30 September 2004 Ministerial Correspondence 2004-0096351M4 - Taxation of status Indian employment income

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 particular individuals be exempt from tax on their employment income?

Position: Question of Fact

Reasons: General information provided about the Indian Act Exemption for Employment Income Guidelines.

2004-009635
XXXXXXXXXX Renée Shields
(613) 948-5273
September 30, 2004

Dear XXXXXXXXXX:

Re: Taxation of Status Indian Employment Income

This is in response to your letter of September 10, 2004 addressed to the Minister of Revenue of Quebec and copied to the Honourable John McCallum, Minister of National Revenue, in which you inquired about the taxation of the employment income of members of the XXXXXXXXXX. Because the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") is responsible for providing interpretations of the Income Tax Act (the "Act") and related statutes, we have been asked to reply.

It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advanced income tax ruling requested directly by the affected taxpayer or an authorized representative. Information Circular 70-6R5, "Advanced Income Tax Rulings, (available on the CRA website at http://www.cra-arc.gc.ca) explains the advance income tax ruling process. Furthermore, the confidentiality provisions of the Act prevent us from commenting on the tax treatment of specific individuals. However, we can provide you with the following general information, which may be helpful in addressing your questions.

Paragraph 81(1)(a) of 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. 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. 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 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 (the "Guidelines"), incorporating the various connecting factors that describe the employment situations covered by the Indian Act. Although not hard and fast rules, 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 Guidelines can be read in their entirety on-line at the following internet address: http://www.cra-arc.gc.ca/aboriginals/guidelines-e.html, but the following is a very general summary:

Guideline 1 exempts 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%, 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.

Guideline 2 exempts employment income of status Indian employees who live on 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. 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 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 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.

In any particular situation, the 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.

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