19 November 2002 External T.I. 2002-0169825 - EXEMPTION OF INDIAN 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Taxation of Indian employment income

Position: Question of Fact but likely yes

Reasons: Guideline 3 likely applies.

2002-016982
XXXXXXXXXX Renée Shields
(613) 948-5273
November 19, 2002

Dear XXXXXXXXXX:

Re: Taxation of Indian Employment Income

This is in response to your facsimile of September 25, 2002 inquiring about whether employment income earned by an Indian registered under the Indian Act is eligible for tax-exempt status.

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 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

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. We have enclosed a copy of the Guidelines for your information.

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).

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 will be considered incidental. When the time spent on reserve is considered incidental, the employment income will not qualify for the exemption.

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

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. 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.

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.

A definitive determination of the tax status of an individual's employment income can only be made following a thorough review of all applicable facts. However, where, as in this case, an Indian who resides on reserve works for nine months of a taxation year on a reserve and three months off-reserve for his or her off-reserve employer, we would conclude that Guideline 3 would apply to exempt the Indian's employment income from that off-reserve employer for that particular taxation year.

In situations in which the TD1-IN indicates that Guideline 3 will apply to an employee, we would recommend that you obtain guidance from your local Tax Services Office with respect to administering source deductions.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Enclosure

c.c. Kenneth Nicholson

Toronto East T.S.O.