15 September 2003 Internal T.I. 2003-0037957 - TAXATION OF INDIAN EMPLOYMENT

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: Was an Indian's employment income taxable?

Position: Question of Fact

Reasons:

General information provided. Very few details were provided with which to make a determination. We would have to assume that the individual is a status Indian since there is no confirmation of this fact. The memo indicates that the taxpayer does not live on reserve, that her employer was not resident on reserve and that approximately 30% of her duties were performed on reserve. The Proration Rule appears to apply to exempt 30% of her income.

Linda Bromke
Human Resources Development Canada
2045 Broad Street 2003-003795
Regina SK S4P 2N6 Renée Shields
(613) 948-5273
September 15, 2003

Dear Ms. Bromke:

Re: Taxation of Employment Insurance (EI) Benefits Paid to Status Indian

This is in response to your memorandum dated March 31, 2003 sent to the Regina Tax Services Office requesting comments from the Canada Customs and Revenue Agency (the "CCRA") as to whether a status Indian is taxable on EI benefits paid with respect to certain employment. Your memorandum was forwarded to the Income Tax Rulings Directorate on September 9, 2003.

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 reserve. The proper approach in determining the situs of personal property is to evaluate the various connecting factors, which tie the property to one location or another.

Based on the guidance provided by 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. In addition, the CCRA has developed a web site that provides information for status Indians. You can access the Guidelines and the Aboriginal web site at www.ccra-adrc.gc.ca/aboriginals/menu-e.html.

With respect to employment-related income, the Guidelines provide that employment insurance benefits will be exempt when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of these amounts will be exempt.

Accordingly, in order to determine if a status Indian's EI benefits are exempt from income tax, one has to determine if the employment income that created the EI entitlement was exempt from income tax. Because the confidentiality provisions of the Act prevent us from disclosing taxpayer information to unauthorized persons, we cannot disclose whether or not a specific individual's income from employment was taxable. We can, however, offer our general comments on the situation in the context of the Guidelines. We note that a conclusive determination of a taxpayer's status is a question of fact that would have to be ascertained by his or her Tax Services Office. Our comments are therefore of a general nature and are not binding on the CCRA.

Guideline 1 would apply to exempt all of the income of a status 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"). If the individual referred to in your memorandum is a status Indian and 30% of her employment income was derived from working on a reserve, then it is likely that 30% of her employment income was tax-exempt. As indicated above, EI benefits related to tax-exempt employment income would also be tax-exempt.

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

Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer be 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 be 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.

In order to determine conclusively whether EI benefits are tax exempt, we suggest that you require the claimant to prove that her related employment income was tax-exempt under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. The claimant could provide you with a copy of her T4, which would indicate if the employment income was exempt from income tax. Alternatively, the claimant could provide you with a copy of her income tax return with the appropriate Notice of Assessment accepting the individual's claim for the tax exemption. Finally, the claimant may request some form of approval from her local Tax Services Office.

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

c.c. Joan Erwin
Regina Tax Services Office