27 February 2002 External T.I. 2002-0124505 - EMPLOYMENT INCOME-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: Whether employment income guidelines apply to exempt the employment income of status Indian employees?

Position: Question of Fact

Reasons: General comments provided.

2002-012450
XXXXXXXXXX Karen Power, CA
(613) 957-8953
February 27, 2002

Dear XXXXXXXXXX:

Re: Tax Exemption for Status Indians

We are writing in reply to your letter of February 11, 2002, in which you requested our comments regarding the taxation of employment income received by status Indians.

Our Comments

An advance ruling is a written statement given by the Canada Custom and Revenue Agency ("CCRA") to a taxpayer stating how it will interpret specific provisions of existing Canadian tax law in its application to a definite, proposed transaction or transactions which the taxpayer is contemplating. Full disclosure is required and where the transaction is to be completed at some indefinite future time or where satisfactory evidence is lacking that a proposed transaction is being seriously contemplated the request for an advance ruling may be refused. Additionally, where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all pertinent facts cannot be established at the time of the request for the advance ruling, an advance ruling will not be granted.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. Although an advance income tax ruling will not be issued on this matter, we have provided you with the following 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 reserve. The courts have previously determined that, for purposes of section 87 of the Indian Act, the reference to personal property includes employment income. In Williams (92 DTC 6320), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors that tie the property to one location or another.

Based on the guidance provided by the decision 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. A copy of the Guidelines has been enclosed for your reference.

The term "Indian", as used in the Guidelines, is defined on page 10 of the Guidelines to mean "an Indian as defined for purposes of the Indian Act". Subsection 2(1) of the Indian Act defines an "Indian" as "a person who pursuant to this Act is registered as an Indian or is entitled to be registered as an Indian", while sections 6 and 7 of the Indian Act describe persons who are, and persons who are not, entitled to be registered as Indians. Accordingly, in our view, persons who are entitled to such registration, but who have not been so registered, would be included within the meaning of the term "Indian" and as such may benefit from the provisions of the Indian Act. That is, it is the date of the entitlement to be registered and not the date of registration itself that is relevant for purposes of the exemption provided in paragraph 81(1)(a) of the Act and section 87 of the Indian Act. The onus of proving "entitlement" to registration is on the individual. The exemption from taxation does not apply to other persons with some claim to aboriginal status, such as Innuit, Metis or non-status Indians.

Guideline 1 would apply to exempt all of the income of an Indian if at least 90% of the employment duties are performed on a reserve. 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 from tax (the proration rule).

Guideline 2 would apply to exempt the employment income of employees who live on a reserve provided that the employer is 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 a reserve.

Guideline 4 requires that the employer is resident on a reserve. It also requires 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 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 reserve. These elements must all be satisfied in order for Guideline 4 to apply.

Whether any of the Guidelines apply in a particular situation is a question of fact based on a review of all the pertinent information and details of a situation. When the Guidelines apply and when the facts of a particular situation satisfy the requirements of a guideline, the employment income should be exempt. In the situations you describe, Guidelines 2 & 4 would not apply to exempt your employees' employment income, as the employer is not resident on a reserve. It is also unlikely that Guideline 3 would apply to exempt employment income, as it would appear that less than 50% of your employees' duties of employment were performed on reserve. In calculating the time spent performing employment duties on a reserve, it should be noted that travel time to and from the reserve is not included.

Although Guideline 1 would not apply to exempt all of your status Indian employees' income, the proration rule to Guideline 1 may apply to exempt the portion of the employment income that relates to the employment duties performed on a reserve. A portion of the employment income may only be exempt by virtue of the Guideline 1 proration rule 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. Basically, when the time spent on reserve is minimal it is considered incidental and does not qualify for exemption.

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.

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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