19 October 2000 Ruling 2000-0029923 - INDIAN ACT EXEMP.-EMPLOYMENT 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: Exemption for Indian income from employment when employer and employee/shareholder reside on reserve. Deductibility of salaries, crew share and director's fees to Corporation.

Position: Salaries, crew share (if employment income), and director's fees would be exempt from taxation to the Indian recipient. A crew share, if business income, would be taxable. The amounts would be deductible to the Corporation, subject to the general limitations of the Act as would apply to non-Indian owned corporations.

Reasons: The employment situation fits within Guideline 2 of the Indian Act Exemption guidelines. Business income would be taxable, as revenue-generating activities are carried out off reserve. General comments provided.

XXXXXXXXXX 				D. Shugar
					2000-002992
Attention: XXXXXXXXXX 

October 19, 2000

Dear Sir:

Re: XXXXXXXXXX ("Mr. X") and XXXXXXXXXXX (the "Corporation")

This is in reply to your letter of September 25, 2000 withdrawing your request for an advance income tax ruling in favour of an opinion instead. Therefore, we are providing our comments which are of a general nature and are not binding on the Canada Customs and Revenue Agency (the "CCRA"). We acknowledge receipt of your previous letters of February 21, May 29, and July 6, 2000.

An invoice for the time spent reviewing the Advance Ruling Request will be sent to you under separate cover.

You have provided us with the following information in your correspondence and in various phone calls between June 28 and September 25, 2000 (XXXXXXXXXX/Shugar):

Mr. X is a status Indian and a member of the XXXXXXXXXX First Nation. Mr. X resides off the reserve at this time but intends to move onto the reserve. We understand that the XXXXXXXXXX First Nation occupy reserves XXXXXXXXXX.

The Corporation is a Canadian Controlled Private Corporation in the business of fishing. Mr. X is a director, and the sole shareholder, of the Corporation. The Corporation owns its own vessel and carries out fishing activities off the reserve. Proceeds from the sale of fish is shared between the vessel and the crew in accordance with accepted practice in the fishing industry. The Corporation presently operates from Mr. X's home, however, it intends to rent an office on the reserve, which will be its permanent establishment at which it will:

• keep the minute book, company seal, corporate files and financial records;
• receive its mail;
• make all payments to creditors, settlements and crew advances;
• hold its meetings with the crew, fish processors, and others;
• hold its directors and shareholder meetings; and
• be the location from which the Corporation will conduct its activities.

Until XXXXXXXXXX, the Corporation had an agreement to sell all its fish to XXXXXXXXXX. In XXXXXXXXXX sold its interest to XXXXXXXXXX. The Corporation alleged that this contravened their agreement with XXXXXXXXXX and, in arbitration, the Corporation won the right to market its fish to the highest bidder. This changed the nature of the operation of the Corporation. In addition to carrying out fishing activities, the Corporation intends to custom process and market the fish. It is anticipated that by marketing its own fish, there would be a better/more easily accessed market and the Corporation will be able to command a higher price for the finished product. These changes contributed to the decision to move the Corporation onto the reserve.

You have asked for our opinion on whether the salaries, crew share, and director's fees paid by the Corporation to Mr. X would be tax exempt in Mr. X's hands when both Mr. X and the Corporation reside on the reserve, and whether those payments would be deductible to the Corporation in computing its income.

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 a reserve. The Courts have determined that employment income is personal property. Therefore, what must be determined is whether the employment income of Mr. X is situated on a reserve.

The approach adopted by the Supreme Court of Canada in the case of Williams v. The Queen, 92 DTC 6320, requires the examination of all factors connecting income to a reserve to determine if the income is situated on the reserve. Following the Supreme Court of Canada decision, the CCRA developed guidelines (the "Guidelines") to clarify which types of employment situations qualify for the Indian Act tax exemption.

The Guideline that would be relevant in the situation you describe is Guideline 2, which states:

When:

• The employer is resident on a reserve; and

• The Indian lives on a reserve;

All of the income of an Indian from an employment will usually be exempt from income tax.

According to Guideline 2, where the employment duties are performed entirely off a reserve, the employment income earned will be tax-exempt only if both the employer is resident on a reserve and the Indian employee lives on a reserve.

Residency of an Indian

The meaning given to the phrase "Indian lives on a reserve" as used in Guideline 2 is that the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the centre of his or her daily routine. The facilities that would be expected in a principal place of residence would typically be a kitchen, bathroom and sleeping area. In a situation where an individual has two residences, a determination must be made regarding which of the two is his principal place of residence. Where an Indian has residences on and off reserve, and the principal place of residence is off reserve, Guideline 2 would not apply.

Residency of the Employer

As stated in the Guidelines, an employer is resident on a reserve if the reserve is the place where the central management and control over the employer organization is actually located. Numerous court cases have established that the residence of a corporate employer is the place where the employer exercises control and management. The most notable of these cases is De Beers Consolidated Mines Ltd. v. Howe (1906) A.C. 455. 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. Generally, management and control is exercised at the principal place of business but it is recognized that this function may be legitimately exercised at a place other than the principal administrative office of the organization. There must be sufficient control exercised from a reserve in order for the organization to be considered to be resident there. The fact that annual meetings are held on a reserve does not, in and by itself, mean that the organization is controlled from a reserve as it is a question of fact as to whether central management and control is exercised during those meetings which are held on reserve.

In our view, one should consider the residence of the employer on an annual basis. If there is a change in the residence during a year and the exemption of the employee's income rests on the employer's residence, it would be appropriate to prorate the employee's exemption for that year.

In our view, provided that the management and control of the Corporation is exercised on the reserve, the Corporation would be considered to be resident on a reserve.

Employment Income of an Indian

Subsection 5(1) of the Act states that a taxpayer's income for a taxation year from an office or employment is the salaries and wages and other remuneration, including gratuities, received by the taxpayer in the year. Employment income includes all salary, wages, bonuses, vacation pay, tips and gratuities, honorariums, directors' fees, commissions, taxable allowances, the value of taxable benefits and any other payments actually received during the year for services during the year as an officer or employee. In our view, the salary and director's fees received by Mr. X from the Corporation would be exempt from tax under paragraph 81(1)(a) of the Act, commencing at the time both he and the Corporation become resident on the reserve.

Crew Share

Whether a crew share is employment income or business income is a question of fact. We cannot determine from the information you have provided whether Mr. X would receive a crew share in his capacity as an employee of the Corporation, or as business income of a self-employed fisher. For your information, CCRA generally considers a person to be a self-employed fisher if any of the following applies:

• the person owns or rents a fishing boat,
• the person is a captain of a fishing boat, or
• the person is a shareperson who gets a share of the catch.

A fisher does not include a person under a contract of service. If, after examining the facts, Mr. X's crew share is found to be income from employment, it would be exempt from tax under paragraph 81(1)(a) of the Act, commencing at the time both he and the Corporation become resident on the reserve. However, if it is determined that the crew share is business income of Mr. X, the Guidelines would not apply. CCRA's position with respect to the factors connecting business income to a reserve, and the weight given to each factor, is based on the Federal Court of Appeal case of Southwind v. The Queen (98 DTC 6084) which is the leading case dealing with the business income of an Indian. The location where a self-employed Indian lives is not a determining factor in connecting the business income to the reserve. In our view, in the case of a fishing business, the location where the fishing is done is a connecting factor of major importance. In the situation at hand, fishing is done off reserve. Therefore, if all of the fishing is done off reserve, the fishing business income earned by Mr. X, in the form of a crew share, would be more connected to a location off reserve than to a location on reserve and, consequently, it would not be exempt from taxation.

Income of the Corporation

Since a corporation is not an "Indian" or "band," as defined in the Indian Act, it does not qualify for the exemption under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. Therefore, the Corporation will be taxable on its income unless otherwise exempt from taxation under another provision of the Act. In computing its income, the Corporation is entitled to deduct the salaries, crew shares and director's fees paid to Mr. X subject to the general limitation on the deduction of outlays or expenses, as described in Interpretation Bulletin IT-487, General Limitation on the Deduction of Outlays or Expenses. Paragraph 18(1)(a) of the Act provides a general restriction on the deductions permitted in the computation of income of a taxpayer from a business or property by prohibiting the deduction of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. Even when an outlay or expense is brought within the wording of paragraph 18(1)(a) of the Act, it does not necessarily follow that it is deductible. Deductions may still be denied by one of the more specific prohibitions contained in the Act. For example, the deduction of a capital outlay or loss is denied by paragraph 18(1)(b), reserves by paragraph 18(1)(e) of the Act, and personal or living expenses by paragraph 18(1)(h) of the Act. In addition, section 67 of the Act denies a deduction of expenses to the extent that they are unreasonable. However, in our view, in the absence of evidence to the contrary, it appears that the salaries, crew shares and director's fees paid to Mr. X would be deductible to the Corporation, subject to the general limitation in paragraph 18(1)(a) of the Act and the reasonableness test in section 67 of the Act.

Recent Jurisprudence

You referred to the case of Shilling v. The Queen in your letter of May 29, 2000. The CCRA has appealed this case. Accordingly, until such time as the decision is rendered and reviewed by the CCRA, our position with respect to employment income earned by a status Indian remains unchanged.

We trust our comments 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