8 January 2002 External T.I. 2001-0115985 - RETIRING ALLOW.-STATUS INDIANS

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: Taxation of retiring allowances received by status Indians.

Position: General exempt if it relates to employment income that was exempt.

Reasons: Position outlined in the Indian Act Exemption for Employment Income Guidelines.

            2001-011598
XXXXXXXXXX  Karen Power, CA
(613) 957-8953
January 8, 2002

Dear XXXXXXXXXX:

Re: Retiring Allowances Received by Status Indians

This is in reply to your letter of December 10, 2001, requesting current information regarding the Canada Customs and Revenue Agency (the "CCRA") views on the taxation of retiring allowances received by status Indians.

Our Comments

Paragraph 81(1)(a) of the Income Tax 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 previously concluded that the reference to personal property in section 87 of the Indian Act includes income. In the 1992 case of Glenn Williams v. Her Majesty the Queen, the Supreme Court of Canada reconsidered the approach to use in determining whether income should be considered to be situated on a reserve and therefore tax exempt. The proper approach is to evaluate the various connecting factors that tie the property to one location or another. In Williams, the Court also agreed with the proposition in the Supreme Court of Canada case of Mitchell v. Peguis Indian Band, which states that the purpose of the Indian Act is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens.

Based on the guidance provided in Williams, and after receiving representations from interested Indian groups and individuals, the CCRA identified a number of connecting factors that can be used to determine whether employment income is situated on a 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. We enclose a copy of the Guidelines which were issued by the CCRA in June 1994 and reflect the CCRA's current positions. There are four general guidelines any one of which, if met, will generally exempt an Indian's income from taxation. Generally, a status Indian's employment income will be exempt from taxation:

1. where substantially all the duties of employment are performed on a reserve;

2. where the Indian lives on a reserve and the employer is resident on a reserve;

3. where more than half the duties are performed on a reserve and either the Indian lives on a reserve or the employer is resident there; and

4. where the employer is resident on a reserve, the duties are part of certain non-commercial activities of the employer and the employer is an Indian band, tribal council or Indian organization as described in Guideline 4 at page 7 of the Guidelines.

With respect to 1 above, a proration rule further provides that when less than 90% of the duties of employment are performed on a reserve, and none of the other guidelines apply, the portion that is performed on a reserve is exempt from tax.

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."

In addition, employment-related income such as retiring allowances will usually be exempt when received if it relates to employment income that was tax exempt. If a portion of the employment income was exempt, then a similar portion of the employment-related income will be exempt.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4 titled Advanced Income Tax Rulings, dated January 29, 2001 and may be obtained on the Internet at http://www.ccra-adrc.gc.ca/menu/EmenuKKB.html.

Yours truly,

Mickey Sarazin, CA
Manager, Aboriginal Affairs Section
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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