15 June 2004 Internal T.I. 2004-0072201I7 - Indian employment adjacent to reserve

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: Is the employment income of certain status Indian employees working at a location near a reserve taxable?

Position: Yes

Reasons: None of the Guidelines apply and there is insufficient connection between the employment income and a reserve to satisfy an "extenuating factors" analysis.

			June 15, 2004

	XXXXXXXXXX  TAX CENTRE		HEADQUARTERS
				Income Tax Rulings
	Attention:  XXXXXXXXXX 			  Directorate
				Renée Shields
(613) 948-5273

				2004-007220

Taxation of status Indian employees

This is in response to your memorandum of April 15, 2004 as well as the additional information contained in your electronic correspondence of April 19 and May 20, 2004 regarding the taxation of the employment income of status Indian employees (the "Employees") of XXXXXXXXXX (the "Employer").

In the situation you are examining, the Employer is a non-reserve resident business which is XXXXXXXXXX% owned by a status Indian. The Employer is a retail store that has been in operation since XXXXXXXXXX and is one of at least XXXXXXXXXX stores in the vicinity of or on the reserve (specifically, the Employer, XXXXXXXXXX). The customers of the business are primarily reserve-resident status Indians. The Employees are status Indians who may or may not live on the reserve. The Employees perform their employment duties at the Employer's business premises, which is XXXXXXXXXX from the reserve.

Paragraph 81(1)(a) of the Income Tax Act (the "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 a case called Williams v. the Queen ("Williams"), the Supreme Court of Canada reconsidered the approach to use in determining whether income is situated on a reserve and concluded that the proper approach is to evaluate the weight of 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 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. Subsequently, 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 would be relevant to the employment situations covered by the Indian Act. The Guidelines can be summarized very generally as follows:

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).

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.

In the situation you have described, none of the Guidelines would apply to exempt the employment income of the Employer's Employees. However, because the Guidelines were developed as an administrative tool to assist in the determination of whether employment income of a status Indian is taxable, they do not necessarily constitute a definitive test. It is acknowledged that occasionally there may be unique situations in which additional connecting factors are relevant and may be given significant emphasis. As an example, in situations where a business is established in an extremely remote location, is completely surrounded by or adjacent to reserve land and is historically connected to the reserve, the employment income of a status Indian may be connected to the reserve where the business is generally the primary source of supplies and necessities of life for status Indians resident on the reserve, and at least 90% of its business is with such Indians.

It is our opinion that an off-reserve employer that commenced business operations in XXXXXXXXXX lacks a sufficient historical connection to the reserve for the income of its employees to be connected to a reserve and exempt from tax. A historical connection of sufficient significance would be one in which, for example, a business came into existence prior to or contemporaneously with the creation of a reserve. It has not been stated whether the Employer is the primary source of supplies and necessities of life for the reserve residents, but the fact that there are at least XXXXXXXXXX other retail businesses would likely be relevant to this determination.

Although we acknowledge that the primary customers of the Employer's business are reserve-resident Indians, in the absence of the satisfaction of the other criteria, it is not sufficient that employment duties involve the provision of goods or services to status Indians on a reserve. As the Federal Court of Appeal said in the case of Akiwenzie v. the Queen (2004 DTC 6007), the fact that an employee's duties were beneficial to reserves cannot result in his income being situated on these reserves. The decision also cites the case of Monias v. the Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:

That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves. Rather, it is to protect from erosion by taxation the property of individual Indians that they acquire, hold and use on a reserve, although in the case of an intangible, such as employment income, it is the situs of its acquisition that is particularly important

The Employer in question submits that significant emphasis should be put on the fact that XXXXXXXXXX% of the business is owned by a status Indian. This characteristic of the business does not alter the fact that the Employer is not resident on a reserve, nor does it situate the employment duties on a reserve. The fact that an individual works for a business partly owned by a status Indian does not create a significant link between the employment income and a reserve.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch