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.
Principal Issues: Whether a status Indian residing full-time on a reserve is entitled to a partial exemption on employment income if, as a community consultant for aboriginal relations, some of her employment duties take place on reserve
Position: Question of fact.
Reasons: When less than 90% of the duties are performed on a reserve and none of the other Guidelines apply, the portion that is performed on a reserve is exempt from tax under the "proration rule".
XXXXXXXXXX 2004-005646
J. Gibbons, CGA
April 22, 2004
Dear XXXXXXXXXX:
Re: Employment Income Earned on Reserve
Your letter dated December 17, 2003, to the XXXXXXXXXX Tax Services Office was forwarded to us for reply. You have requested written confirmation of the advice you received verbally from an agent of the Canada Revenue Agency (CRA) that a portion of your employment income will be exempt from income tax. You are a status Indian residing full-time on a reserve, and, as a community consultant for aboriginal relations, some of your employment duties take place on reserve.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.
The authority for the tax exemption enjoyed by status Indians on certain income is derived from paragraph 81(1)(a) of the Income Tax Act and paragraph 87(1)(b) of the Indian Act. In particular, the latter statute provides that the tax exemption applies to "the personal property of an Indian or a band situated on a reserve." The Supreme Court of Canada in Williams v. the Queen [92 DTC 6320] concluded that the determination of whether income is situated on a reserve and thus exempt from tax under the Indian Act requires the evaluation of the various connecting factors which tie the property to one location or another.
To facilitate the application of the connecting factors test for status Indians earning employment income, the Canada Revenue Agency has developed a number of administrative guidelines (the "Guidelines") which can be used by status Indians to determine whether some or all of their employment income is exempt from income tax. Since Guidelines 1 to 3 may apply to your situation, we have summarized them below. However, you can find a complete description of the Guidelines on our website at www.ccra-adrc.gc.ca/formspubs/clientgroup/other/aboriginals-e.html.
Guideline 1 would apply to exempt all of the employment 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").
Guideline 2 would apply to exempt the employment income of a status Indian who lives on a reserve provided that the employer is also 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.
Guideline 3 would apply to exempt all of the income of a status Indian if two conditions are met. First, more than 50% of the employment duties must be performed on a reserve. Second, either the employer must be resident on a reserve or the status Indian must live on a reserve.
It is a question of fact whether all or a portion of a status Indian's employment income is exempt from income taxes. However, based on the facts presented in your letter, it appears that the proration rule may apply in your situation. If the employment duties performed by you on reserve increase to more than 50% in a given year and you continue to reside on reserve, your employment income may be completely exempt under guideline 3.
As the CRA agent advised you, the fifth box (under the "Type of exemption") on Form TDI-IN should be ticked by your employer if the proration rule applies to you. The exemption will be based on the portion of the employment income that relates to the duties performed on the reserve.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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