than the principal administrative office of the organization. It is a question of fact where the central management and control is exercised.

Finally, with respect to employment-related income, the Guidelines provide that employment insurance benefits will be exempt when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of these amounts will be exempt.

Accordingly, in order to determine if the Employee's EI benefits are exempt from income tax, one has to determine if her employment income from the College was exempt from income tax under any one of the Guidelines. The information you have provided is insufficient for us to determine whether the Employee was exempt from taxation on her employment income from the College. As the Employee does not work on a reserve, Guideline 1 and 3 cannot apply. Guideline 2 or 4 may apply; however, it is a question of fact as to whether the Employee lives on a reserve, whether the employer is resident on a reserve as defined and whether the College and the Employee's duties satisfy the requirements of Guideline 4.

The confidentiality provisions of the Act prevents us from disclosing taxpayer information to unauthorized persons. Thus we cannot disclose whether the Employee's income from the College was exempt from taxation or was taxable. However, she could contact the XXXXXXXXXX Tax Services Office to obtain a letter confirming her tax status during her employment period with the College. Such request should be addressed to XXXXXXXXXX.

We trust that the foregoing comments are of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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