21 February 2005 Internal T.I. 2005-0113311I7 - Guideline 4 - for the most part live on 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: Comments were requested by the XXXXXXXXXX TSO on the phrase "Indians who for the most part live on reserves" in Guideline 4

Position: Most of the beneficiaries of the employer's activities must be reserve-resident Indians. Residency is a question of fact to be determined from a review of the individual's circumstances.

Reasons: Comments provided

 		February 21, 2005

	XXXXXXXXXX  TSO	HEADQUARTERS
		Income Tax Rulings 
	Attention:  XXXXXXXXXX 	  Directorate
		Renée Shields
(613) 948-5273
				2005-011331
	     Guideline 4

This is in response to your electronic correspondence of January 26, 2005 requesting our comments on the phrase "Indians who for the most part live on reserves," as contained in Guideline 4 of the Indian Act Exemption for Employment Income Guidelines.

You have described an employer organization (the "Organization") that has been established to XXXXXXXXXX Although the Organization's office is in XXXXXXXXXX , you have indicated that based on demonstrations of central management and control, you are satisfied that the Organization is resident on a reserve. The employees in question work in XXXXXXXXXX . Of note, however, is the fact that although all participants are sponsored by a First Nation, not all students who benefit from the Organization's services were necessarily reserve residents prior to being sponsored. The Organization has asserted the position that the residency of the students at any time is irrelevant insofar as they are being sponsored by a First Nation with a reserve. In their view, Guideline 4 has been met and the employment income of the Organization's employees should be tax-exempt.

Guideline 4 exempts the employment income of a status Indian individual if certain conditions are met. The first requirement is that the employer be 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. Additionally, the employer must be resident on a reserve. Further, the organization must be exclusively dedicated to the social, cultural, educational, or economic development of status Indians who for the most part live on reserves. Finally, the individual's duties of the employment must be in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserves.

The phrase "Indians who for the most part live on reserves" appears twice in Guideline 4 and to deny that the wording has any relevance would be to ignore a key aspect of the Guideline. This requirement is integral to establishing a connecting factor between employment income and a reserve. Such a connection is necessary in order to benefit from the tax exemption in section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. From a practical point of view, the phrase "Indians who for the most part live on reserves" requires not only that the beneficiaries of the employer's activities be Indians, but furthermore that most of these beneficiaries be resident on a reserve. The analysis necessitated by this latter requirement is twofold:

? Firstly, the residency of each beneficiary of the employer's services during the year in question must be ascertained.

The determination of an individual's principal residence is a question of fact to be ascertained following a review of that individual's circumstances. Although the issue usually arises in the context of determining a taxpayer's province of residence or their Canadian residency status, the general principles would seem to be applicable in this context as well. Particularly in the case of students, there may be situations in which someone has more than one place of residence. However, in ascertaining an individual's principal place of residence, we generally look to the location where the person ordinarily resides in a permanent home and with which he or she has closer social and economic ties. Since a student may leave a reserve to attend school and either sever or maintain residential ties with the reserve, the scenarios described in your correspondence would necessitate a review of the facts with a view to making the determinations described above. However, if a particular individual is a member of a First Nation with a reserve, but has always lived in the city, in our opinion it could not be asserted that this individual is resident on a reserve.

In our view, in order to substantiate a claim that any particular employee's employment income is tax-exempt, the required information regarding the residency of the Organization's beneficiaries should be provided by the Organization or by the taxpayer.

? Secondly, having ascertained the residency of individual participants, the residency of the overall "clientele" of the employer must be considered.

The beneficiaries of the employer's services must "for the most part" be reserve-resident Indians. The phrase "for the most part" has no obvious mathematical equivalent that would be conducive to establishing a threshold percentage of reserve-resident beneficiaries. The requirement is not so stringent as to preclude the application of Guideline 4 because of the incidental existence of non-reserve resident beneficiaries. However, the more non-reserve residents that benefit; the less the income of the employer's employees can be said to be connected to a reserve and the less likely that Guideline 4 would apply to exempt the income from tax. In our view the standard is less than would be imposed by an "all or substantially all" requirement (which is generally understood to impose a 90% threshold), but nonetheless requires more than a simple majority. It is entirely likely that for any given employer, the results of this analysis would vary from year to year.

The foregoing discussion outlines a technical interpretation of the Guideline. It is acknowledged that depending upon the nature and scope of an employer's activities and clientele, it may not be practical to conduct an analysis of the residency of each and every beneficiary of the employer's services. In such situations, audit practice and procedures would, of necessity, come into play.

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