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: Various questions regarding the Indian Act Exemption for Employment Income Guidelines presented to employees of DIAND.
Position:
Reasons:
Jamie McInnis
Department of Indian and
Northern Development 2000-000284
10 Wellington Street Karen Power, CA
Hull, Quebec (613) 957-8953
K1A 0H4
March 7, 2000
Dear Ms. McInnis:
As per your request, please find enclosed the following items which were presented and discussed at the recent Committee for the Advancement for Native Employment "CANE" conference.
- Questions and Answers
- Paper presented
- Slide show presented
We trust that this information will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Questions on First Nation Taxation
Questions #1
Does DIAND need to tax at source a First Nation (FN) employee who normally works in one of our district offices on reserve, where tax is not normally withheld, who then takes an Interchange assignment off-reserve but where DIAND continues to pay the salary for a specified period? Does the nature of the work being done off reserve make any difference? Does the residency make any difference.
Answer #1
By virtue of paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act, personal property owned by an Indian and situated on a reserve is exempt from tax. Since the Courts have determined that employment income is personal property, the taxability of employment income earned by an Indian depends on whether such income is situated on a reserve. The court have directed that connecting factors must be considered when making this determination. In this regard, the Department developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"), which are based on comments made by the Supreme Court in Glenn Williams v. The Queen, 92 DTC 6320, and on comments made by interested Indian groups and individuals. The Guidelines incorporate the various connecting factors, that describe employment situations covered by section 87 of the Indian Act.
The following summarizes the Guidelines:
Guideline 1 will apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve regardless of where the employer is resident. 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 (the proration rule).
Guideline 2 will apply to exempt all of the employment income of employees who live on reserve provided that the employer is in fact resident on a 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 a) that the employer is resident on a reserve; b) 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 c) that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves. These elements must all be satisfied in order for Guideline 4 to apply.
In the above situations, none of the employment duties during the Interchange assignment are performed on a reserve which precludes the application of Guideline 3 and Guideline 1 and its proration rule. In addition, Guideline 2 and Guideline 4 will not apply as the First Nation employee is an employee of DIAND which is not an employer resident on reserve. Accordingly, in our view, the employment income of DIAND employees will be taxable throughout the duration of the Interchange assignment. The nature of the work performed off reserve, and the residency of the status Indian will not change this position.
Question #2
Now that pay equity has been settled, can DIAND issue tax exemption letters for First Nation employees who were working on reserve part-time during the time covered by pay equity?
Answer #2
Provided that a status Indian's employment income arising from the pay equity agreement related to previous employment income that was tax exempt in accordance with paragraph 81(1)(a) of the Income Tax Act (the "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 payment 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.
The interest on pay equity payments is taxable as interest income pursuant to paragraph 12(1)(c) of the Act for the year payment is received.
Under subsection 153(1) of the Act, every person making a payment of salary or wages or other remuneration is required to withhold taxes. In the case where recipients are status Indians whose employment income may be exempt from income tax, including partially exempt, if the payor wishes to be relieved from the obligation to withhold taxes, we suggest that the payor request individual waivers under the provisions of subsection 153(1.1) of the Act. Queries with respect to this matter should be referred to the Assistant Director, Client Services Division, of your local tax services office.
Question #3
How should DIAND handle situations where the First Nation employees who now work full-time on reserve (and are currently tax exempt on the pay system) but did not work on reserve during the pay equity period, handle pay equity payments?
Answer #3
As discussed in question #2, where the employment income received by the status Indian during the pay equity period was not exempt from tax, the pay equity payment to be received in 2000 that relate to it will be taxable. Although, the individual may be currently exempt on the pay system, withholdings will be required on pay equity payments.
Question #4
An employee in one region has been told that Revenue Canada is requesting travel claims to be used as supporting documentation for on-reserve work rather than letters from DIAND. (a) Would Revenue Canada advise what kind of information DIAND needs to provide to employees? (b) Also what information does DIAND need to get from FN organizations? (c) Does DIAND need to ask employees to document that they are status Indians?
Answer #4 (Prepared by Audit Directorate -VECR)
We refer to Information Circular 78-10R3 - Books and Records Retention/Destruction of which a copy is attached.
Paragraph 6 states "As a general rule, the Department does not specify the records and books to be kept. However, records and books of account have to: permit the taxes payable or the taxes or other amounts to be collected, withheld, or deducted by a person to be determined; and be supported by source documents that verify the information in the records and books of account."
Also, paragraph 7 states "A source document includes items such as sales invoices, purchase invoices, cash register receipts, formal written contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence."
The CCRA Payroll Deductions Guide provides information for employers to determine which deductions are to be made for status Indians. Where an employer determines that the income of a status Indian is not taxable, the employer must complete a TD1-IN Determination of Exemption of an Indian's Employment Income and the employer must maintain this form on file for each employee.
(a) CCRA is not able to specify what documents are required to support the TD1-IN as each case may be different and as such have different supporting documentation. However, since the employer has made the determination, CCRA may request to see documentation to support the basis of the determination.
(b) (Note - We are unsure of what is being asked in this question. However we assume that the question relates to DIAND employees on an interchange assignment with a FN organization.) If DIAND is the employer of the individual, no information should be required relating to the FN organization. If the FN organization is the employer of the individual, the FN organization would be responsible for completion of the TD1-IN and documentation to support the exemption.
(c) The TD1-IN requires the employer to answer the question "Is the employee registered or entitled to be registered as an Indian under the Indian Act?". In order to answer this question it is encumbent on the employer to verify that the answer is correct. DIAND may require the employee to provide documentation to support their status, however CCRA does not require the employer to maintain specific documentation.
Question #5
There is much interest around the Shilling decision and how it could pertain to Status Aboriginal employees within DIAND. If the decision was upheld, could employees take Interchange assignments with an organization such as OI Leasing and be contracted to work with the department on a tax exempt basis? If not, why not?
Answer #5
The Canada Customs and Revenue Agency ("CCRA") has examined the judgment in the Shilling case and the judgment has been appealed. Consequently, until such time as the matter is resolved by the courts, the CCRA will apply the Indian Act Exemption for Employment Income Guidelines in its current format.
The CCRA has appealed the Shilling decision for the following reasons:
- The Court has misapplied the connecting factors approach established by the Supreme Court in placing too much emphasis on the sole factor of the employer's residence. More weight should have been given to the fact that Ms. Shilling did not work or live on a reserve.
- The Supreme Court has already expressed the view that the use of a sole factor to support an income tax exemption could lead to manipulation and abuse (Glenn Williams 92 DTC 6320).
If the Shilling decision is upheld, the impact that it will have on the CCRA's position on the taxation of employment income, can only be determined at that time based on the comments of the court.
Question #6
The June 29, 1994, letter from Revenue states that "...tax exemption will apply in the following employment situations: 2) Where some or all of the duties are performed off reserve but the Indian lives on a reserve and the employer is resident on a reserve." With respect to the Shilling decision, it is understood that the following exchange occurred between Madame Justice Sharlow and the Justice lawyer, Mr. Plourde:
The Court: "So with employment income, residence is irrelavent?
Mr. Plourde: "I would agree with that."
The Court: "You would agree that the residency of the employee is off the table when dealing with employment income?"
Mr. Plourde: "Yes"
This question was sent because it is felt that under the current guidelines the employee must live on reserve in order to be tax exempt when they work less than 50% of the time on reserve? It is thought that the Shilling decision changes this residency requirement. Is this true?
Answer #6
As discussed in question #5, the Canada Customs and Revenue Agency ("CCRA") has examined the judgment in the Shilling case and the judgment has been appealed. Consequently, until such time as the matter is resolved by the courts, the CCRA will apply the Guidelines in their current format.
One should also note, that the representations made during the hearings were made in the context of and solely with respect to the Shilling matter. Furthermore, the CCRA is not bound by an argument presented in court.
Question #7
The guidelines say that Revenue "recognizes that employees of bands, tribal councils or organizations that operate on behalf of bands or tribal councils may perform most of their activities off reserve. For the employees, the connection to a reserve is that the employer is resident on reserve....". DIAND has a number of employees working on assignment/special interchange with the AFN. For a number of years, DIAND has not withheld deductions at source for these employees during these assignments.
a) Are our employees on assignment at the AFN at any risk of future audits which will disallow their tax exempt status and result in unexpected tax assessments? Is DIAND at any risk of vicarious responsibility if previous tax returns are audited and the tax exemptions disallowed?
b) If status DIAND employees working at the AFN are tax exempt, could status employees of DIAND, which has a very similar mandate, not claim tax exemption since the DIAND employees are "employed in a non-commercial activity for the social, cultural, educational, or economic development of Indians who for the most part live on reserve?
Answer #7 a) (Prepared by Audit Directorate - VECR)
CCRA may at anytime within three years of the date of the notice of assessment for an individual's income tax return, request to verify the taxes assessed. If an individual as described above was selected for audit, that person may be asked to show documentation to support the Indian Act exemption for income tax related to that employment income. Audit would look for documentation to support one of the four Guidelines as set out in Question #1. If the documentation does not support the exemption, then an assessment could be raised for the taxable income not previously reported.
As an employer DIAND is responsible for the proper withholding of source deductions. The Employers' Guide - Payroll Deductions at page 12 notes that employers may be subject to penalties and interest for amounts that were required to have been withheld by subsection 153 (1) of the Income Tax Act. However, penalties and interest will not generally be applied if the employer has taken proper steps to support withholding exemptions.
Answer #7 b)
As discussed in question #1, in order for the employment income of a status Indian to be exempt under Guideline 4, all of the following elements must be met:
a) that the employer is resident on a reserve;
b) 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
c) that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.
In your situation, the employer, DIAND, does not meet elements a) or b) of Guideline 4, and there are insufficient connecting factors to situate the employment income on reserve.
Question #8
There is an impression among First Nations employees that the advice given by Revenue Canada is not consistent across the country. How can employees get some kind of comfort on this? Is there any way that employees can get a second opinion from Revenue Canada?
Answer #8 (Prepared by Audit Directorate - VECR)
The CCRA strives to maintain high standards of accuracy for all officers. This includes developing manuals and other material to assist them in interpreting and applying the legislation consistently. All officers receive regular training and information to ensure that they are current in their knowledge of the law and the Agency's administrative practices.
In situations where an individual is not satisfied with the advice given by a CCRA officer, the individual may request to speak to a supervisor or client services representative of the Tax Services Office. In addition, anyone may write or phone CCRA requesting an interpretation (opinion) on the application of tax legislation as described at paragraph 22 and 23 of Information Circular IC70-6R3 Advanced Income Tax Rulings.
Question #9
Can First Nations employees, not eligible for any tax exemption, have their tax dollars diverted to their own communities?
Answer #9 (Prepared by Neil Mitchell)
No, not as such.
One Possibility: Tax Credit for Donations to First Nations as "Municipalities"
- Gifts or donations made to an Indian band that qualifies as a "municipal or public body performing a function of government in Canada" may generally be treated in the same way as gifts or donations to a municipality or a registered charity.
- They are eligible for the same type of federal tax credit: 17% on first $200; 29% on any amounts in excess of $200. Corresponding reduction in provincial taxes. So the more one gives, the more one's taxes are reduced.
- Such gifts must be supported by proper receipts.
- Gifts in excess of 75% of net income in a year are not eligible for credit, but may be carried forward for up to five years.
- An Indian band that has passed by-laws under both section 81 and 83 of the Indian Act will generally qualify to receive tax-creditable gifts, or its status may be evaluated on a case-by-case basis (i.e., it is a question of fact
- The former test, before amendment of Indian Act, was whether or not the band had reached an "advanced stage of development."
Otherwise, with the exception of arrangements with seven self-governing Yukon First Nations discussed below, there are no provisions which would permit the diversion of federal or provincial income taxes to a First Nation government or community. The general tax rules would apply.
Yukon First Nations Income Tax Collection and Sharing Arrangements
- The tax collection arrangements with the Yukon First Nation are based on their authority to impose direct taxation within their settlement lands under their self-government agreements with Canada.
- Note: a "buy-out" of the section 87 tax exemption in the Yukon went into effect after 1998, pursuant to the agreements and implementing legislation.
- Under the tax collection arrangements negotiated with the Department of Finance, starting in 1999, seven Yukon First Nations impose their own income tax on all residents of their settlement lands.
- This tax is equivalent to 75% of the federal tax and 95% of the territorial income tax, minus certain credits.
- Canada and the territory have vacated most of their tax room (by providing credits or abatements against federal or territorial tax).
- So the "bottom line" amount of tax payable by residents of these settlement lands is the same as would apply elsewhere in the Yukon - but the revenue goes to the First Nation government instead of to Canada or the Territory.
- Periodic payments are made to the First Nation by Canada, to be verified against information from tax filings.
- Form T1C(Yukon)AG allocates the tax to the relevant Yukon First Nations and illustrates the calculation - it is publicly available.
- The Yukon First Nations Tax is intended to be a simple and efficient way to provide own-source revenue to the First Nations.
- * Similar arrangements may be offered to other First Nations under self-government agreements or arrangements, but thus far the Yukon arrangements are the only ones that have been implemented regarding income tax.
- * (Some "GST-style" sales tax arrangements have also been implemented with a number of other First Nations.)
- * Further questions about such initiatives should be directed to the Department of Finance.
- * Note that the 2000 Federal Budget repeated the "offer" from previous years, to discuss and put into effect arrangements in respect of direct taxation with interested First Nations.
Question #10
Can First Nation employees who return to any reserve on salary for either annual leave, sick leave or disability purposes claim that time as exempt? Can First Nations employees who spend time on reserve for the purpose of training (ie, Aboriginal Awareness Training) claim that time as tax exempt?
Answer #10
The receipt of salary for either annual leave, sick leave or disability purposes will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If only a portion of the employment income was exempt, then a similar portion of the above amounts will be exempt. Thus, if a Fist Nation employee, living on reserve, receives sick leave which is related to taxable employment income, the sick leave will also be considered taxable. This issue was addressed in the case of Kahn-Tineka Horn (89 DTC 147) wherein it was held that receiving vacation or sick pay while residing on a reserve does not site the income on a reserve.
For purposes of the Guidelines, one must take into consideration the location where the duties of employment are performed, when less than 90% of the duties of employment are performed on a reserve the exemption in Guideline 1 can be prorated. A portion of employment income may only be exempt by virtue of the Proration rule to Guideline 1 provided that such portion is significant enough to constitute a meaningful connecting factor and that the employee's presence on a reserve by virtue of employment is not merely occasional. The closer the amount of time spent on reserve is to nil, the greater the likelihood that the time spent on reserve is incidental and taxable. The closer the amount of time spent on reserve is to 10% of total duties, the greater the likelihood that the Proration rule should apply. Basically, when the time spent on reserve is minimal it is considered incidental and does not qualify for exemption. For instance, in the past, we have denied exemption for time spent during a 5-day training course on a reserve. If attending the training sessions, forms a significant part of the status Indian employees duties of employment, the time spent training on reserve will be exempt from tax.
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