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: Would employment income be exempt if a status Indian works for an off-reserve employer but moves back to a reserve and works from home?
Position: Question of Fact
Reasons: Guideline 1, Guideline 3 or the Proration Rule may apply, but it would have to be demonstrated that it is a requirement of the individual's employment that she work from home. Merely doing so for her own convenience will not be a sufficient connection. Further, it would have to be demonstrated that the reason for working on the reserve is not merely to establish a connecting factor.
2004-0007037
XXXXXXXXXX Renée Shields
(613) 948-5273
July 15, 2004
Dear XXXXXXXXXX:
Re: Taxation of Status Indian Employment Income
This is in response to your letter of April 5, 2004 inquiring about the taxation of the employment income of a status Indian employee who works from her home on a reserve for a non-reserve resident employer.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings (which can be accessed on the Canada Revenue Agency ("CRA") website at the following address: http://www.cra-arc.gc.ca), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, the following general comments, which are not binding on the CRA, may be of assistance.
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 income. Because income is intangible property, as opposed to a physical object, it can be difficult to determine whether it is situated on a reserve. The Supreme Court of Canada addressed this problem in a case called Williams v. the Queen (92 DTC 6320). The decision in Williams requires that we first identify the various connecting factors that are relevant to the particular property. These factors should then be analyzed to determine what weight they should be given in identifying the location of the property. If the most significant factors connect the property to a location on a reserve, the income will be tax-exempt.
Based on the guidance provided by the decision in Williams and after receiving representations from interested government departments, as well as 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. Generally, the most common connecting factors in the employment income context are: the place where employment duties are performed, the residence of the employee and the residence of the employer.
With a view to assisting the Indian community, the CRA 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 can be viewed on the CRA website at the following address: http://www.cra-arc.gc.ca/aboriginals/guidelines-e.html. Although not a hard and fast rule, the Guidelines are a useful administrative tool for taxpayers and for CRA employees to be able to work with the very broadly worded tax exemption provided by the Indian Act and the Act. The following is a very general summary of the Guidelines:
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%, but more than an incidental proportion 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 status Indian employees who live on a reserve provided that the employer is also resident on a reserve.
Guideline 3 would apply to exempt all of the income of a status Indian if two conditions are met. Firstly, more than 50% of the employment duties must be performed on a reserve. Secondly, either the employer must be resident on a reserve or the status Indian must live on a reserve.
Guideline 4 requires that the employer be 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.
Whether any of the Guidelines apply to a particular individual's employment income will always be a question of fact to be determined in each particular situation. Because Guidelines 1 and 3 and the Proration Rule provide for full or partial exemption of a status Indian's employment income if employment duties are performed on a reserve, it is possible that a tax exemption may be available if an individual is working for an off-reserve employer but working from their on-reserve home.
In such a situation, in order to apply one of the foregoing Guidelines, the CRA generally takes the position that if an individual is merely permitted to work at home, or chooses to do so as a matter of convenience, the Guideline requirement will not have been satisfied. Instead, it is our view that the employer must require the employee to work from his or her on-reserve home under the terms of the employment contract or a "work at home" agreement. We acknowledge that it may be the employee who initiates a "work at home" arrangement. However, if a formal agreement is entered into, and its terms require the employee to work certain hours from home, then the agreement is binding upon the parties until the agreement terminates and if the on-reserve time is more than incidental, then the Guideline requirement will be satisfied. Although the Guidelines do not make any specific reference to the location where an employee is required to work, all of the examples published with the Guidelines contemplate situations in which the employee is working at a location determined by the employer.
Reliance on the Guidelines also necessitates that it be established that one of the main purposes for the existence of this arrangement is not to establish a connecting factor between the income in question and a reserve. Evidence to satisfy this requirement may consist of demonstrating, for example, that other employees participate in the "work at home" programme.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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