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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether employment income guidelines apply to exempt the employment income of status Indian employees?
Position: Question of Fact
Reasons: General comments provided.
2002-012465
XXXXXXXXXX Karen Power, CA
(613) 957-8953
March 6, 2002
Dear XXXXXXXXXX:
Re: Tax Exemption for Status Indians
We are writing in reply to your letter of February 14, 2002, in which you requested our comments regarding the taxation of employment income received by status Indians. You would like to know whether a new organization (the "Entity") would meet Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").
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 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.
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 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 a reserve.
Whether any of the Guidelines apply in a particular situation is a question of fact which would require a review of all of the pertinent information and details of the 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. Guideline 4 is a generous interpretation of the direction provided by the Courts in Williams, so it is appropriate to restrict its application to situations that fit squarely within it. All elements of the Guideline must be satisfied in order for the Guideline to apply. The following summarizes our comments on each of the specific requirements of Guideline 4:
The employer must be resident on a reserve.
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. The central management and control of an organization is usually considered to be exercised by the group that performs the function of the 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 at a place other than the principal administrative office of the organization. Where an organization which would otherwise not be considered to be resident on a reserve is asserting that it satisfies the definition because it holds its board of directors meetings on a reserve, it should generally be considered to satisfy the definition where management and control over the organization is legitimately exercised during those meetings.
The term "on a reserve", as used in the Guidelines, is defined on page 10 of the Guidelines to mean "on a reserve as defined for purposes of the Indian Act, including any settlements deemed to be reserves for purposes of the Indian Settlements Remission Order, and any other areas given similar treatment under Federal legislation (for example, Category I-A lands under the Cree-Naskapi (of Quebec) Act)." According to subsection 2(1) of the Indian Act, reserve means a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band, and for purposes of section 87 of the Indian Act, includes designated lands. Designated lands is defined in subsection 2(1) of the Indian Act as a tract of land or any interest therein, the legal title to which remains vested in Her Majesty and in which the band for whose use and benefit it was set apart as a reserve has, otherwise than absolutely, released or surrendered its rights or interests. We have not been provided with sufficient information to determine whether the First Nation Territory would be considered reserve land for purposes of the Indian Act.
The employer must be an Indian organization controlled by one or more Indian bands which have reserves or tribal councils.
Guideline 4 requires that the employer be an Indian band which has a reserve, or a tribal council representing one or more bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils.
The Entity is not an Indian band or tribal council. In order for Guideline 4 to apply, the Entity must be an Indian organization controlled by one or more Indian bands which have reserves or tribal councils representing one or more Indian bands which have reserves. The concept of control in Guideline 4 is the kind that exists where there is power to command and direct. Where a band or tribal council can replace the directors of an organization, the band or tribal council could be said to control the organization. We have not been provided with sufficient information to determine who controls the Entity.
The employer must be dedicated exclusively to the social, cultural, educational, or economic development of Indians.
The intention of the word "exclusively" is to restrict Guideline 4 to those organizations, which are, dedicated only to the social, cultural, educational or economic development of Indians living on reserve. Where these form only part of an organization's objectives, the organization will not qualify under Guideline 4 described above.
The employer must service Indians who for the most part live on reserve.
Guideline 4 indicates that the organization must be dedicated exclusively to the development of Indians "who for the most part live on reserves". That is, almost all of the Indians in the population served by the organization must live on reserve. Guideline 4 recognizes that there will be situations where an Indian works for an organization which is dedicated exclusively to the development of Indians on reserves, and the work may require the Indian to live away from the reserve. Although the employee's residence would not be a factor which connects the Indian's employment to the reserve, it is appropriate, under the circumstances laid out in Guideline 4, to recognize a connection since the employee is working for the benefit of Indians on reserve. However, if the population served by the organization is not comprised almost entirely of Indians who live on reserve, this latter connection would not exist.
It is a question of fact whether an Indian lives on reserve. As indicated on page 10 of the Guidelines, the term "Indian lives on a reserve" means the Indian lives on the reserve in a domestic establishment that is his or her principal place of residence and that is the center of his or her daily routine. However, it should also be noted that the fact that an Indian may be absent from a reserve for a short period of time, does not necessarily mean that the Indian has taken up residence off reserve.
We have not been provided with sufficient information to establish whether the Entity will provide services to Indians who for the most part live on reserve. Such a determination would require a review of all Indians serviced by the Entity. This is a question of fact which is best resolved by a tax services office.
The employee's duties of employment must be in connection with the employer's non-commercial activities.
To determine whether Guideline 4 applies to a particular Indian employee, the employment duties of the Indian employee would also have to be considered, in order to establish whether they are in connection with the employer's non-commercial activities. While the employer may have a non-profit mandate, this does not necessarily mean that all of its activities are non-commercial. As a general rule, a commercial activity entails the provision of services or the creation of a product to be provided to others for compensation. On the other hand, an example of a non-commercial activity would be a governmental or quasi-governmental activity.
The employee's duties must be carried on exclusively for the benefit of Indians.
We have not been provided sufficient details regarding the employees' employment duties and are unable to establish whether this element of Guideline 4 would be met.
The employee's duties must be carried on exclusively for the benefit of Indians who for the most part live on a reserve.
As discussed above, we are unable to establish whether the duties carried out by the Entity's employees' are carried on for the benefit of Indians who for the most part live on a reserve. Such a determination would require a review of all the Indians serviced by the Entity, to determine the percentage of its clientele living off reserve.
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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