7 June 2004 Internal T.I. 2004-0074171I7 - employment income of Indian employee/shareholder

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 a status Indian shareholder/employee performing all employment duties on a reserve taxable?

Position: No

Reasons: Application of the Guidelines

			June 7, 2004

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

				2004-007417

Taxation of employment income of status Indian

This is in response to your electronic correspondence of April 30, 2004 regarding the taxation of the employment income of a status Indian (the "Employee") who is also the sole shareholder of the employer corporation (the "Employer").

We understand that the Employee lives off reserve and in addition to being the sole shareholder of the Employer, is employed as its General Manager. You have determined that the Employer, which carries on a XXXXXXXXXX business, is resident on a reserve. Further, you have advised that all of the Employer's customers are located off reserve and its income-earning activities take place off reserve. The Employee performs all of his employment duties at the Employer's head office, which is located on a reserve. You have indicated that you dispute neither the legitimacy of the employer-employee relationship nor the reasonableness of the Employee's remuneration.

As you know, following the Supreme Court of Canada's introduction of the connecting factors test in the Williams case, the Canada Revenue Agency developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines"). The Guidelines are a published administrative tool to assist taxpayers and CRA employees to comply and to work with the very broadly worded tax exemption provided by the Income Tax Act (the "Act") and the Indian Act. The Guidelines were also created to ensure the consistent application of the exemption from taxes under the Act and the Indian Act to all status Indians.

It is our opinion that if the Employee's salary for duties performed is reasonable, his employment income will fall within Guideline 1 which provides that where at least 90% of the employment duties are performed on a reserve the income from that employment is tax exempt. The determination of the amount of salary that is reasonable for the duties performed is always a question of fact.

Although your memorandum does not make specific mention of a bonus in this situation, we note that it is our view that if a Canadian controlled private corporation pays a bonus to a status Indian owner/manager to reduce the corporation's income (either to nil or to the small business deduction limit), it is our view that such a bonus will not fall within the application of the Guidelines. Accordingly, unless the amount of the bonus (essentially re-directed business income) can be situated on the reserve under a connecting factors analysis, it would not be exempt from tax under paragraph 81(1)(a) of the Act.

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