2 January 2004 Ministerial Correspondence 2003-0051771M4 - Indian Employment Income Exemption

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: Will a status Indian's employment income be tax exempt?

Position: Question of fact, but it would appear that Guideline 2 would be applicable

Reasons: General information provided

Signed on January 2, 2004

XXXXXXXXXX

Dear XXXXXXXXXX:

Mr. Alan Nymark, Commissioner of the Canada Revenue Agency (CRA), has asked me to reply to your letter of November 17, 2003, concerning the tax treatment of employment income earned by status Indians employed by your business.

Paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act provide a tax exemption for a status 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 the 1992 case of Williams v. the Queen, the Supreme Court of Canada reconsidered the approach used in determining whether income is situated on a reserve. The proper approach in determining the location 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 CRA 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 CRA developed the Indian Act Exemption for Employment Income Guidelines, incorporating the various connecting factors that describe the employment situations covered by the Indian Act. I am attaching a copy of these guidelines for your review. The following general comments summarize the application of these Guidelines.

Guideline 1 exempts all of the employment income of a status Indian if at least 90 per cent of the employment duties were performed on a reserve. When less than 90 per cent 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.

Guideline 2 exempts employment income of status Indian 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 a corporation is usually considered to be exercised by the group that performs the function of a board of directors of the corporation. 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.

Guideline 3 exempts all of a status Indian's employment income if more than 50 per cent of the employment duties are performed on a reserve and the employer is resident on a reserve or the status Indian lives on a reserve.

Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer is an Indian band that has a reserve, or a tribal council representing one or more Indian bands that 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 status 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.

While 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 pertaining to each individual employee, it would appear that if the employer is, in fact, resident on a reserve and the status Indian employee is also resident on a reserve, Guideline 2 would apply and exempt from tax the status Indian employee's income.

I trust that this information will be helpful.

							Yours sincerely,

							Bill McCloskey
							Assistant Commissioner
							Policy and Legislation Branch

Attachment

Kimberly Duval
(613) 957-8982
2003-005177
December 9, 2003