6 May 2003 External T.I. 2003-0013475 - TAXATION OF PART II EI BENEFIT TO INDIAN

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:

Are benefits payable to a status Indian under Part II of the EI Act taxable?

Position:

Generally, yes. However, a deduction from income under paragraph 110(1)(g) may be available for assistance related to the payment of certain tuition fees.

Reasons:

Because Part II EI benefits are not related to the Indian's prior exempt employment income, they are not situated on reserve. The connecting factors test is not normally satisfied. The Part II EI benefits are therefore taxable under subparagraph 56(1)(r)(ii).

However, a 2002 ITA amendment, applicable to the 1997 and subsequent taxation years, established paragraph 110(1)(g) and provides a deduction from income for the amount of certain tuition assistance included in an individual's income pursuant to subparagraph 56(1)(r)(ii).

Radmila Duncan
Human Resources Development Canada
140 Promenade du Portage 2003-001347
Hull QC K1A 0J9 Renée Shields
(613) 948-5273
May 6, 2003

Dear Ms. Duncan:

Re: Part II Employment Insurance Assistance Paid to a Status Indian

This is in response to your electronic correspondence of April 15, 2003 requesting clarification of the taxation of amounts paid to status Indians pursuant to Part II of the Employment Insurance Act ("EI Act").

In our view, training benefits (including tuition, allowances & books) provided to individuals which are funded under the EI Act are taxable under paragraph 56(1)(r) of the Income Tax Act (the "Act"). This paragraph was included in Bill C-28, which received Royal Assent on June 18th, 1998. This amendment is retroactive to June 30, 1996, the date of coming into force of the EI Act and the Canada Customs and Revenue Agency ("CCRA") will apply the amendment beginning with the 1997 tax year.

Paragraph 56(1)(r) of the Act subjects to tax various training-related amounts. Specifically, this paragraph includes in a taxpayer's income financial assistance received under Part II of the EI Act, as well as similar financial assistance received from a government or government agency under the terms of an agreement with the Canada Employment Insurance Commission. As a result, recipients of financial assistance under Part II EI programs will be taxed regardless of whether the payments have been made directly by the federal government, a province or an organization under a devolution agreement.

Paragraph 110(1)(g) of the Act, included in Bill C-49, which received Royal Assent on March 27, 2002 and is applicable to the 1997 and subsequent taxation years, provides that for the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted:

(g) any amount that

(i) is received by the taxpayer in the year under a program referred to in subparagraph 56(1)(r)(ii) or (iii), a program established under the authority of the Department of Human Resources Development Act or a prescribed program,

(ii) is financial assistance for the payment of tuition fees of the taxpayer that are not included in computing an amount deductible under subsection 118.5(1) in computing the taxpayer's tax payable under this Part for any taxation year,

(iii) is included in computing the taxpayer's income for the year, and

(iv) is not otherwise deductible in computing the taxpayer's taxable income for the year

Given the fairly recent introduction of the foregoing deduction from income, the availability of a tax exemption for a status Indian may not be as significant a concern as it once was. Nonetheless, we will provide our comments on this aspect of your question.

When training benefits are received by status Indians, paragraph 81(1)(a) of the Act and section 87 of the Indian Act may provide a tax exemption if the income is considered an Indian's personal property situated on a reserve. The Courts have determined that, for the purposes of this exemption, income is personal property. Consequently, what must be determined is whether the income of an Indian is situated on a reserve.

In determining whether income is situated on a reserve, the approach taken by the Supreme Court of Canada in the case of Williams (92 DTC 6320) must be followed. The proper approach to determining the situs of personal property is to evaluate the various connecting factors which tie the property to one location or another. The Supreme Court indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve.

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 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.

The Guidelines also provide that employment-related income of a status Indian, such as EI benefits, will usually be exempt from income tax when received as a result of employment income that was exempt from tax. This position generally applies to regular EI benefits and, consequently, it would apply to the regular EI benefits received by individuals who are eligible for training funding because, as noted-above, a benefit program has been established.

Training benefits received by status Indians which are funded by the EI Act are not related to employment income. In our view, such training benefits will generally not be connected to a reserve and consequently this assistance will not be exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. However, where the training is actually taken on reserve, the foregoing exemption may apply.

Paragraph 90(1)(b) of the Indian Act provides that for purposes of section 87, personal property that was given to Indians under a treaty or agreement between a band and Her Majesty shall be deemed always to be situated on a reserve. 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. It is a question of fact whether assistance for education received by a status Indian is received under treaty or agreement between a band and Her Majesty and is exempt or is received under some other program and is taxable. In our view, training benefits funded under the EI Act would generally not be considered received under a treaty or agreement between a band and Her Majesty and consequently would not be tax exempt by virtue of section 90 of the Indian Act.

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