24 August 2001 External T.I. 2001-0083905 - 81(1)(a)

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 related to status Indian taxation

1.) Are EI premiums deductible as non-refundable tax credits or are they fully refundable where the taxpayer is a status Indian living and working on a reserve?

2.) Are Registered Pension Plan contributions deductible by a status Indian living and working on a reserve?

3.) Is a lump sum received by a status Indian living on reserve taxable?

4.) Is a status Indian living and working on a reserve eligible to receive the GST credit?

5.) Is a scholarship received by a status Indian from a university taxable when received by a treaty Indian?

Position:

1.) As per 118.7 of the Act, EI premiums can only be deducted as non-refundable tax credits.

2.) Question of fact
3.) Question of fact, not enough information provided
4.) Yes

5.) Depends on whether received under a treaty or an agreement between a band and Her Majesty.

Reasons:

Per the Indian Act Exemption for Employment Income Guidelines, various employer's guides and ITRD opinions.

XXXXXXXXXX 	2001-008390
		Cornelis Rystenbil, CGA
August 24, 2001

Dear XXXXXXXXXX:

Re: Indian Taxation

This is in reply to your letter of May 3, 2001 in which you ask several questions related to the taxation of status Indians.

Our comments

Written confirmation of the consequences inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Where the particular transactions are completed, all relevant facts and documentation should be submitted to the appropriate Tax Services Office. However, we are prepared to provide the following general comments that may be of assistance.

Paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act provide a tax exemption for a status Indian's personal property situated on a reserve. The courts have previously concluded that the reference to personal property in section 87 of the Indian Act includes income. The Canada Customs and Revenue Agency's (CCRA) position on the tax treatment of employment income earned by a status Indian is reflected in the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). We have attached a copy of the Guidelines for your files. The Employer's Guide - Payroll Deductions - Basic Information 2000 - 2001 contains instructions as to whether an employer has to withhold income tax, Canada Pension Plan (CPP) premiums and Employment Insurance (EI) premiums where the employee is a status Indian.

You have asked whether a status Indian employee's EI premiums on tax-exempt employment income qualify as a non-refundable tax credit or whether they are fully refundable. As per section 118.7 of the Act, EI premiums can only be deducted in the form of a non-refundable tax credit.

With regard to your question of whether contributions to a registered pension plan (RPP) are fully deductible on a status Indian's return, as stated in the 2000 Employer's Guide - Filing the T4 Slip and Summary Form, "registered pension plan contributions that have been made in respect of tax exempt income are not deductible. If the employment income that relates to an RPP contribution is comprised of both taxable and tax exempt income, you have to prorate the RPP contribution." A taxpayer's income from a particular employment includes all amounts required to be brought into income by virtue of sections 5, 6 and 7 of the Act, minus any section 8 deductions that are applicable to that particular employment. It is this net amount (if positive) that is relevant for purposes of the exemption under paragraph 81(1)(a) the Act. If a portion of the income from an employment source qualifies for the exemption, it is in fact a portion of this net amount that is exempt (i.e., the net employment income would be prorated). As employment income and related deductions are reported separately on a tax return, it follows that both the employment income and deductions should be prorated.

Your third question refers to a status Indian who receives a small lump sum payment that is reported in box 18 of a T4A slip. You have asked that since the taxpayer is living on a reserve, is the lump sum exempt. You have not provided us with sufficient information to answer this question; for example, what type of income does this lump sum relate to and whether the lump sum payment relates to employment income that was exempt, taxable or both. If the lump sum relates to employment income, please consult the enclosed Guidelines to determine whether this lump sum is fully exempt, partially exempt or taxable.

Your fourth question concerns a status Indian who is living and working on a reserve. You ask whether the status Indian is entitled to the Goods and Services Tax (GST) credit. A status Indian is eligible to receive the GST credit to the extent provided in section 122.5 of the Act. In general terms, the GST credit that an individual is otherwise entitled to is reduced by a percentage of "adjusted income" (as defined in subsection 122.5(1) of the Act), which is the combined income of the individual and the individual's qualified relation. Since, pursuant to paragraph 81(1)(a) of the Act, exempt income is not included in computing income, a status Indian's exempt income will not reduce the GST credit that the status Indian is otherwise entitled to.

In your final question, you describe a situation where a status Indian, who resides on a reserve, becomes a full time student off reserve, at a university. You want to know whether the scholarship received from the university is taxable when received by a treaty Indian. It is a question of fact whether assistance for education received by a status Indian is received under a treaty or agreement between a band and Her Majesty and is exempt by virtue of section 90 of the Indian Act, or is received under some other program and is taxable. As described in Mitchell v. Peguis Indian Band ((1990) 2 SCR 85), in paragraph 90(1)(b) of the Indian Act, the words "treaty" and "agreement" take colour from each other and, in our view, an agreement would have to be similar in nature to a treaty. Since you indicate that the scholarship was received from a university and assuming that the status Indian did not receive the scholarship under a treaty or agreement between a band and Her Majesty, the scholarship is taxable to the extent provided in paragraph 56(1)(n) of the Act.

Should you require further information, please contact the local Tax Services Office, the Business enquiry - Individual telephone line at 1-800-959-8281 or Business Windows at 1-800-959-5525. Copies of the Employer's Guides can be obtained from your local Tax Services Office or from our website at www.ccra-adrc.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

Attachment

- 3 -