3 February 2000 Income Tax Severed Letter 2000-0002106 - INCOME INTEREST INDIAN

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:

1. Whether a portion of the pay equity payment relating to employment income that was tax exempt will be tax exempt.

2. Whether interest on pay equity payments is taxable.

Position:

1. Yes

2. Yes it is taxable under paragraph 12(1)(c) of the ITA for the year the payment is received.

Reasons:

1. Where a status Indian 's employment income arising from the pay equity agreement relates to previous employment income that was tax exempt by virtue of paragraph 81(1)(a) of the ITA and section 87 of the Indian Act, the portion of the pay equity that relates to that employment income will be similarly exempt from income tax.

2. See 1999-001285, 1999-001364, 9421464, 9727105, 942146a, 9426687, 9316439, 9905415, 9901237, 9830245, 9421464, 9808118, 9824695.

		February 3, 2000

	Individual Programs Section	HEADQUARTERS
	Client Services Directorate	M. Shea-DesRosiers
		957- 8953
	Attention: Mr. Philip Clarke
	               Manager
		2000-000210

Pay Equity Payments and Status Indians

This is further to your memorandum of January 13, 2000, wherein you requested our opinion concerning the pending pay equity payments and the implications for status Indian recipients.

You enquire as to whether the pay equity payment relating to employment income that was tax exempt will be tax exempt and if the Indian's current residence is a factor in determining whether the payment will be taxable. You ask the two following questions:

If an individual received income from employment for the period covered by the pay equity agreement (1985 to 1998) that was tax exempt, either in whole or in part, because of the prevailing Indian Act guidelines at the time the income was paid, will the income be tax exempt when the payments will be made in 2000?

Also, will the place of residence of the Indian when the payment is made have an impact on whether the income will be taxable? For example, if an Indian receives a pay equity payment for a period when their employment income was taxable, will the pay equity be nontaxable if they are currently living on a reserve?

To implement the Canadian Human Rights Tribunal Ruling of July 29, 1998, an Agreement was signed on October 29, 1999 between the Public Service Alliance of Canada and Treasury Board for pay equity employment income and pay equity interest payments to be received in 2000. The Memorandum of Agreement mentions that the annual total payout is to be calculated based on the fiscal year annual average salaries for the period 1985-1986 through 1997-1998. Interest will be applicable to 90% of the total pay equity adjustment on a fiscal year basis and will be calculated semi-annually on 90% of the total pay equity adjustment owing as of March 31 and September 30 of each year up to the date of ultimate payment of the pay equity adjustment. The parties agree that the interest applicable at the "book end" period of March 8 and March 31, 1985 will be calculated separately.

In answer to your first query, provided that a status Indian's employment income arising from the pay equity agreement relates to previous employment income that was tax exempt in accordance with paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act, the portion of the pay equity that relates to that employment income will be similarly exempt from income tax. However, where a portion of the pay equity relates to previous employment income that was taxable, that portion of the pay equity payment will be taxable. Consequently, where the employment income received by the status Indian was not exempt from tax, the pay equity payment to be received in 2000 that relates to it will be taxable. Also, the changes in the interpretation of the Indian Act exemption for employment income over the years will have an impact on the determination of whether the pay equity payments will be taxable in 2000 only to the extent that the income to which the payments relate were treated as exempt in those years based on the changing interpretation.

The decisions of the Federal Court of Appeal and the Tax Court of Canada in Recalma, in our view, support our position that interest on pay equity payments is taxable. The Court considered the taxability of income earned by an Indian living on reserve, from investments purchased from an on reserve branch of a bank. It should be noted that the nature of the property in question was the income of the investments and not the investments themselves. The Court had to determine if the investment income was situated on a reserve. This determination required the review of all relevant connecting factors and consideration as to how much weight should be given to each factor. The following were considered in determining the situs of the investment income:

a) the residence of the taxpayer;

b) the origin or location of the capital used to buy the securities;

c) the location of the bank branch where the securities were bought;

d) the location where the investment income is used;

e) the location of the investment instruments;

f) the location where the investment income payment is made; and

g) the nature of the securities and in particular:

I) the residence of the issuer;

II) the location of the issuer's income generating activity from which the investment is made; and

III) the location of the issuer's property in the event of a default that could be subject to potential seizure.

While the Court considered all of these factors it placed considerable weight on (g) (II) - the location of the income generating activity of the issuer of the securities. In Recalma, the income in question was interest from banker's acceptances and income from mutual funds. Basically the Court concluded that income from these investments started with companies off reserve and was passed through the bank on reserve to the taxpayers. It was held that the investment income was not personal property situated on a reserve. The Court concluded that in making these investments the taxpayers chose to invest in the economic mainstream of normal business conducted off reserve.

As a result, while the determination in any situation would involve a review of all relevant connecting factors and consideration as to how much weight should be given to each factor, the major determining factor is the source of the income. Based on the Recalma decision, unless the income can be identified as exclusively generated on the reserve, in our view, the income is not exempt.

With respect to the determination of the taxation of interest on the pay equity payments paid by the federal government to a status Indian, we would need to determine how the federal government generated the interest. As the federal government generates interest from investments off a reserve, any interest which it pays to a status Indian would be taxable.

Also, in the case of Brenda Bellingham v. The Queen, 96 DTC 6075, the Federal Court of Appeal found that, although ordinary interest, payable as compensation for the use of money during the delay in settlement, is taxable as interest, additional interest payable under the Alberta Expropriation Act is punitive in nature and not intended as compensation for the use of money. As a result, the Court held that such additional interest was not truly interest or compensation for the land thus taken and thus was not taxable to the recipient, either as interest or as part of the proceeds of disposition. In our view, although the judgment in this Court case with respect to additional interest is not applicable to interest on pay equity payments, this decision appears to support our position that ordinary interest, payable as compensation for the use of money during the delay in settlement, is taxable as interest. .

It should be pointed out that it is the Canada Customs and Revenue Agency's position that prejudgment or pre-settlement interest in respect of damages for personal injury, death, wrongful dismissal and retroactive workers' compensation awards are treated as non-taxable. As the pay equity payments are not damages for personal injury or wrongful dismissal, the interest on pay equity payments is taxable as interest income pursuant to paragraph 12(1)(c) of the Income Tax Act for the year payment is received.

R. Albert
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -