16 March 2005 External T.I. 2004-0107341E5 - Social assistance paid to Indian by First Nation

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 social assistance paid by a First Nation to a status Indian taxable?

Position: If certain conditions are met, the amount would be tax exempt.

Reasons: If the First Nation is running a social assistance program which makes benefits available only to Indians, and if the recipient is a status Indian who is a reserve resident, then the amount will be sufficiently connected to a reserve to be exempt under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

2004-010734
XXXXXXXXXX Renée Shields
(613) 948-5273
March 16, 2005

Dear XXXXXXXXXX:

Re: Taxation of social assistance paid to status Indians

This is in response to your letter of December 10, 2004, as clarified in a conversation with XXXXXXXXXX of your office (Shields/XXXXXXXXXX), inquiring about the taxation of social assistance paid by First Nations to status Indians.

Should your request involve a specific taxpayer, we caution that 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. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot comment on any specific situation, we are prepared to provide the following general comments, which may provide some clarification.

The term "social assistance payment" refers to payments made on the basis of a means, needs or income test. Such payments are reported by the payer on a form T5007 and included in the recipient's income by paragraph 56(1)(u) of the Income Tax Act (the "Act"). There is an offsetting deduction available in paragraph 110(1)(f) of the Act.

However, 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. In order to determine whether intangible property such as income (which includes social assistance) is situated on a reserve, we use the "connecting factors test" which was established in a Supreme Court of Canada case called Williams v. the Queen. This test 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.

It is the position of the Canada Revenue Agency that if a social assistance payment is made under a program run by a First Nation (which can generally be characterized as a program that makes benefits available only to Indians), then benefits received under such a program by a reserve-resident status Indian will be sufficiently connected to a reserve to be tax-exempt. As such, even if the First Nation has prepared a T5007 reporting slip, the amount received need not be included in income on that individual's T1 General Return. It will always be a question of fact whether in a particular situation the social assistance is actually paid by a First Nation pursuant to a program which provides benefits only to Indians and whether the recipient is a status Indian who is resident on a reserve. In the event that these conditions are not met, the payment is treated as an income inclusion with an offsetting deduction as described above.

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